SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
(Amendment No. _______)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss. 240.14a-12
OBSIDIAN ENTERPRISES, INC.
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the
amount on which the filing fee is calculated and state how it
was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
PRELIMINARY PROXY SOLICITATION MATERIALS -
DEFINITIVE PROXY SOLICITATION MATERIALS
INTENDED TO BE RELEASED TO STOCKHOLDERS
ON OR ABOUT OCTOBER __, 2003
[Obsidian Enterprises, Inc. Letterhead]
October __, 2003
Dear Stockholder:
You are cordially invited to attend the 2003 Annual Meeting of Stockholders of
Obsidian Enterprises, Inc. to be held at the Company's offices, 111 Monument
Circle, Suite 4800, Indianapolis, Indiana 46204, on Wednesday, November 19,
2003, at 10:00 a.m. (local time). To ensure that a quorum will be represented at
the meeting, we encourage you to complete, sign, date and return the enclosed
proxy card promptly in the enclosed postage prepaid envelope. This will not
limit your right to attend the meeting and vote in person.
The enclosed Notice of Annual Meeting and the Proxy Statement cover the business
to come before the meeting, which will include the election of directors and the
amendment of the Company's Certificate of Incorporation to effect a reverse
stock split. We urge you to read these materials carefully.
Your management team has decided not to print a separate annual report but,
instead, to use our annual report on Form 10-K for the year ending October 31,
2002, as amended, that was filed with the SEC. Utilizing this format allowed
Obsidian to take advantage of significant cost saving measures, while allowing
us to provide you with important information you need in order to cast your vote
at the Annual Meeting.
We look forward to meeting our stockholders and welcome the opportunity to
discuss the business of your company with you.
Timothy S. Durham
Chairman and Chief Executive Officer
[Obsidian Enterprises, Inc. Letterhead]
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Our Stockholders:
The Annual Meeting of Stockholders of Obsidian Enterprises, Inc. (the "Company")
will be held on Wednesday, November 19, 2003, 10:00 a.m. (local time), at the
Company's offices, 111 Monument Circle, Suite 4800, Indianapolis, Indiana 46204,
for the purpose of considering and voting upon the following matters:
1) The election of seven directors to hold office until the 2004 Annual
Meeting of Stockholders and until their successors are elected and
have qualified.
2) The amendment of the Certificate of Designation for the Company's
Series C Preferred Stock to provide for proportionate adjustments to
reflect any increases and decreases in the Company's Common Stock.
3) The amendment of the Certificate of Designation for the Company's
Series D Preferred Stock to provide for proportionate adjustments to
reflect any increases and decreases in the Company's Common Stock.
4) The amendment of the Company's Certificate of Incorporation to effect
a 50-to-1 reverse stock split.
5) The amendment of the Company's Certificate of Incorporation following
effectiveness of the reverse stock split to decrease the number of
authorized shares of capital stock from 45,000,000 to 15,000,000
shares, consisting of 10,000,000 shares of Common Stock and 5,000,000
shares of Preferred Stock.
6) The ratification of the appointment of McGladrey & Pullen, LLP as the
independent auditors of the Company for the fiscal year ending October
31, 2003.
7) The transaction of such other business as may properly come before the
meeting or any adjournment thereof.
Only stockholders of record at the close of business on October 10, 2003, the
record date fixed by the Board of Directors, are entitled to notice of and to
vote at the Annual Meeting.
Your attention is directed to the accompanying Proxy Statement and Proxy.
Even if you plan to attend the meeting, please mail your Proxy promptly so that
there may be proper representation at the meeting. You are urged to complete,
sign, date and return the enclosed Proxy in the envelope provided. No postage is
required if mailed in the United States.
By Order of the Board of Directors
Jeffrey W. Osler
Secretary
October __, 2003
TABLE OF CONTENTS
Page
----
Summary Term Sheet........................................................... 1
General Information About the Annual Meeting................................. 3
The Reorganization............................................................5
The Company............................................................ 5
Background of the Reorganization....................................... 6
The Reorganization Agreement........................................... 7
Regulatory Approvals................................................... 7
Name Change and Change in State of Incorporation....................... 7
Financial Information.................................................. 7
Business of the Company Subsequent to Reorganization................... 8
Sale of Champion Trailer, Inc.......................................... 8
Proposals Related to the Reorganization................................ 8
Proposals to Be Considered At the Annual Meeting............................. 9
Proposal 1: Election of Directors..................................... 9
Board of Directors.................................................. 9
Meetings of the Board of Directors..................................11
Executive Compensation..............................................11
Compensation of Directors...........................................11
The Audit Committee.................................................11
Report of the Audit Committee.......................................12
The Compensation Committee..........................................13
Report of the Compensation Committee................................13
Compensation Committee Interlocks and Insider Participation.........14
Common Stock Ownership by Principal Stockholders and Management.....16
Performance Graph...................................................17
Change in Independent Accountant....................................19
Introduction to Proposals 2, 3, 4 and 5................................19
Proposal 2: Amendment of Series C Preferred Stock Certificate of
Designation.........................................................20
Proposal 3: Amendment of Series D Preferred Stock Certificate of
Designation.........................................................21
Proposal 4: Reverse Stock Split.......................................22
Proposal 5: Amendment of Certificate of Incorporation to Decrease
Authorized Shares of Capital Stock..................................27
Proposal 6: Ratification of Appointment of Independent Auditors.......29
Additional Information.......................................................29
Independent Public Accountant..........................................29
Section 16(a) Beneficial Ownership Reporting Compliance................29
Expenses...............................................................30
Stockholder Proposals for 2004 Annual Meeting..........................30
Annual Report..........................................................30
Other Matters..........................................................30
APPENDIX A: Certificate of Amendment of Certificate of Designations,
Preferences, Rights and Limitations of Series C Preferred Stock
APPENDIX B: Certificate of Amendment of Certificate of Designations,
Preferences, Rights and Limitations of Series D Preferred Stock
APPENDIX C: Certificate of Amendment of Certificate of Incorporation
APPENDIX D: Obsidian Enterprises, Inc.- Form 10-K, as amended, for the
Fiscal Year Ended October 31, 2002
APPENDIX E: Obsidian Enterprises, Inc. - Information from the Form 10-Q
for the Fiscal Quarter Ended July 31, 2003
1
PROXY STATEMENT
OBSIDIAN ENTERPRISES, INC.
ANNUAL MEETING OF STOCKHOLDERS
November 19, 2003
This Proxy Statement is furnished to the stockholders of Obsidian Enterprises,
Inc., a Delaware corporation (the "Company" or "we"), in connection with the
solicitation by the Board of Directors of proxies to be voted at the Annual
Meeting of Stockholders of the Company to be held on Wednesday, November 19,
2003, at 10:00 a.m. (local time), and at any adjournment thereof. The meeting
will be held at the Company's offices, 111 Monument Circle, Suite 4800,
Indianapolis, Indiana 46204 (Telephone: 317-237-4122). This Proxy Statement and
accompanying form of proxy have been mailed to stockholders on or about _______,
2003.
A change in control and reorganization of the Company (the "Reorganization")
occurred in 2001. The Company acquired four companies in the Reorganization in
exchange for shares of the Company's Series C Preferred Stock. Since the
shareholders will be voting at the Annual Meeting on certain amendments to the
Company's Certificate of Corporation that would facilitate the conversion of the
shares of Series C Preferred Stock issued in the Reorganization into shares of
Common Stock, this Proxy Statement includes information about the
Reorganization.
SUMMARY TERM SHEET
The following summary briefly describes the material terms of the
Reorganization. We have included in the summary references to the sections of
this Proxy Statement in which you can find a more complete description of the
topics addressed in this summary.
The Reorganization
Prior to the Reorganization, the Company engaged through its wholly owned
subsidiary, Danzer Industries, Inc., in the fabrication of metal parts and truck
bodies for the service and utilities markets. The Company acquired four new
subsidiaries in the Reorganization:
o United Acquisition, Inc. (which the Company now operates as United
Expressline, Inc.), an Indiana corporation, which manufactures cargo,
racing and specialty trailers;
o Pyramid Coach, Inc., a Tennessee corporation, which provides luxury
coach leases for corporations and the entertainment industry;
o Champion Trailer, Inc., an Indiana corporation, which manufactures
customized racecar transporters, specialty exhibits trailers and
mobile hospitality units; and
o U.S. Rubber Reclaiming, Inc., an Indiana corporation, which owns and
operates butyl-rubber reclaiming facilities.
2
For more information about the Company and these subsidiaries, see "The
Reorganization" below beginning on page 5.
The terms and conditions of the Reorganization were set forth in an Acquisition
Agreement and Plan of Reorganization, dated as of June 21, 2001. The parties to
that Reorganization Agreement included:
o the Company (which was at that time a New York corporation named
"Danzer Corporation");
o Danzer Industries, Inc.;
o Pyramid Coach, Inc.;
o Champion Trailer, Inc.;
o United Acquisition, Inc.;
o U.S. Rubber Reclaiming, Inc.;
o Timothy S. Durham; and
o Obsidian Capital Partnership, L.P.
Mr. Durham was elected Chief Executive Officer and Chairman of the Board of the
Company at the time of the Reorganization. He also is the Managing Member and
Chief Executive Officer of Obsidian Capital Company LLC, which is the general
partner of Obsidian Capital Partnership, L.P. Terry G. Whitesell was elected
President and Chief Operating Officer and a director of the Company in the
Reorganization. Mr. Whitesell also is a Managing Member of Obsidian Capital
Company LLC.
For more information on the parties to the Reorganization, see the discussion
below under the caption "The Reorganization" beginning on page 5. (On January
31, 2003, the Company sold Champion Trailer, Inc. to Champion Trailer
Acquisition Company, LLC, which was formed by Messrs. Durham and Whitesell. See
"The Reorganization - Sale of Champion Trailer, Inc." on page 8.)
Shares Issued in the Reorganization
The Company issued a total of 4,177,855 shares of Series C Preferred Stock in
the Reorganization. Each share of Series C Preferred Stock is convertible into
20 shares of Common Stock and votes on an as-converted basis. At the completion
of the Reorganization, Obsidian Capital Partnership, L.P. had the right to vote
approximately 80% of the votes entitled to be cast on matters voted upon at
meetings of the stockholders. The following table shows the number of shares of
Series C Preferred Stock issued in the Reorganization for each of the companies
that was acquired:
3
Total Number of Shares of
Series C
Name of Acquired Company Preferred Stock Issued
---------------------------------------------------------------
Pyramid 810,099
U.S. Rubber 1,025,151
Champion 135,712
United 2,206,893
---------------------------------------------------------------
Proposals to Be Considered at Annual Meeting
The Company is seeking stockholder approval at the Annual Meeting of several
amendments to the Company's Certificate of Incorporation. If the amendments in
Proposals 2, 3 and 4 are approved by the stockholders, the persons who received
shares of the Company's Series C Preferred Stock in the Reorganization and
shares of the Company's Series D Preferred Stock in subsequent transactions
would be able to convert those shares into shares of Common Stock. See the
discussion in "Introduction to Proposals 2, 3, 4 and 5" below (beginning on page
19) for more information about the reasons for and effect of the proposals. The
stockholders also will be voting at the Annual Meeting on the election of
directors and the ratification of the appointment of independent auditors.
GENERAL INFORMATION ABOUT THE ANNUAL MEETING
Who can vote at the Annual Meeting?
Only stockholders of record as of the close of business on October 10, 2003 (the
"Record Date"), are entitled to notice of, and to vote at, the Annual Meeting.
The holders of the Company's Common Stock, Series C Preferred Stock and Series D
Preferred Stock will vote together as a class on the election of directors
(Proposal 1) and the ratification of the independent auditors (Item 6) and also
will vote as separate classes on the reverse stock split (Proposal 4) and the
decrease in authorized shares (Proposal 5). The holders of the Company's Common
Stock, Series C Preferred Stock and Series D Preferred Stock will vote together
as a class on the amendment to the Certificate of Designation of the Series C
Preferred Stock (Proposal 2) and on the amendment to the Certificate of
Designation of the Series D Preferred Stock (Proposal 3). In addition, the
holders of Series C Preferred Stock will vote as a separate class on Proposal 2
and the holders of Series D Preferred will vote as a separate class on Proposal
3. (The Series C Preferred Stock and Series D Preferred Stock are referred to
collectively as the "Preferred Stock"). Each share of Common Stock is entitled
to one vote on each matter. The shares of Preferred Stock are convertible into
shares of Common Stock and are entitled to vote on an as-converted basis on each
matter to be voted on at the Annual Meeting, with each share of Series C
Preferred Stock being entitled to 20 votes and each share of Series D Preferred
Stock being entitled to 175 votes.
How do I vote by proxy?
The enclosed proxy is designed to permit each stockholder of record of the
Common Stock or the Preferred Stock on the Record Date to vote at the Annual
Meeting. All properly executed proxies delivered pursuant to this solicitation
will be voted at the meeting in accordance with the instructions of the
4
stockholders given in the proxies. In the absence of such instructions, the
shares represented by proxy will be voted:
o "FOR" the election of the seven nominees for director (Proposal 1);
o "FOR" the amendments to the Certificates of Designation for the
Company's Series C Preferred Stock and Series D Preferred Stock
(Proposal 2 and 3);
o "FOR" the approval of the reverse stock split and subsequent decrease
in the number of authorized shares of capital stock (Proposals 4 and
5); and
o "FOR" the ratification of the appointment of the independent auditors
(Proposal 6).
The named proxies will vote the proxy in their discretion on other matters that
may properly come before the meeting. A proxy may be revoked any time before the
meeting by delivering to the Company's Secretary a written notice of revocation
or a later-dated proxy. A stockholder of record also may revoke a proxy by
voting in person at the meeting.
What will the stockholders vote on at the Annual Meeting?
Stockholders will be voting on the following proposals:
o Election of seven directors to hold office until the next Annual
Meeting of Stockholders or until their successors are elected and have
qualified.
o Amendment of the Certificate of Designation for the Company's Series C
Preferred Stock to provide for proportionate adjustment to the Series
C Preferred Stock to reflect any increases and decreases in the
Company's Common Stock.
o Amendment of the Certificate of Designation for the Company's Series D
Preferred Stock to provide for proportionate adjustment to the Series
D Preferred Stock to reflect any increases and decreases in the
Company's Common Stock.
o Amendment of the Company's Certificate of Incorporation to effect a
50-to-1 reverse stock split.
o Amendment of the Company's Certificate of Incorporation immediately
following the reverse stock split to decrease the number of authorized
shares of capital stock.
o Ratification of the appointment of McGladrey & Pullen, LLP as the
independent auditors for the Company for the fiscal year ending
October 31, 2003.
Management is not aware of any other matters to be presented at the meeting and
has not received notice from any stockholders requesting that other matters be
considered.
What constitutes a quorum?
A majority of the outstanding shares of the Company entitled to vote at the
meeting, present or represented by proxy, constitutes a quorum for the Annual
Meeting. As of the Record Date, 36,007,925 shares of Common Stock, 4,368,399
shares of Series C Preferred Stock (having 20 votes per share) and 118,688
shares of Series D Preferred Stock (having 175 votes per share), were issued and
outstanding. Thus, a total of 144,146,253 votes are entitled to be cast at the
Annual Meeting and 72,073,127 votes will constitute a quorum.
5
How many votes are required for the election of directors and the other
proposals?
The nominees for election as directors of the Company (Proposal 1) named in the
Proxy Statement will be elected by a plurality of the votes cast. The
affirmative vote of the holders of a majority of the outstanding shares of the
Common Stock, Series C Preferred Stock (on an as-converted basis) and Series D
Preferred Stock (on an as-converted basis) is required for Proposals 2 and 3. In
addition, the affirmative vote of the Series C Preferred Stock, voting as
separate class, is required for Proposal 2, and the affirmative vote of the
Series D Preferred Stock, voting as a separate class, is required for Proposal
3. The affirmative vote of the holders of a majority of the outstanding shares
of the Common Stock, Series C Preferred Stock (on an as-converted basis) and
Series D Preferred Stock (on an as-converted basis) voting as a combined class
and as separate classes is required to approve the proposed amendments to the
Company's Certificate of Incorporation for the reverse stock split (Proposal 4)
and to decrease the number of authorized shares of capital stock (Proposal 5).
The affirmative vote of a majority of the votes present, in person or
represented by proxy and entitled to vote on the matter, is required to ratify
the appointment of the independent auditors (Proposal 6).
Abstentions are counted for purposes of determining the presence or absence of a
quorum but are not considered votes cast. Brokerage firms generally have
authority to vote customers' shares held in street name for the election of
directors and on other matters that are considered "routine." Shares held by
brokers in street name and for which the brokers do not have discretion to vote
are called "broker non-votes." Abstentions and instructions to withhold
authority will result in a nominee for director (Proposal 1) receiving fewer
votes but will not count as votes "against" the nominee. Abstentions and broker
non-votes will affect the determination of the approval of the changes to the
Certificates of Designation of the Series C Preferred Stock and Series D
Preferred Stock (Proposals 2 and 3, respectively), the reverse stock split
(Proposal 4) and the decrease in authorized shares of capital stock (Proposal
5). Abstentions will have the effect of a vote against the ratification of the
independent auditors (Proposal 6) but broker non-votes will have no effect.
The Company's executive officers and directors who hold, or have the power to
direct the voting of, shares of Common Stock and Preferred Stock eligible to
vote at the meeting have indicated that they intend to vote for all of the
proposals. As of the Record Date, those executive officers and directors held or
had the power to direct 122,905,291 (90.6%) of the votes (which includes the
right to vote (on a converted basis) 3,947,193 shares (90.4%) of the Series C
Preferred Stock and 118,688 shares (100%) of the Series D Preferred Stock).
Therefore, they hold sufficient shares to approve all of the proposals and it is
anticipated that all of the proposals will be approved.
THE REORGANIZATION
The Company
Prior to the Reorganization, the Company engaged through its wholly owned
subsidiary, Danzer Industries, Inc., in the fabrication of metal parts and truck
bodies for the service and utilities markets. On June 21, 2001, the Company
issued to Obsidian Capital Partnership, L.P. (the "Partnership"), Mr. Durham and
certain affiliates a total of 1,970,962 shares of the Company's Series C
Preferred Stock in exchange for all of the issued and outstanding shares of
three companies:
6
o Pyramid Coach, Inc. ("Pyramid"), a provider of luxury coach leases for
corporations and the entertainment industry (810,099 shares);
o U.S. Rubber Reclaiming, Inc. ("U.S. Rubber"), a butyl-rubber
reclaiming operation (1,025,151 shares); and
o Champion Trailer, Inc. ("Champion"), a manufacturer of customized
racecar transporters, specialty exhibit trailers and mobile
hospitality units (135,712 shares).
On July 31, 2001, the Company issued an additional 2,206,893 shares of Series C
Preferred Stock to the Partnership to acquire all of the issued and outstanding
shares of an additional company:
o United Acquisition, Inc. (now operated as United Expressline, Inc.)
("United"), a manufacturer of cargo, racing and specialty trailers
(2,206,893 shares).
Each share of Series C Preferred Stock is convertible into 20 shares of Common
Stock and the holders of shares of Series C Preferred Stock vote on an
as-converted basis together with the holders of shares of Common Stock (except
when separate class votes are required by the Delaware General Corporation Law
or the Company's Certificate of Incorporation).
Background of the Reorganization
The Reorganization of the Company occurred in June and July 2001. Prior to the
Reorganization, the Company had engaged through its wholly owned subsidiary,
Danzer Industries, Inc. ("Danzer Industries"), in the fabrication of metal parts
and truck bodies for the service and utility markets.
On June 21, 2001, the Company acquired from the Partnership, Mr. Durham and
certain other persons all of the shares of three companies: Pyramid; U.S.
Rubber; and Champion. Also on that date, Mr. Durham was elected Chief Executive
Officer and Chairman of the Board of the Company. On July 31, 2001, the Company
acquired from the Partnership and Mr. Durham substantially all of the assets of
United. These acquisitions and the related changes are referred to in this Proxy
Statement as the "Reorganization."
The Partnership is a private equity fund that specializes in buying controlling
positions in and developing middle market companies. Timothy S. Durham has been
the Chief Executive Officer and a Managing Member of Obsidian Capital Company
LLC, the general partner of the Partnership, since the formation of the
Partnership in April 2000. The other managing members of Obsidian Capital
Company LLC are Terry G. Whitesell and Jeffrey W. Osler.
Mr. Durham became interested in the possible acquisition by the Partnership of
Danzer Industries, a small trailer company owned by Danzer Corporation. In
February 2001, Mr. Durham approached Renaissance Capital Group, Inc.
("Renaissance Capital"), the beneficial owner of approximately 65% of the Danzer
Corporation common ctock, to determine whether there was any interest in selling
Danzer Industries.
Mr. Durham engaged in discussions about the possible acquisition with
representatives of Renaissance Capital and the management of Danzer Corporation.
As the discussions progressed, Danzer Corporation's representatives proposed
that Danzer Corporation acquire U. S. Rubber and Champion, which were controlled
by the Partnership; United, which the Partnership was in the process of
acquiring; and Pyramid Coach, which was owned by Timothy Durham and Terry
Whitesell.
7
Negotiations for the acquisitions continued during the following months. As part
of the parties' due diligence investigations conducted in March and April 2001,
Mr. Durham visited the Danzer Industries operations in Hagerstown, Maryland, and
members of Danzer Corporation's management and representatives of Renaissance
Capital visited the operations of the United, U.S. Rubber and Champion. The
Board of Directors of Danzer Corporation approved the Reorganization and
Reorganization Agreement and the Reorganization Agreement was signed by the
parties as of June 21, 2001. The United acquisition was completed on July 31,
2001.
The Reorganization Agreement
The terms and conditions of the Reorganization were set forth in an Acquisition
Agreement and Plan of Reorganization (the "Reorganization Agreement"), dated as
of June 21, 2001, by and among the Company (then named "Danzer Corporation"),
Danzer Industries, Pyramid, Champion, United, U.S. Rubber, the Partnership and
Timothy S. Durham.
Since the Company did not have a sufficient number of authorized and unissued
shares of Common Stock, all of the acquisitions in the Reorganization were made
in exchange for shares of the Company's Series C Preferred Stock. Pursuant to
the Reorganization Agreement, in June 2001 Mr. Durham was named the Company's
Chairman and Chief Executive Officer, Mr. Whitesell was named the Company's
President and Chief Operating Officer and Jeffrey Osler, a managing member of
Obsidian Capital Company LLC, was named Executive Vice President, Secretary and
Treasurer of the Company. Messrs. Durham, Whitesell and Osler also were elected
directors of the Company in June 2001.
Regulatory Approvals
No federal or state regulatory approvals were required for the Reorganization.
The Company did not obtain any reports, opinions or appraisals in connection
with the Reorganization.
Name Change and Change in State of Incorporation
Following the Reorganization and at the Annual Meeting of Stockholders held on
October 5, 2001, the Company's stockholders approved the reincorporation of the
Company in Delaware and the change of the Company's name. On October 2001, the
Company's state of incorporation was changed from New York to Delaware and the
Company's name was changed from Danzer Corporation to Obsidian Enterprises, Inc.
The Company originally was incorporated in New York in 1987 under the name
Affiliated National, Inc. and had subsequently changed its name to Global
Environmental Corp. and then to Danzer Corporation.
Financial Information
The Reorganization is reflected in the Company's consolidated financial
statements, which have been included in filings the Company has made with the
SEC since the Reorganization. Audited financial statements for and as of the
Company's fiscal year ended October 31, 2002, are included in Appendix D to this
Proxy Statement. Unaudited financial statements for and as of the nine-month
period ended July 31, 2003, are included in Appendix E to this Proxy Statement.
In addition, financial statements for each of the businesses the Company
acquired in the Reorganization were filed in amendments to Form 8-Ks the Company
filed with the SEC on April 19, 2002. (The filings the Company makes with the
SEC may be obtained without charge at the SEC's website at www.sec.gov.)
8
Business of the Company Subsequent to the Reorganization
The Company currently is a holding company headquartered in Indianapolis,
Indiana that conducts business through five subsidiaries: U.S. Rubber, a
butyl-rubber reclaiming operation; Pyramid, a provider of short- and long-term
luxury coach leases for corporations and the entertainment industry; Obsidian
Leasing Co., Inc. ("Obsidian Leasing"), the owner of certain of the coaches
operated by Pyramid; United, a manufacturer of steel-framed cargo, racing and
specialty trailers; and Danzer Industries, a manufacturer of service and utility
truck bodies and accessories and cargo trailers. (Champion, a manufacturer of
customized racecar transporters, specialty exhibit trailers and mobile
hospitality units, formerly owned by the Company, was sold in January 2003. See
"Sale of Champion Trailer, Inc." below.)
The Company operates in three industry segments comprised of butyl-rubber
processing; trailer and related transportation equipment manufacturing; and
leasing of transportation. For a detailed description of the Company's business,
including segment information, see "Description of Business" in Appendix D.
Sale of Champion Trailer, Inc.
The Company determined in 2002 that it would not be possible for Champion to
achieve profitable operations in the foreseeable future without a substantial
cash infusion. On October 30, 2003, the Company's Board of Directors agreed to
sell the assets of Champion to an entity controlled by Messrs. Durham and
Whitesell in exchange for the assumption of all of Champion's liabilities other
than subordinated debt. The sale was completed on January 30, 2003.
Proposals Relating to the Reorganization
The Company's stockholders will be voting on several proposals at the Annual
Meeting that will facilitate the conversion into Common Stock of shares of
Preferred Stock issued in and subsequent to the Reorganization:
o Amendment of the Company's Certificates of Designation for the Series
C Preferred Stock and Series D Preferred Stock to provide for
proportionate adjustments to reflect any increases and decreases in
the Company's Common Stock (such as would occur in a reverse stock
split) (Proposals 2 and 3).
o Amendment of the Company's Certificate of Incorporation to effect a
50-to-1 reverse stock split (Proposal 4).
o Amendment of the Company's Certificate of Incorporation following
effectiveness of the reverse stock split to decrease the number of
authorized shares to capital stock from 45,000,000 to 15,000,000
consisting of 10,000,000 shares of Common Stock and 5,000,000 shares
of preferred stock.
9
The stockholders also will be voting on the following proposals at the Annual
Meeting:
o Election of seven directors for one-year terms (Proposal 1).
o Ratification of the appointment of McGladrey & Pullen, LLP as the
Company's independent auditors for the fiscal year ending October 31,
2003 (Proposal 6).
PROPOSALS TO BE CONSIDERED AT THE ANNUAL MEETING
PROPOSAL 1
ELECTION OF DIRECTORS
The Company's Board of Directors consists of seven members. The members of the
Board of Directors are elected to serve one-year terms. Each director serves
until the next Annual Meeting of Stockholders or until the director's successor
has been elected and has qualified. The following table presents biographical
information on the seven nominees.
The Board of Directors unanimously recommends that the stockholders
vote FOR the election of the seven nominees.
BOARD OF DIRECTORS
--------------------------------------------------------------------------------
Name Age Business Experience and Service as a Director
--------------------------------------------------------------------------------
Timothy S. Durham 41 Mr. Durham has served as the Chief Executive
Officer and Chairman of the Board and as a
director of the Company since June 2001. He
has served as a Managing Member and Chief
Executive Officer of Obsidian Capital
Company LLC, which is the general partner of
Obsidian Capital Partners LP, since April
2000. Beginning in 1998, Mr. Durham founded
and maintained a controlling interest in
several investment funds, including Durham
Capital Corporation, Durham Hitchcock
Whitesell and Company LLC, and Durham
Whitesell & Associates LLC. From 1991 to
1998, Mr. Durham served in various
capacities at Carpenter Industries, Inc.,
including as Vice Chairman, President and
Chief Executive Officer. Mr. Durham also
serves as a director of National Lampoon,
Inc. Mr. Durham is Mr. Osler's
brother-in-law.
--------------------------------------------------------------------------------
Daniel S. Laikin 41 Mr. Laikin has served as a director of the
Company since September 2001. Mr. Laikin is
Chief Operating Officer and a director of
National Lampoon, Inc. He has been a
Managing Member of Fourleaf Management LLC,
a management company of an investment fund
that invests in technology related entities,
since 1999. Mr. Laikin served as the
Chairman of the Board of Biltmore Homes from
1993 to 1998.
--------------------------------------------------------------------------------
10
BOARD OF DIRECTORS
--------------------------------------------------------------------------------
Name Age Business Experience and Service as a Director
--------------------------------------------------------------------------------
D. Scott McKain 48 Mr. McKain has been a director of the
Company and Vice Chairman of the Board since
September 2001. He has served as the
Chairman of McKain Performance Group since
1981. Mr. McKain also has been the Vice
Chairman of Durham Capital Corporation since
1999. From 1983 to 1998, Mr. McKain was a
broadcast journalist and television
commentator. Mr. McKain also has authored
several books and is a keynote speaker who
presents high content workshops across the
nation.
--------------------------------------------------------------------------------
Jeffrey W. Osler 35 Mr. Osler has served as the Executive Vice
President, Secretary and Treasurer and as a
director of the Company since June 2001. He
also is a Managing Member of Obsidian
Capital Company LLC and has served as Senior
Vice President at Durham Whitesell &
Associates LLC and Durham Capital
Corporation since September 1998. Prior to
that time, Mr. Osler served as the General
Manager of Hilton Head National Golf Club.
Mr. Osler is Mr. Durham's brother-in-law.
--------------------------------------------------------------------------------
John A. Schmit 35 John A. Schmit has been a director since
July 2001. Mr. Schmit joined Renaissance
Capital Group, Inc. in 1997 and is Vice
President--Investments. Prior to joining
Renaissance Capital Group, Mr. Schmit
practiced law with the law firm of Gibson,
Ochsner & Adkins in Amarillo, Texas from
September 1992 to September 1994. Between
August 1994 and May 1996, Mr. Schmit
attended Georgetown University where he
earned his L.L.M. in International and
Comparative Law.
--------------------------------------------------------------------------------
Goodhue W. Smith, III 53 Mr. Smith has been a director of the Company
since 1997. Mr. Smith founded Duncan-Smith
Investments, Co., an investment banking firm
in San Antonio, Texas, in 1978 and since
that time has served as its Secretary and
Treasurer. Mr. Smith also is a director of
Citizens National Bank of Milam County.
--------------------------------------------------------------------------------
Terry G. Whitesell 64 Mr. Whitesell has served as the President
and Chief Operating Officer and as a
director of the Company since June 2001.
Prior to that time he co-founded several
entities with Mr. Durham, including Obsidian
Capital Company, LLC, Durham Hitchcock
Whitesell and Company LLC and Durham
Whitesell & Associates LLC. Mr. Whitesell
also is a Managing Member of Obsidian
Capital Company LLC. From April 1992 until
September 1998, Mr. Whitesell served as
Executive Vice President of Carpenter
Industries, Inc.
--------------------------------------------------------------------------------
Each of the nominees has agreed to serve the term for which he has been
nominated. It is intended that the proxies solicited by the Board of Directors
will be voted for the nominees named above. If any nominee is unable to stand
for election, the Board of Directors may designate a substitute nominee or adopt
a resolution reducing the number of members on the Board. If a substitute
nominee is designated, shares represented by proxy would be voted for the
substituted nominee.
Nomination of Directors
The Company's Board of Directors does not have a nominating committee. The
functions customarily performed by a nominating committee are performed by the
Board as a whole.
11
MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES
During fiscal 2002, the Company's Board of Directors held two meetings and took
action by unanimous consent on six occasions. All the Company's directors
attended 75% or more of the aggregate of the meetings of the Board of the
Company and all committees upon which the Directors served. The Company has two
standing committees, the Audit Committee and the Compensation Committee.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information concerning the compensation
paid or accrued by the Company for services rendered during the Company's past
three fiscal years ended October 31, 2002 by the Company's Chief Executive
Officer. (No executive officers of the Company received a salary and bonus for
fiscal 2002 in excess of $100,000 so as to require their inclusion in the
table.)
-----------------------------------------------------------------------------------------------------------------
Long-Term
Compensation
Annual Compensation Awards
-----------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------
Securities
Name and Underlying All Other
Principal Position Year Salary Bonus Options/SARs Compensation
------------------------------------------------------------------------------------------------------------------
Timothy S. Durham, 2002 $75,000 $0 $0 $0
Chief Executive 2001 $27,404 $0 $0 $0
Officer(1) 2000 N/A N/A N/A N/A
------------------------------------------------------------------------------------------------------------------
(1) Mr. Durham was elected Chief Executive Officer and Chairman of the Board on
June 21, 2001.
Option/SAR Grants in Last Fiscal Year
No grants were made during fiscal 2002 pursuant to the Company's 1999 Stock
Option Plan or the 2001 Long Term Incentive Plan.
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End
Option/SAR Values
No executive officer named in the Summary Compensation Table held unexercised
options or SARs as of October 31, 2002 or exercised options during fiscal 2002.
Employment and Control Agreements
The Company did not have any employment agreements with any of the executive
officers named in the Summary Compensation Table as of the end of fiscal 2002.
Compensation of Directors
Directors who are not employees of the Company are entitled to a board meeting
attendance fee of $750 plus reimbursement of expenses.
THE AUDIT COMMITTEE
The Audit Committee members for fiscal 2002 were Mr. John A. Schmit, who served
as Chair, and Messrs. Goodhue W. Smith, III and Daniel S. Laikin. The Audit
12
Committee met three times in fiscal 2002. In addition to the three full meetings
of the audit committee, the Chairman of the audit committee discussed with
McGladrey & Pullen, LLP their findings and procedures relative to the quarterly
reviews performed by McGladrey & Pullen, LLP. These meetings and discussions
were designed to facilitate and encourage communication between the Audit
Committee and the Company's independent auditors, McGladrey & Pullen, LLP.
The Audit Committee aids management in the establishment and supervision of the
Company's financial controls, evaluates the scope of the annual audit, reviews
audit results, makes recommendations to the Board regarding the selection of
independent auditors, consults with management and the independent auditors
prior to the presentation of financial statements to stockholders and, as
appropriate, initiates inquiries into aspects of the Company's financial
affairs. The members of the Audit Committee are independent as defined by the
National Association of Securities Dealers' ("NASD") listing standards. The
Company's Board of Directors adopted a written charter for the Audit Committee
in 2001. A copy of the Audit Committee Charter was attached as Appendix A to the
proxy statement for the 2001 Annual Meeting of Stockholders.
REPORT OF THE AUDIT COMMITTEE
This report is being provided to inform stockholders of the Audit Committee's
oversight with respect to the Company's financial reporting.
The Audit Committee has reviewed and discussed with management the Company's
audited consolidated financial statements for the year ended October 31, 2002.
The Audit Committee also has discussed with the Company's independent auditors,
McGladrey & Pullen, LLP, the matters required to be discussed by SAS 61 as
amended by SAS 89 and SAS 90 (Codification of Statements on Auditing Standards,
AU ss.380). The Audit Committee has received from McGladrey & Pullen, LLP, the
written report, the written disclosures and the letter required by Independence
Standards Board Standard No. 1 (Independence Discussions with Audit Committees)
and has reviewed, evaluated and discussed with McGladrey & Pullen, LLP its
independence. The Audit Committee also has discussed with management and with
McGladrey & Pullen, LLP, such other matters and received such assurances from
them as the Audit Committee has deemed appropriate.
In reliance upon the reviews and discussions referred to above, the Audit
Committee recommended to the Company's Board of Directors that the audited
consolidated financial statements be included in the Company's Annual Report on
Form 10-K for the year ended October 31, 2002, as amended, that has been filed
with the Securities and Exchange Commission.
This Report is submitted by the members of the Audit Committee:
John A. Schmit
Goodhue W. Smith, III
Daniel S. Laikin
13
THE COMPENSATION COMMITTEE
D. Scott McKain, who served as Chair, and John A. Schmit served as the members
of the Compensation Committee for fiscal 2002. The Compensation Committee met
once in fiscal 2002. The Committee reviews all salary and employee benefit
issues relating to employees and directors of the Company and makes
recommendations to the Board regarding the compensation of executive officers.
The Compensation Committee also is responsible for the administration of the
1999 Stock Compensation Plan and 2001 Long Term Incentive Plan.
REPORT OF THE COMPENSATION COMMITTEE
October 31, 2002
Compensation Policies
In connection with the change of control and reorganization of the Company that
occurred on June 21, 2001 (the "Reorganization"), Timothy S. Durham became Chief
Executive Officer and Chairman of the Board of the Company, replacing the former
Chief Executive Officer, who resigned on that date. The other executive officers
of the Company also were replaced in the Reorganization. In addition, Mr. Durham
and the other new executive officers acquired in the Reorganization beneficial
ownership of more than a majority of the voting power of the Company's capital
stock.
Given the Reorganization, his beneficial ownership interest and the Company's
financial concerns, Mr. Durham recommended to the Compensation Committee that he
and the other new executive officers receive only nominal salaries for the 2001
fiscal year and that no bonuses or other incentive compensation packages be
approved for fiscal 2001. The Compensation Committee adopted Mr. Durham's
recommendations. As a consequence, Mr. Durham's total compensation for the more
than four months that he served during the 2001 fiscal year was only $27,404 and
none of the other new executive officers received compensation in an amount
requiring the compensation to be reported in the Summary Compensation Table.
Mr. Durham made similar recommendations concerning compensation for fiscal 2002
as he had made for fiscal 2001 and the Compensation Committee again adopted his
recommendations. Consequently, Mr. Durham received a salary of $75,000 and no
bonus for fiscal 2002 and none of the other executive officers received
compensation in an amount that would require their inclusion in the Summary
Compensation Table. The amount of compensation paid to Mr. Durham and the other
executive officers was not based on the Company's performance.
This report is submitted by the members of the Compensation Committee:
D. Scott McKain
John A. Schmit
14
COMPENSATION COMMITTEE INTERLOCKS AND
INSIDER PARTICIPATION
A number of related party transactions occurred in connection with the
Reorganization in 2001. As discussed above, the Reorganization transactions
occurred in two parts:
o On June 21, 2001, the Company acquired from the Partnership, Mr.
Durham and certain other shareholders all of the shares of Pyramid,
Champion and U.S. Rubber.
o On July 31, 2001, the Company acquired from the Partnership and Mr.
Durham substantially all of the assets of United.
Prior to these transactions, DW Leasing, LLC ("DW Leasing"), a company owned by
Messrs. Durham and Whitesell, had entered into a number of transactions with
Pyramid whereby coaches owned by DW Leasing were operated by Pyramid and the
debt on these coaches were cross-guaranteed by DW Leasing and Pyramid. Although
the Company does not own any interest in DW Leasing, the accounts of DW Leasing
are included in the financial statements of the Company.
The agreements entered into at the time of the Reorganization contemplated that
the coaches and related debt would be promptly transferred by DW Leasing to the
Company's subsidiary, Obsidian Leasing Co., Inc. ("Obsidian Leasing"). Twenty
seven coaches were transferred by DW Leasing to Obsidian Leasing in November
2001 in consideration of the assumption of the related debt. Pyramid continues
to operate the remaining seven coaches for DW Leasing pursuant to a management
agreement. Prior to the Reorganization described above, DW Leasing and Pyramid
were privately owned and structured in a tax-efficient manner. Because of the
nature of this structure, transfer of the remaining seven coaches owned by DW
Leasing would have adverse tax consequences to the owners of DW Leasing which
had not been contemplated in the Reorganization. Accordingly, the Company has
agreed to continue to operate these coaches through DW Leasing. During 2002, the
Company received gross revenue of $674,000 from the coaches operated by Pyramid
for DW Leasing and paid fees of $538,000 to DW Leasing for the use of the
coaches.
During 2002 and 2001, Obsidian Capital Partners, LP, the majority stockholder of
the Company, advanced funds to the Company. These funds were advanced to fund
losses of Champion and to fund the professional fees with respect to the filings
with the SEC in connection with the Reorganization in 2001 and closing costs in
connection with the Reorganization and the closing of the purchase of United.
The maximum amount outstanding during 2002, related to funding of Champion
losses and funding professional fees was $1,290,000 and $1,275,000 respectively.
On April 25, 2002, $1,290,000 of the amounts advanced was converted to Series C
Preferred Stock. On October 24, 2002, $1,275,000 of the amounts advanced was
converted to Series D Preferred Stock.
Mr. Durham owns a 50% interest in Fair Holdings, Inc. ("Fair Holdings"). During
2002, Fair Holdings advanced funds to the Company to fund a debt reduction at
Champion and to fund certain professional fees with respect to the filing with
the SEC. The maximum amount outstanding in 2002 to Fair Holdings related to debt
restructuring at Champion and funding certain professional fees was $596,000 and
$270,000, respectively. On April 25, 2002, $596,000 of the amounts advanced was
converted to Series C Preferred Stock. On October 24, 2002, $270,000 of the
amounts advanced was converted to Series D Preferred Stock.
15
In addition to the advances, during the fiscal year ended October 31, 2002, Fair
Holdings provided a $5,000,000 line of credit to the Company. The maximum amount
outstanding in 2002 was $1,798,000. The line of credit is unsecured, bears
interest at 10% per annum and matures in January 2005.
Fair Holdings also has leased certain computer equipment to the Company on a
short-term basis commencing on August 1, 2002. The rental paid in 2002 was
$1,000.
Fair Holdings lent Obsidian Leasing an aggregate of $1,588,000 in connection
with the refinancing of coaches. The maximum amount outstanding during 2002 for
this refinancing was $1,588,000. The loans are ten-year, interest-only loans,
subordinate to the bank debt on the coaches and bear interest at 14% per annum.
The Company subleases its headquarters space from Fair Holdings under a sublease
with a monthly rental of $3,675. Prior to the sublease with Fair Holdings, the
Company sublet space from Obsidian Capital Company and paid $56,000 to Obsidian
Capital Company for its space in 2002.
Fair Holdings leased certain computer equipment to Danzer under a twelve month
lease effective August 1, 2002. The aggregate rental due under the twelve month
lease is $8,000.
DW Trailer, LLC, a company owned by Messrs. Durham and Whitesell, has leased a
forklift to Danzer under a 38 month lease at $1,000 per month.
United advanced Obsidian Capital Company $216,000, as a part of the closing of
the purchase of the United transaction. The amount was paid back to United in
2002.
DC Investments, a company controlled by Mr. Durham, lent U.S. Rubber $700,000
pursuant to a subordinated note which bears interest at 15% per annum with the
principal payable in March 2007. The loan was made to permit the Company to
complete the elimination of the interest of SerVaas, Inc. in U.S. Rubber.
During 2002, DC Investments purchased the senior secured loans to Champion from
the bank which held them. The maximum amount outstanding to DC Investments in
2002 was $602,000. The loans bear interest at 5.5%.
On October 30, 2002, the Company entered into a Memorandum of Agreement with
Messrs. Durham and Whitesell pursuant to which Champion agreed to sell all of
its assets to an entity to be designated by Messrs. Durham and Whitesell subject
to the payment by Messrs. Durham and Whitesell of $1.00 and the assumption by
the entity acquiring the assets of all of the liabilities of Champion except for
the liability of Champion to Markpoint Equity Growth Fund IV, which was settled
by the Company. This transaction closed on January 30, 2003.
Management believes that the transactions described above were on terms no less
favorable to the Company and its subsidiaries than would have been the case for
transactions with unrelated third parties.
16
COMMON STOCK OWNERSHIP BY PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table sets forth information with respect to beneficial ownership
of Common Stock as of October 10, 2003, by (i) all persons known to the Company
to be the beneficial owner of five percent or more of the Common Stock, (ii)
each director of the Company, (iii) the Chief Executive Officer and each of the
Company's other most highly compensated executive officers whose total annual
compensation for 2002 based on salary and bonus earned during 2002 exceeded
$100,000 (the "named executive officers"); (iv) the current executive officers;
and (v) all Company directors and executive officers as a group. This table does
not include shares of Common Stock that may be purchased pursuant to options not
exercisable within 60 days of the record date. All persons listed have sole
voting and investment power with respect to their shares unless otherwise
indicated.
Common Stock Series C Preferred Stock Series D Preferred Stock
------------ ------------------------ ------------------------
Number of Percentage of Number of Percentage Number of Percentage of
Shares Shares Shares of Shares Shares Shares
Name and Address of Beneficially Beneficially Beneficially Beneficially Beneficially Beneficially
Beneficial Owner Owned Owned Owned Owned Owned Owned
---------------- ----- ----- ----- ----- ----- -----
Executive Officers and
Directors:
Timothy S. Durham (1) 109,067,817 80.4% 3,942,193 90.2% 118,688 100.0%
D. Scott McKain 810,100 2.2% -- -- -- --
Jeffrey W. Osler (2) 91,201,903 72.2% 3,755,869 86.0% 87,185 73.5%
John A. Schmit (3) 5,016,000 13.9% -- -- -- --
Goodhue W. Smith, III (4) 298,334 * 5,000 * -- --
Terry G. Whitesell (5) 97,287,683 77.0% 3,755,869 86.0% 87,185 73.5%
Daniel S. Laikin -- -- -- -- -- --
Barry Baer(6) 10,000 * -- -- -- --
Rick D. Snow(7) -- -- -- -- -- --
Anthony P. Schlichte(8) -- -- -- -- -- --
All current officers and
directors as a group (9
persons) 122,905,291 90.6% 3,947,193 90.4% 118,688 100.0%
Other 5% Owners:
Fair Holdings, Inc.(9) 9,239,505 20.4% 186,324 4.3% 31,503 26.5%
Huntington Capital
Investment Company (10) 7,724,126 17.7% 386,206 8.8% -- --
Obsidian Capital Partners,
L.P. (11) 87,874,705 70.9% 3,755,869 86.0% 87,185 33.5%
Richard W. Snyder(12) 1,946,667 5.4% -- -- -- --
The number of shares of Common Stock above also includes the Preferred Stock
converted to Common Stock equivalents.
---------
*less than one percent
(1) Includes 7,338,103 shares of Common Stock directly owned by Mr. Durham;
2,088,366 shares held by Diamond Investments, LLC, for which Mr. Durham
serves as Managing Member and for which shares Mr. Durham may be deemed to
share voting and dispositive power; 3,942,193 shares of Series C preferred
stock and 118,688 shares of Series D preferred stock over which Mr. Durham
shares voting and dispositive power and that may be deemed to be
beneficially owned by Mr. Durham due to his position as a managing member
of Obsidian Capital Company, LLC, which is the general partner of Obsidian
Capital Partners, LP, which directly owns such shares; 186,324 shares of
Series C preferred stock and 31,503 shares of Series D preferred stock over
which Mr. Durham shares voting and dispositive power and that may be deemed
to be beneficially owned by Mr. Durham due to his position as an executive
officer and shareholder of Fair Holdings, which directly owns such shares;
and 27,140 shares of Common Stock over which Mr. Durham shares voting and
dispositive power and that may be deemed to be beneficially owned by Mr.
Durham due to his position as a managing member of Durham Whitesell and
Associates, LLC, which directly owns such shares. The address of Mr. Durham
is 111 Monument Circle, Suite 4800, Indianapolis, Indiana 46204.
17
(2) Includes 827,200 shares of Common Stock directly owned by Mr. Osler; and
3,755,869 shares of Series C preferred stock and 87,185 shares of Series D
preferred stock over which Mr. Osler shares voting and dispositive power
and that may be deemed to be beneficially owned by Mr. Osler due to his
position as a managing member of Obsidian Capital Company, LLC, which is
the general partner of Obsidian Capital Partners, LP, which directly owns
such shares. The address of Mr. Osler is 111 Monument Circle, Suite 4800,
Indianapolis, Indiana 46204.
(3) Represents shares that may be acquired pursuant to convertible debentures
issued by the Company on July 19, 2001, to Renaissance US Growth Investment
Trust PLC ("RUSGIT") and BFSUS Special Opportunities Trust PLC ("BFS") and
pursuant to warrants issued on January 24, 2003, in consideration of a
waiver granted in connection with the convertible debentures. Mr. Schmit is
Vice President of Renaissance Capital Group, Inc., the investment manager
of RUSGIT and BFS. Mr. Schmit disclaims beneficial ownership as to the
shares beneficially owned by RUSGIT and BFS. The address of Mr. Schmit is
8080 North Central Expressway, Suite 210, Dallas, Texas 75206.
(4) Includes 81,667 shares of Common Stock and 5,000 shares of Series C
Preferred Stock directly owned by Mr. Smith. The address of Mr. Smith is
711 Navarro, San Antonio, Texas 78205.
(5) Includes 6,885,840 shares of Common Stock directly owned by Mr. Whitesell;
3,755,869 shares of Series C preferred stock and 87,185 shares of Series D
preferred stock over which Mr. Whitesell shares voting and dispositive
power and that may be deemed to be beneficially owned by Mr. Whitesell due
to his position as a managing member of Obsidian Capital Company, LLC,
which is the general partner of Obsidian Capital Partners, LP, which
directly owns such shares; and 27,140 shares of Common Stock over which Mr.
Whitesell shares voting and dispositive power and that may be deemed to be
beneficially owned by Mr. Whitesell due to his position as a managing
member of Durham Whitesell and Associates, LLC, which directly owns such
shares. The address of Mr. Whitesell is 111 Monument Circle, Suite 4800,
Indianapolis, Indiana 46204.
(6) Mr. Baer completed his term of employment with the Company in April 2003.
(7) Mr. Snow was named Executive Vice President and Chief Financial Officer in
April 2003. He continues to serve as Chief Financial Officer for Fair
Finance, Inc., a company for which Mr. Durham, the Company's Chairman and
Chief Executive Officer, also serves as Chief Executive Officer. Prior to
joining Fair Finance, Inc., in 2002, Mr. Snow had served as Senior Manager
of Brockman, Coats, Gedelian & Co., a regional accounting firm. Prior to
joining Brockman, Coats, Gedelian & Co., he was an accountant with Grant
Thornton LLP.
(8) Mr. Schlichte has served as Executive Vice President of Corporate Finance
since April 2003. Previously he held vice president and senior lending
officer positions at First Indiana Bank.
(9) Consists of 186,324 shares of Series C preferred stock and 31,503 shares of
Series D preferred stock directly owned by Fair Holdings, Inc.
(10) Based on the information reported in a Schedule 13G filed with the SEC on
August 6, 2001.
(11) Consists of 3,755,869 shares of Series C preferred stock and 87,185 shares
of Series D preferred stock directly owned by Obsidian Capital Partners,
L.P. Voting and dispositive power over the shares may be deemed to be held
by Obsidian Capital Partners, LP, Obsidian Capital Company, LLC and the
managing members of Obsidian Capital Company LLC, which include Messrs.
Durham, Whitesell and Osler.
(12) Based on the information reported in a Schedule 13D filed with the SEC on
September 9, 1996.
PERFORMANCE GRAPH
The SEC requires the Company to include in this Proxy Statement a line graph
comparing the Company's cumulative five-year total stockholder returns on Common
Stock with market and industry returns over the past five years. The following
18
chart (prepared by Standard & Poor's) compares the yearly percentage change in
the cumulative total stockholder return on the Company's Common Stock from
October 31, 1998 through October 31, 2002, with the cumulative total return of
the Nasdaq U.S. Index and of a peer group of issuers with similar market
capitalizations. Because there is an insufficient number of publicly traded
companies with businesses comparable to the Company's business, the peer group
has been selected on the basis of similar market capitalization rather than on
an industry or a line-of-business basis. The comparison assumes $100 was
invested immediately prior to such period in Common Stock and in each of the
foregoing indices and assumes reinvestment of dividends. Dates on the following
chart represent the last day of the indicated fiscal year. The Company paid no
dividends during the period.
[GRAPH OMITTED]
*The peer group consists of the following issuers: 21st Century Holding Co;
Arrhythmia Research Technology; Avalon Holdings Corp; Bio Imaging Technologies,
Inc.; C-3d Digital, Inc.; Coram Healthcare Corp.; Cubic Energy, Inc.; Elmers
Restaurants, Inc.; Emergency Filtration Products, Inc.; Evolve Software, Inc.;
IIS Intelligent Information Systems, Ltd.; Knowledgemax Inc.; Merchant Capital
Group, Inc; Movie Star, Inc.; Systemone Technologies Inc.; TAT Technologies,
Ltd.; Vialink Co.; VLPS Lighting Services International; WTC Industries, Inc.;
and Zoom Technologies, Inc.
INDEXED RETURNS
Base Years Ending
Period
Company Name / Index Oct97 Oct98 Oct99 Oct00 Oct01 Oct02
----------------------------------------------------------------------------------------------------
OBSIDIAN ENTERPRISES INC 100 68.00 48.00 168.00 200.00 208.00
NASDAQ U.S. INDEX 100 111.87 188.83 213.11 107.07 84.95
PEER GROUP 100 51.23 39.07 38.29 5.91 6.08
19
CHANGE IN INDEPENDENT ACCOUNTANT
As previously reported in the 2002 Proxy Statement and in a Current Report Form
8-K filed on November 13, 2001, the Audit Committee of the Company's Board of
Directors decided on November 7, 2001, to dismiss Linton, Shafer & Company, P.A.
("Linton Shafer") as the Company's independent auditors. The audit reports of
Linton Shafer on the consolidated financial statements of the Company as of and
for the years ended October 31, 2000 and 1999 did not contain any adverse
opinion or disclaimer of opinion, nor were they qualified or modified as to
uncertainty, audit scope or accounting principles. During the fiscal years ended
October 31, 2000 and 1999 and the period following October 31, 2000, there were
no disagreements between the Company and Linton Shafer on any matter regarding
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure. A letter from Linton Shafer confirming the statements set
forth in this Item 9 was attached as Exhibit 16 to the Current Report on Form
8-K filed on November 13, 2001.
On November 7, 2001, the Board of Directors engaged McGladrey & Pullen, LLP
("McGladrey") as the Company's new independent auditors. During the fiscal years
ended October 31, 2000 and 1999 and during the period following October 31,
2000, the Company did not consult McGladrey regarding either (i) the application
of accounting principles to a specified transaction, either completed or
proposed, or the type of audit opinion that might be rendered on the Company's
financial statements, and neither a written report was provided to the Company
nor oral advice provided that McGladrey concluded was an important factor
considered by the Company in reaching a decision as to an accounting, auditing
or financial reporting issue; or (ii) any matter that was either the subject of
a disagreement or a reportable event.
INTRODUCTION TO PROPOSALS 2, 3, 4 AND 5
We are asking our stockholders to vote on four separate proposals to amend the
Company's current Certificate of Incorporation. Stockholders may vote for all,
some or none of Proposals 2, 3, 4 and 5; stockholders should note, however, that
the Board will not implement Proposal 5 unless the stockholders first approve
Proposal 4.
As discussed above, at the time of the Reorganization in 2001, the Company did
not have a sufficient number of authorized and unissued shares of Common Stock,
the Company issued shares of the Company's Series C Preferred Stock as
consideration for the companies acquired in the Reorganization. The Company also
has issued shares of Series D Preferred Stock since the Reorganization.
Proposal 2 would amend the Certificates of the Designations, Preferences, Rights
and Limitations of Series C Preferred Stock and Proposal 3 would amend the
Certificate of the Designations, Preferences, Rights and Limitations of Series D
Preferred Stock. The amendments made by Proposals 2 and 3 are the same: each
amendment would add a new subsection to provide for the proportionate increase
or decrease in the number of shares of Series C Preferred and Series D
Preferred, respectively, to reflect an increase or decrease in the shares of
outstanding Common Stock.
In the Reorganization Agreement, the Company agreed that, following the
effective date of the Reorganization, it would seek stockholder approval of the
authorization of sufficient shares to permit conversion of the Series C
20
Preferred Stock into Common Stock and to effect a reverse stock split. The
Reorganization Agreement also obligated the persons who had acquired the shares
of Series C Preferred Stock to convert those shares into shares of Common Stock
within 30 days after that stockholder approval. The Company has been unable
until now to seek stockholder approval of the reverse stock split and change in
authorized Common Stock because of the need to comply with certain SEC financial
statement requirements relating to the Reorganization. On August 28, 2003, the
SEC granted the Company a waiver of those financial statement requirements.
To provide sufficient authorized shares of Common Stock for the conversion of
the Preferred Stock, we propose to reduce the number of outstanding shares by
the reverse stock split in Proposal 4. Following the reverse stock split,
720,158 shares of Common Stock would be outstanding. The reverse stock split
would not affect the number of shares of Common Stock that are authorized, so we
are proposing in Proposal 5 to reduce the Company's authorized shares of Common
Stock from 40,000,000 to 10,000,000.
PROPOSAL 2
AMENDMENT OF SERIES C PREFERRED STOCK
CERTIFICATE OF DESIGNATION
The Board of Directors has adopted, subject to stockholder approval, an
amendment to the Certificate of Desigation for the Series C Preferred Stock. The
preferences, rights and limitations of the Series C Preferred Stock are set
forth in the Certificate of Designation for the Series C Preferred Stock, which
is part of the Company's Certificate of Incorporation filed with the Delaware
Secretary of State. The Certificate of Incorporation authorizes the Company to
issue 5,000,000 shares of preferred stock and 4,600,000 of those shares of
preferred stock are designated Series C Preferred Stock. As of the record date,
4,368,399 shares of Series C Preferred Stock were issued and outstanding. Each
share of Series C Preferred Stock is convertible, at the option of the holder,
into twenty shares of Common Stock and votes with the shares of Common Stock on
an as-converted basis.
The proposed amendment would amend Section 4, "Conversion, Adjustments and
Registration Rights," of the Certificate of Desigation for the Series C
Preferred to add a new subsection (h) to provide that, if the Company divides
its number of shares of Common Stock in to a greater number of shares or
combines its number of shares of Common Stock into a lesser number of shares,
the number of shares of Common Stock issuable upon conversion of the Series C
Preferred Stock into shares of Common Stock would be proportionately increased
or decreased. The exact text of the new subsection (h) of Section 4 is as
follows:
"(h) In the event the Corporation shall at any time subdivide (by any
stock split, stock dividend or otherwise) its outstanding shares of
Common Stock, into a greater number of shares, the number of shares of
Common Stock issuable hereunder upon conversion of shares of Series C
Preferred shall be proportionately increased, and, conversely, in the
event the outstanding shares of Common Stock shall be combined into a
fewer number of shares (by reverse stock split or otherwise), the
number of shares of Common Stock issuable hereunder upon conversion of
shares of Series C Preferred shall be proportionately decreased."
This proposal must be approved by a majority of the holders of Common Stock,
Series C Preferred Stock (on an as-converted basis) and Series D Preferred Stock
21
(on an as-converted basis) voting as a class and also by the holders of the
Series C Preferred Stock voting as a separate class. The description of the
Certificate of Designation and the proposed amendment set forth above is only a
summary and is qualified in its entirety by reference to the full text of the
Certificate of the Amendment to the Certificate of Designation, which is
attached to this Proxy Statement as Appendix A. The amendment to the Certificate
of Designation will become effective at the time specified in the Certificate of
Amendment filed with the Delaware Secretary of State.
The Board of Directors recommends a vote "For"
the proposed amendment to the Certificate of Designation for
the Series C Preferred Stock.
PROPOSAL 3
AMENDMENT OF SERIES D PREFERRED STOCK
CERTIFICATE OF DESIGNATION
The Board of Directors has adopted, subject to stockholder approval, an
amendment to the Certificate of Desigation for the Series D Preferred Stock. The
preferences, rights and limitations of the Series D Preferred Stock are set
forth in the Certificate of Designation for the Series C Preferred Stock, which
is part of the Company's Certificate of Incorporation filed with the Delaware
Secretary of State. The Certificate of Incorporation authorizes the Company to
issue 5,000,000 shares of preferred stock and 200,000 of those shares of
preferred stock are designated Series D Preferred Stock. As of the record date,
104,402 shares of Series D Preferred Stock were issued and outstanding. Each
share of Series D Preferred Stock is convertible, at the option of the holder,
into 175 shares of Common Stock and votes with the shares of Common Stock on an
as-converted basis.
The proposed amendment would amend Section 4, "Conversion, Adjustments and
Registration Rights," of the Certificate of Desigation for the Series D
Preferred to add a new subsection (h) to provide that, if the Company divides
its number of shares of Common Stock in to a greater number of shares or
combines its number of shares of Common Stock into a lesser number of shares,
the number of shares of Common Stock issuable upon conversion of the Series D
Preferred Stock into shares of Common Stock would be proportionately increased
or decreased. The exact text of the new subsection (h) of Section 4 is as
follows:
"(h) In the event the Corporation shall at any time subdivide (by any
stock split, stock dividend or otherwise) its outstanding shares of
Common Stock, into a greater number of shares, the number of shares of
Common Stock issuable hereunder upon conversion of shares of Series D
Preferred shall be proportionately increased, and, conversely, in the
event the outstanding shares of Common Stock shall be combined into a
fewer number of shares (by reverse stock split or otherwise), the
number of shares of Common Stock issuable hereunder upon conversion of
shares of Series D Preferred shall be proportionately decreased."
This proposal must be approved by a majority of the holders of Common Stock,
Series C Preferred Stock (voting on an as-converted basis) and Series D
Preferred Stock (voting on an as-converted basis) voting as a class and also by
the holders of the Series D Preferred Stock voting as a separate class. The
description of the Certificate of Designation and the proposed amendment set
forth above is only a summary and is qualified in its entirety by reference to
the full text of the Certificate of the Amendment to the Certificate of
Designation, which is attached to this Proxy Statement as Appendix B. The
22
amendment of the Certificate of Designation will become effective at the time
specified in the Certificate of Amendment filed with the Delaware Secretary of
State.
The Board of Directors recommends a vote "For"
the proposed Amendment to the Certificate of Designation for
the Series D Preferred Stock.
PROPOSAL 4
REVERSE STOCK SPLIT
General
The Board of Directors has adopted, subject to stockholder approval, an
amendment to the Company's Certificate of Incorporation to effect a reverse
50-to-1 split of the issued and outstanding shares of Common Stock. The reverse
stock split would combine each 50 shares of outstanding Common Stock into one
share of Common Stock, thus reducing the number of outstanding shares. As a
result, the number of shares of our Common Stock owned by each stockholder would
be reduced in the same proportion as the reduction in the total number of shares
outstanding, so the percentage of the outstanding shares owned by each
stockholder would remain unchanged. The reverse stock split will be effective
upon the filing of the Certificate of Amendment with the Delaware Secretary of
State.
The text of the proposed amendment is provided in Appendix C to this Proxy
Statement. The text of the proposed amendment is subject of modifications to
include such changes as may be required by the office of the Secretary of State
of Delaware or as our Board of Directors deems necessary and advisable to effect
the reverse stock split.
Reasons for Board Recommendation
As discussed above in the Introduction to Proposals 2, 3, 4 and 5, the Company
is now able to seek stockholder approval of the transactions that will enable
the conversion of the Preferred Stock to Common Stock as it is obligated to do
under the Reorganization Agreement. The approval of the reverse stock split will
allow the holders of shares of Preferred Stock to convert those shares into
shares of Common Stock.
If the reverse stock split is approved, it would have the following effects:
o the number of issued and outstanding shares of Common Stock would be
reduced by the 50-to-1 ratio;
o proportionate adjustments would be made to the per share exercise
price and the number of shares issuable upon the exercise of all
outstanding options and warrants entitling the holders thereof to
purchase shares of Common Stock, which will result in approximately
the same aggregate price being required to be paid in cash for such
options or warrants upon exercise of such options and warrants
immediately preceding the effectiveness of the reverse stock split;
23
o the number of shares into which each share of Series C Preferred Stock
and Series D Preferred Stock is convertible will be proportionately
adjusted to reflect the 50-for-1 ratio; and
o the number of shares reserved for issuance under the Company's
existing stock option plans will be proportionately reduced to reflect
the 50-to-1 ratio.
The reverse stock split will not affect the par value of our Common Stock. The
reverse stock split also will not change the proportionate equity interests of
our stockholders, or the voting and other rights of stockholders, except for
possible immaterial changes due to fractional shares as described below. Our
issued Common Stock will remain fully paid and non-assessable. We will continue
to be subject to the periodic reporting requirements of the Securities Exchange
Act of 1934, as amended.
Effect of the Reverse Stock Split On the Authorized But Unissued Shares of
Common Stock
Upon effectiveness of the reverse stock split, the number of authorized shares
of Common Stock that are not issued or outstanding would increase to reflect the
50-to-1 decrease in the issued and outstanding shares. As a result of the
reverse stock split, the number of authorized shares of Common Stock remaining
available for issuance would increase from 3,992,075 to 39,279,842. The
additional authorized shares of Common Stock will be used for the conversion of
the Series C Preferred Stock and Series D Preferred Stock. Although the increase
in the number of remaining authorized but unissued shares resulting from the
reverse stock split could, under certain circumstances, have an anti-takeover
effect (for example, by permitting issuances which would dilute the stock
ownership of a person seeking to effect a change in the composition of our Board
or contemplating a tender offer or other transaction for the combination of our
Company with another company), the reverse stock split is not being proposed in
response to any effort of which we are aware to accumulate shares of Common
Stock or obtain control of the Company and also is not part of a plan by
management to recommend a series of similar amendments to our Board and
stockholders. Other than the reverse stock split proposal and Proposal 5, which
would decrease the number of shares of authorized capital stock subsequent to
the reverse stock split, the Board does not currently contemplate recommending
the adoption of any other amendments to our Certificate of Incorporation that
could be construed as affecting the ability of third parties to take over or
change control of the Company.
Potential Disadvantages to the Reverse Stock Split
Generally, a reduction of outstanding shares of Common Stock in a reverse stock
split results in a proportionate increase in the market price of the Common
Stock. We cannot assure you, however, that the reverse stock split in the
Company's Common Stock will increase the market price of the Common Stock equal
to the 50-to-1 ratio of the reverse stock split. We also cannot assure you that
the market price of our Common Stock immediately after the effective date of the
proposed reverse stock split will be maintained for any period of time or that
the ratio of post- and pre-split shares will remain the same after the reverse
stock split is effected or that the reverse stock split will not have an adverse
effect on our stock price due to the reduced number of shares outstanding after
the reverse stock split. A reverse stock split may be viewed negatively by the
market and, consequently, could lead to a decrease in our overall market
capitalization. If the per share price does not increase proportionately as a
result of the reverse stock split, then our overall market capitalization will
be reduced.
24
Fractional Shares
Implementation of the reverse stock split would result in some stockholders
owning fractional shares of Common Stock. For example, following a 50-to-1
reverse stock split, a holder of 90 shares would hold 1.8 shares. All shares of
Common Stock held by a stockholder after the reverse stock split will be
aggregated and a certificate for the number of whole shares after the
aggregation will be issued to the stockholder. Stockholders that would otherwise
be entitled to receive a fractional share of our Common Stock as a consequence
of the reverse stock split will receive instead a cash amount, without interest,
determined by multiplying (i) the fractional share interest to which the holder
would otherwise be entitled by (ii) the average closing sale price of shares of
Common Stock (on a post-split basis) for the 20 trading days immediately prior
to the effective date of the reverse stock split or, if no sale takes place on
those days, the average of the closing highest asked and lowest bid prices for
those days (on a post-split basis), in each case as reported by the OTC Bulletin
Board.
Each stockholder that owns 50 shares or more of our Common Stock prior to the
reverse stock split would continue to own one or more shares after the reverse
stock split and would continue to share in our assets and any future growth as a
stockholder. The shares of any stockholder that owns fewer than 50 shares of
record (a "Small Stockholder") would receive cash in place of the fractional
share. As a result, the interest of such Small Stockholder in the Company would
be terminated and such Small Stockholder would have no right to share in the
Company's assets or any future growth.
Exchange of Stock Certificates
Promptly following the effective date of the reverse stock split, the Company
will send letters of transmittal to all stockholders of record to be used to
transmit Common Stock certificates to the Company's Transfer Agent. Upon proper
completion and execution of a letter of transmittal and its return to the
Transfer Agent, together with certificates, each stockholder who will have an
interest of at least one whole share will receive a new stock certificate. After
the Effective Date, each certificate representing shares of Common Stock
outstanding prior to the Effective Date and held by a stockholder who is not a
Small Stockholder, until surrendered and exchanged for a new certificate, will
be deemed for all corporate purposes to evidence ownership of such number of
shares as is set forth on the face of the certificate divided by 50. A
stockholder will not be entitled to payment of any dividends declared on shares
of Common Stock subsequent to the reverse stock split until all certificates for
the shares have been reissued to reflect the reverse stock split.
After the reverse stock split and until surrendered, each outstanding
certificate held by a Small Stockholder will be deemed for all purposes to
represent only the right to receive the amount of cash to which the holder is
entitled for the Small Stockholder's fractional share. If the Company is unable
to locate a Small Stockholder, funds otherwise payable to such holders pursuant
to the reverse stock split will be held until proper claim therefore is made,
subject to applicable escheat laws.
25
Effect of Reverse Stock Split On Options and Warrants
The number of shares subject to outstanding options to purchase shares of our
Common Stock also would automatically be reduced in the same 50-to-1 ratio as
the reduction in the outstanding shares. Correspondingly, the per share exercise
price of those options will be increased in direct proportion to the reverse
stock split ratio, so that the aggregate dollar amount payable for the purchase
of the shares subject to the options will remain unchanged.
The agreements governing the outstanding warrants to purchase shares of our
Common Stock include provisions requiring adjustments to both the number of
shares issuable upon exercise of such warrants, and the exercise prices of such
warrants, in the event of a reverse stock split.
No Appraisals Rights
Under the Delaware General Corporation Law and our Certificate of Incorporation
and Bylaws, you are not entitled to appraisal rights with respect to the reverse
stock split.
Material Federal Income Tax Consequences
The following description of the material federal income tax consequences of the
reverse stock split is based on the Internal Revenue Code as amended, applicable
Treasury Regulations promulgated under the Code, judicial authority and current
administrative rulings and practices as in effect on the date of this proxy
statement. Changes to the laws could alter the tax consequences described below,
possibly with retroactive effect. We have not sought and will not seek an
opinion of counsel or a ruling from the Internal Revenue Service regarding the
federal income tax consequences of the proposed reverse stock split. This
discussion is for general information only. It does not discuss the tax
consequences that may apply to special classes of taxpayers or that may be
relevant to you because of special circumstances (including, without limitation,
certain financial institutions, insurance companies, partnerships, "S"
corporations, non-resident aliens, brokers or dealers). The state and local tax
consequences of the reverse stock split may vary significantly as to each
stockholder, depending upon the jurisdiction in which such stockholder resides.
We urge stockholders to consult their own tax advisors to determine the
particular consequences to them.
Sale or Exchange.
If your receipt of cash in lieu of a fractional share is treated as a sale or
exchange (as defined below) of such shares for U.S. federal income tax purposes,
you will recognize capital gain or loss equal to the difference between the cash
payment you receive for the fractional share interest and the adjusted tax basis
in the pre-reverse-stock-split shares purchased. The gain or loss would be
long-term capital gain or loss if the holding period for the shares exceeded one
year. Your receipt of cash will be treated as a sale or exchange for U.S.
federal income tax purposes if it:
o is "not essentially equivalent to a dividend" with respect to you
under section 302(b)(1) of the Code;
o is a "substantially disproportionate" redemption with respect to you
under section 302(b)(2) of the Code; or
26
o results in a "complete termination" of your stock interest in the
Company under section 302(b)(3) of the Code.
In determining whether any of these tests has been met, you must take into
account not only shares you actually own, but also shares you constructively own
within the meaning of section 318 of the Code.
A distribution will be treated as "not essentially equivalent to a dividend" if
it results in a "meaningful reduction" in your stock interest in the Company.
Whether your receipt of cash will result in a meaningful reduction of your
proportionate interest will depend on your particular facts and circumstances.
If your are a stockholder whose relative stock interest (actual or constructive)
in the Company is minimal and who exercises no control over corporate affairs
and you suffer a reduction in your proportionate interest in the Company
(including any ownership of shares constructively owned), you generally should
be regarded as having suffered a meaningful reduction in your interest in the
Company.
Satisfaction of the "complete termination" and "substantially disproportionate"
exceptions is dependent upon compliance with the respective objective tests set
forth in section 302(b)(3) section 302(b)(2) of the Code. A distribution to you
will result in a "complete termination" if either (1) all of the shares actually
and constructively owned by you are exchanged for cash pursuant to the reverse
stock split or (2) all of the shares actually owned by you are exchanged for
cash pursuant to the reverse stock split and you are eligible to waive, and
effectively waive, the attribution of shares constructively owned by you in
accordance with the procedures described in section 302(c)(2) of the Code.
A distribution to you will be "substantially disproportionate" if the percentage
of our outstanding voting stock actually and constructively owned by you
immediately following the payment of cash for a post-reverse-stock-split
fractional share (treating shares resulting in fractional shares pursuant to the
reverse stock split as not outstanding) is less than 80% of the percentage of
our outstanding voting stock actually and constructively owned by you
immediately before the reverse stock split (treating shares resulting in
fractional shares pursuant to the reverse stock split as outstanding), and
immediately following the exchange you actually and constructively own less than
50% of the total combined voting power of the Company.
Contemporaneous dispositions or acquisitions of stock by a shareholder or
related individuals or entities may be deemed to be part of a single integrated
transaction and may be taken into account in determining whether any of the
three tests under section 302(b) of the Code has been satisfied.
Dividend.
If your exchange of shares for cash does not constitute a sale or exchange, the
receipt of cash by you for your fractional share interest will be treated as a
dividend, taxable as ordinary income, to the extent of our current or
accumulated earnings and profits, as determined under federal income tax
principles. To the extent that the amount of the distribution exceeds our
current and accumulated earnings and profits, the excess first will be treated
as a return of capital that will reduce your tax basis in the
pre-reverse-stock-split shares representing a post-reverse-stock-split
fractional interest. Any remaining amount after your tax basis has been reduced
to zero will be taxable as capital gain (which will be long-term capital gain if
you have held the shares for more than one year at the time of the exchange).
Your tax basis (after the adjustment described in the previous sentence)
27
generally will be transferred to any of your remaining stock in the Company. If
you do not retain any actual stock ownership in the Company (having a stock
interest only constructively), you may lose the benefit of your adjusted tax
basis in your shares, as such adjusted tax basis will be transferred to the
shares owned constructively. A dividend received by a corporate stockholder may
be (1) eligible for a dividends-received deduction (subject to applicable
exceptions and limitations) and (2) subject to the "extraordinary dividend"
provisions of section 1059 of the Code.
The recently enacted Jobs and Growth Tax Relief Reconciliation Act of 2003 has
reduced the rate applicable to long term capital gains to 15% and reduced the
maximum tax rate on dividends to 15%.
We will not recognize any gain or loss as a result of the reverse stock split.
Stockholder Approval and Board Recommendation
The amendment of the Company's Certificate of Incorporation to effect the
reverse stock split requires the affirmative vote of the holders of a majority
of the outstanding shares of Common Stock, Series C Preferred Stock (on an
as-converted basis) and Series D Preferred Stock (on an as-converted basis)
voting as a combined class and as separate classes. If approved, the reverse
stock split will become effective at the time specified in the Certificate of
Amendment filed with the Delaware Secretary of State.
The Board of Directors unanimously recommends that stockholders vote "FOR"
the proposed amendment to the Certificate of Incorporation
to effect the reverse stock split (Proposal 4).
PROPOSAL 5
AMENDMENT TO CERTIFICATE OF INCORPORATION TO DECREASE
AUTHORIZED SHARES OF CAPITAL STOCK
The Board of Directors has adopted, subject to stockholder approval, an
amendment to the Company's Certificate of Incorporation to decrease the
Company's authorized number of shares of capital stock from 45,000,000 to
15,000,000.
The Company's current Certificate of Incorporate authorizes 45,000,000 shares of
capital stock, with 40,000,000 being shares of Common Stock and 5,000,000 being
shares of preferred stock. The approval of the reverse stock split in Proposal 2
would not change the number of authorized shares. Therefore, the decrease in the
number of outstanding shares of Common Stock pursuant to the reverse stock split
in Proposal 2 would result in an increase in the number of authorized shares
remaining unissued and available for grant. Even after the conversion of the
Preferred Stock into Common Stock, approximately 37,117,076 shares of Common
Stock would remain authorized but unissued.
The Board of Directors believes that it is in the best interests of the Company
to decrease the authorized number of shares of Common Stock remaining after the
effectiveness of the reverse stock and the conversion of the Preferred Stock.
The Board is proposing in Proposal 5 to amend the Company's Certificate of
Incorporate to decrease the authorized number of shares of the capital stock
28
from 45,000,000 to 15,000,000, with a reduction of shares of authorized Common
Stock from 40,000,000 to 10,000,000 but no change in the 5,000,000 shares of
preferred stock currently authorized.
The decrease in the number of authorized shares of Common Stock would result in
fewer shares of authorized but unissued shares of Common Stock being available
for future issuance. This would decrease the number of shares of Common Stock
available for issuance for various purposes, such as to raise capital, to make
acquisitions or in response to takeover attempts by third parties (by, for
example, reducing the number of shares available to the Company for issuance for
the purpose of diluting the stock ownership of a third party contemplating a
tender offer or other transaction for the combination of the Company with
another company.) The Company believes, however, that after the proposed
decrease the number of authorized but unissued shares of Common Stock remaining
would be sufficient for such purposes.
Following the reverse stock split, approximately 720,158 shares of Common Stock
would be outstanding. Approximately 2,162,766 shares of Common Stock would be
issued in the subsequent conversion of Preferred Stock into Common Stock,
resulting in a total of approximately 2,882,924 shares being issued and
outstanding. Therefore, following the decrease in the number of authorized
shares of Common Stock, more than 7,000,000 authorized but unissued shares of
Common Stock would be available for issuance.
As discussed above in connection with the proposed reverse stock split, the
Company is not aware of any effort to accumulate shares of Common Stock or
obtain control of the Company. The Company also is not currently contemplating
the recommendation of the adoption of any other amendments to the Certificate of
Incorporation (other than Proposal 4) that could be construed as affecting the
ability of third parties to takeover or change control of the Company.
The text of the proposed amendment is provided in Appendix A. The text of the
proposed amendment is subject of modifications to include such changes as may be
required by the office of the Secretary of State of Delaware or as our Board of
Directors deems necessary and advisable to effect the reverse stock split. If
Proposal 5 is approved, the Board will implement the decrease in authorized
Common Stock only if Proposal 4 also has been approved. If approved by the
stockholders, the decrease in authorized Common Stock would become effective
upon the filing with the Secretary of State of the State of Delaware of a
Certificate of Amendment to the Company's Certificate of Incorporation.
Stockholder Approval and Board Recommendation
The amendment of the Company's Certificate of Incorporation to decrease the
number of authorized shares of Common Stock requires requires the affirmative
vote of the holders of a majority of the outstanding shares of Common Stock,
Series C Preferred Stock (on an as-converted basis) and Series D Preferred Stock
(on an as-converted basis) voting as a combined class and as separate classes If
approved, the decrease in the number of authorized shares of capital stock will
become effective at the time specified in the Certificate of Amendment filed
with the Delaware Secretary of State.
The Board of Directors unanimously recommends that stockholders
vote "FOR" the proposed amendment to the Certificate of Incorporation
to decrease the number of authorized shares of capital stock
from 45,000,000 to 15,000,000 shares (Proposal 5).
29
PROPOSAL 6
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
Upon the recommendation of the Audit Committee, the Board of Directors has
selected McGladrey & Pullen, LLP as the Company's independent auditors for the
fiscal year ending October 31, 2003. This selection is being presented to the
stockholders for their approval at the Annual Meeting. If the stockholders do
not approve this selection, the Board of Directors will reconsider its choice.
Representatives of McGladrey & Pullen, LLP will be present at the Annual Meeting
to respond to appropriate questions and to make such statements as they may
desire.
The Board of Directors Recommends that stockholders vote "For" the
ratification of the appointment of McGladrey & Pullen, LLP as the Company's
independent auditors for fiscal year 2003 (Proposal 6).
ADDITIONAL INFORMATION
INDEPENDENT PUBLIC ACCOUNTANTS
McGladrey & Pullen, LLP ("McGladrey & Pullen") served as the Company's
independent auditors for 2002. The services performed by McGladrey & Pullen in
this capacity included conducting an examination in accordance with generally
accepted auditing standards of, and expressing an opinion on, the Company's
consolidated financial statements. The Board of Directors has selected McGladrey
& Pullen as the independent public accountants for the year ending October 31,
2003.
Audit Fees
McGladrey & Pullen's fees for professional services rendered in connection with
the audit and review of Forms 10-Q and all other SEC regulatory filings were
$326,100 for the 2002 fiscal year and $389,216 for the 2001 fiscal year. All of
such fees have been paid.
Audit-Related Fees
McGladrey & Pullen's fees for audit related services rendered in connection with
the audit of a subsidiary's defined contribution plan were $6,955 and none for
the 2002 and 2001 fiscal years, respectively. All of such fees have been paid.
Tax Fees
McGladrey & Pullen did not render any tax compliance advice or planning services
for the 2002 and 2001 fiscal years.
All Other Fees
McGladrey & Pullen's fees for the 2002 and 2001 fiscal years related to
management advisory services were $19,666 and none respectively. All of such
fees have been paid.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Executive officers and directors of the Company and owners of more than 10
percent of the Company's Common Stock are required to file reports of their
ownership and changes in their ownership of the Company's Common Stock with the
SEC. Copies of these reports also must be furnished to the Company. Based solely
30
upon a review of copies furnished to the Company through the date of this Proxy
Statement or written representations that no reports were required, the Company
believes that its executive officers, directors and 10% stockholders complied
with the 2002 filing requirements except that Mr. Smith was late in reporting
the exercise of a warrant.
EXPENSES
In addition to solicitation by mail, proxies may be solicited personally or by
telephone or facsimile or electronic mail, by certain directors, officers and
employees of the Company, who will not be specially compensated for such
solicitation. No solicitation of proxies will be made by paid solicitors. The
Company will bear all expenses in connection with the solicitation of proxies.
STOCKHOLDER PROPOSALS FOR 2004 ANNUAL MEETING
Any stockholder who wishes to have a proposal considered for inclusion in the
Company's Proxy Statement for the fiscal 2004 annual meeting of stockholders
must submit the proposal in writing so that the Company receives it by ______,
2004. Proposals should be addressed to the Company's Secretary, 111 Monument
Circle, Suite 4800, Indianapolis, Indiana 46204. Stockholders who wish to bring
proposals before the annual meeting without having the proposals considered for
inclusion in the proxy statement must submit the proposals in writing to the
Company's Secretary no later than _______, 2004.
ANNUAL REPORT
The Company's Annual Report on Form 10-K for the fiscal year ended October 31,
2002, as amended, accompanies this Proxy Statement. The Annual Report includes
the audited balance sheets of the Company and its subsidiaries on a consolidated
basis for the fiscal years ended October 31, 2002 and 2001, and the audited
statements of income and cash flow for the fiscal years ended October 31, 2002,
2001 and 2000, and the report thereon of the independent auditors.
OTHER MATTERS
Management knows of no matters, other than those reported above, that are to be
brought before the Annual Meeting. The enclosed proxy confers discretionary
authority on the proxies to vote on any other business that may properly come
before the meeting. It is the intention of the persons named in the proxy to
vote in their discretion on any such matter.
We strongly urge you to complete, sign, date and return the enclosed Proxy at
the earliest possible date even if you plan to attend the meeting. If you attend
the meeting, you may withdraw your Proxy and vote in person.
Jeffrey W. Osler
Secretary
Indianapolis, Indiana
October _____, 2003
APPENDIX A
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF DESIGNATIONS, PREFERENCES, RIGHTS AND
LIMITATIONS OF SERIES C PREFERRED STOCK
Obsidian Enterprises, Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware, DOES HEREBY
CERTIFY:
FIRST: That at a meeting of the Board of Directors of Obsidian Enterprises, Inc.
resolutions were duly adopted setting forth a proposed amendment to the
Certificate of Designations, Preferences, Rights and Limitations of Series C
Preferred Stock of said corporation, declaring said amendment to be advisable
and directing that said amendment be considered at the next annual meeting of
the stockholders of said corporation. The resolution setting forth the proposed
amendment is as follows:
RESOLVED, that the Certificate of Designations, Preferences,
Rights and Limitations of Series C Preferred Stock of this corporation
be amended by adding a new subsection to Section 4 thereof such that
the following shall be a new subsection, subsection (h), of said
Section 4 and read as follows:
"(h) In the event the Corporation shall at any time
subdivide (by any stock split, stock dividend or otherwise) its
outstanding shares of Common Stock, into a greater number of
shares, the number of shares of Common Stock issuable hereunder
upon conversion of shares of Series C Preferred shall be
proportionately increased, and, conversely, in the event the
outstanding shares of Common Stock shall be combined into a fewer
number of shares (by reverse stock split or otherwise), the
number of shares of Common Stock issuable hereunder upon
conversion of shares of Series C Preferred shall be
proportionately decreased."
SECOND: That thereafter, pursuant to resolution of its Board of Directors, an
annual meeting of the stockholders of said corporation was duly called and held
upon notice in accordance with Section 222 of the General Corporation Law of the
State of Delaware, at which meeting the necessary number of shares as required
by statute were voted in favor of the amendment.
THIRD: That the amendment was duly adopted in accordance with the provisions of
Section 242 of the General Corporation Law of the State of Delaware.
FOURTH: That this Certificate of Amendment of the Certificate of Designations
shall be effective on ___________, 2003.
IN WITNESS WHEREOF, said Obsidian Enterprises, Inc. has caused this certificate
to be signed by ________, its ______________, this ____ day of _______, 2003.
OBSIDIAN ENTERPRISES, INC.
By: ________________________________
Printed: ___________________________
Title: _____________________________
APPENDIX B
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF DESIGNATIONS, PREFERENCES, RIGHTS AND
LIMITATIONS OF SERIES D PREFERRED STOCK
Obsidian Enterprises, Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware, DOES HEREBY
CERTIFY:
FIRST: That at a meeting of the Board of Directors of Obsidian Enterprises, Inc.
resolutions were duly adopted setting forth a proposed amendment to the
Certificate of Designations, Preferences, Rights and Limitations of Series D
Preferred Stock of said corporation, declaring said amendment to be advisable
and directing that said amendment be considered at the next annual meeting of
the stockholders of said corporation. The resolution setting forth the proposed
amendment is as follows:
RESOLVED, that the Certificate of Designations, Preferences,
Rights and Limitations of Series D Preferred Stock of this corporation
be amended by adding a new subsection to Section 4 thereof such that
the following shall be a new subsection, subsection (h), of said
Section 4 and read as follows:
"(h) In the event the Corporation shall at any time
subdivide (by any stock split, stock dividend or otherwise) its
outstanding shares of Common Stock, into a greater number of
shares, the number of shares of Common Stock issuable hereunder
upon conversion of shares of Series D Preferred shall be
proportionately increased, and, conversely, in the event the
outstanding shares of Common Stock shall be combined into a fewer
number of shares (by reverse stock split or otherwise), the
number of shares of Common Stock issuable hereunder upon
conversion of shares of Series D Preferred shall be
proportionately decreased."
SECOND: That thereafter, pursuant to resolution of its Board of Directors, an
annual meeting of the stockholders of said corporation was duly called and held
upon notice in accordance with Section 222 of the General Corporation Law of the
State of Delaware, at which meeting the necessary number of shares as required
by statute were voted in favor of the amendment.
THIRD: That the amendment was duly adopted in accordance with the provisions of
Section 242 of the General Corporation Law of the State of Delaware.
FOURTH: That this Certificate of Amendment of the Certificate of Designations
shall be effective on ___________, 2003.
IN WITNESS WHEREOF, said Obsidian Enterprises, Inc. has caused this certificate
to be signed by ________, its ______________, this ____ day of _______, 2003.
OBSIDIAN ENTERPRISES, INC.
By: _______________________________
Printed: ___________________________
Title: _____________________________
APPENDIX C
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
Obsidian Enterprises, Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware, DOES HEREBY
CERTIFY:
FIRST: That at a meeting of the Board of Directors of Obsidian Enterprises, Inc.
resolutions were duly adopted setting forth a proposed amendment to the
Certificate of Incorporation of said corporation, declaring said amendment to be
advisable and directing that said amendment be considered at the next annual
meeting of the stockholders of said corporation. The resolution setting forth
the proposed amendment is as follows:
RESOLVED, that the Certificate of Incorporation of this
corporation be amended by changing the Fourth Article thereof so
that, as amended, said Article shall be and read as follows:
"Fourth. The aggregate number of shares of capital
stock that the Corporation will have authority to issue is
15,000,000, 10,000,000 of which will be shares of Common
Stock, having a par value of $.0001 per share, and 5,000,000
of which will be shares of preferred stock, having a par
value of $.001 per share.
Upon this Certificate of Amendment to the Certificate
of Incorporation of the Corporation becoming effective
pursuant to the General Corporation Law of the State of
Delaware (the "Effective Time"), every 50 shares of the
Corporation's Common Stock, par value $.0001 per share (the
"Old Common Stock"), issued and outstanding immediately
prior to the Effective Time, will be automatically
reclassified as and converted into one share of Common
Stock, par value $.0001 per share, of the Corporation (the
"New Common Stock").
No fractional shares of New Common Stock shall be
issued to the holders of record of Old Common Stock in
connection with the foregoing reclassification of shares of
Old Common Stock. In lieu thereof, all shares of Common
Stock so split that are held by a stockholder will be
aggregated subsequent to the reverse stock split. A
certificate for the number of whole shares after the
aggregation shall be issued to the stockholder. In lieu of
any interest in a fractional share of Common Stock after the
aggregation to which a stockholder would otherwise be
entitled as a result of the reverse stock split, the
Corporation shall pay to the holder a cash amount, without
interest, determined by multiplying (i) the fractional share
interest to which the holder would otherwise be entitled by
(ii) the average closing sale price of shares of Common
Stock (on a post-split basis) for the 20 trading days
immediately prior to the Effective Time or, if no sale takes
place on those days, the average of the closing highest
asked and lowest bid prices for those days (on a post-split
basis), in each case as reported by the OTC Bulletin Board.
All certificates for outstanding shares of Common Stock
shall be returned to the Corporation for reissuance and,
until certificates for the outstanding shares of Common
Stock have been reissued, the stockholder shall not be
entitled to payment of any dividends declared on the shares.
Preferred stock may be issued in one or more series as
may be determined from time to time by the Board of
Directors. All shares of any one series of preferred stock
will be identical except as to the dates of issue and the
dates from which dividends on shares of the series issued on
different dates will cumulate, if cumulative. Authority is
hereby expressly granted to the Board of Directors to
authorize the issuance of one or more series of preferred
stock, and to fix by resolution or resolutions providing for
the issue of each such series the voting powers,
designations, preferences, and relative, participating,
optional, redemption, conversion, exchange or other special
rights, qualifications, limitations or restrictions of such
series, and the number of shares in each series, to the full
extent now or hereafter permitted by law."
SECOND: That thereafter, pursuant to resolution of its Board of Directors, an
annual meeting of the stockholders of said corporation was duly called and held
upon notice in accordance with Section 222 of the General Corporation Law of the
State of Delaware, at which meeting the necessary number of shares as required
by statute were voted in favor of the amendment.
THIRD: That the amendment was duly adopted in accordance with the provisions of
Section 242 of the General Corporation Law of the State of Delaware.
FOURTH: That this Certificate of Amendment of the Certificate of Incorporation
shall be effective on ___________, 2003.
IN WITNESS WHEREOF, said Obsidian Enterprises, Inc. has caused this certificate
to be signed by ________, its ______________, this ____ day of _______, 2003.
OBSIDIAN ENTERPRISES, INC.
By: _______________________________
Printed: ___________________________
Title: _____________________________
APPENDIX D
OBSIDIAN ENTERPRISES, INC.
FORM 10-K, AS AMENDED,
FOR FISCAL YEAR ENDED OCTOBER 31, 2002
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED OCTOBER 31, 2002 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO
_______________
0-17430
Commission File Number
OBSIDIAN ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Delaware 35-2154335
(State or other jurisdiction of incorporation (IRS Employer Identification No.)
or organization)
111 Monument Circle, Suite 4800
Indianapolis, IN 46204
(Address of principal executive offices) (Zip Code)
(317) 237-4122
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($0.0001 par value)
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO ____ - ------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of the Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes ___ No X ---
As of January 22, 2003, the aggregate market value of the Company's common stock
held by non-affiliates of the registrant, based on the average bid and ask price
on such date, was approximately $3,317,000.
As of January 22, 2003, the registrant had 36,007,855 shares of common stock,
4,368,399 shares of Series C Preferred Stock and 88,330 shares of Series D
Preferred Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
INFORMATION REQUIRED IN PART II AND PART III HAS NOT BEEN INCORPORATED BY
REFERENCE.
EXPLANATORY NOTE
This Amendment No. 1 amends the Registrant's Annual Report on Form 10-K for the
fiscal year ended October 31, 2002, by amending and restating Items 6, 7, 8, 10,
12 and 14 to incorporate certain changes.
PART I
ITEM 1. BUSINESS.
HISTORY AND DEVELOPMENT OF BUSINESS
A change in control and reorganization of the Registrant occurred on June 21,
2001. On that date, Timothy S. Durham was elected Chief Executive Officer and
Chairman of the Board of the Registrant and the Registrant acquired from
Obsidian Capital Partners, L.P. (the "Partnership"), Mr. Durham and certain
other shareholders all of the shares of the following companies: Pyramid Coach,
Inc., a Tennessee corporation ("Pyramid"); Champion Trailer, Inc., an Indiana
corporation ("Champion"); and U.S. Rubber Reclaiming, Inc., an Indiana
corporation ("U.S. Rubber"). On July 31, 2001, the Registrant acquired from the
Partnership and Mr. Durham substantially all of the assets of United
Acquisition, Inc., an Indiana corporation, which the Registrant now operates as
United Expressline, Inc. ("United"). All of the acquisitions were made in
exchange for shares of the Registrant's Series C Preferred Stock ("Series C
Preferred Stock") and were pursuant to an Acquisition Agreement and Plan of
Reorganization by and among the Registrant, Danzer Industries, Inc. ("Danzer
Industries"), Pyramid, Champion, United Acquisition, U.S. Rubber, the
Partnership, Timothy S. Durham and other related parties, dated as of June 21,
2001. Prior to the reorganization, the Registrant had engaged through its wholly
owned subsidiary, Danzer Industries, in the fabrication of metal parts and truck
bodies for the service and utility markets.
In October 2001, the Registrant's state of incorporation was changed from New
York to Delaware and the Registrant's name was changed from Danzer Corporation
to Obsidian Enterprises, Inc. The Registrant was originally incorporated in New
York in 1987 under the name Affiliated National, Inc. and subsequently changed
its name to Global Environmental Corp. and then to Danzer Corporation.
As used in this report, the term "Company" refers to Obsidian Enterprises, Inc.
together with its consolidated subsidiaries.
DESCRIPTION OF THE BUSINESS
OVERVIEW
The Company is a holding company headquartered in Indianapolis, Indiana with a
strategic goal of maximizing profitability of its acquired entities, acquiring
manufacturing companies of similar size and continuing to grow the Company. The
Company currently conducts business through five subsidiaries: U.S. Rubber, a
butyl-rubber reclaiming operation; Pyramid a provider of short and long-term
luxury coach leases for corporations and the entertainment industry; Obsidian
Leasing Co., Inc. ("Obsidian Leasing"), the owner of certain of the coaches
operated by Pyramid; United, a manufacturer of steel-framed cargo, racing and
specialty trailers; and Danzer Industries, a manufacturer of service and utility
truck bodies and accessories and cargo trailers. Champion, a manufacturer of
customized racecar transporters, specialty exhibit trailers and mobile
hospitality units formerly owned by the Company has been sold subsequent to the
close of the fiscal year.
The Company operates in three industry segments comprised of butyl-rubber
processing; trailer and related transportation equipment manufacturing; and
leasing of transportation. All sales are in the Western Hemisphere, primarily in
the United States. For quantitative segment information see Note 14 to the
Consolidated Financial Statements.
BUTYL RUBBER PROCESSING
The Company's butyl rubber processing facilities are located in two adjacent
plants in Vicksburg, Mississippi. The Company is the sole manufacturer of
reclaimed butyl rubber in the domestic tire, tape and tube business in the
Western Hemisphere. The Company collects various used and scrap butyl rubber
products, primarily inner tubes from tires, which are then reprocessed into
reclaimed butyl rubber sheets. Customers mix the product with virgin butyl
rubber and use the product predominately as the inner liner of tubeless tires,
and also as inner tubes for tires and for tapes and mastics for pipelines.
Reclaimed butyl rubber used in combination with virgin butyl rubber has
properties that facilitate some manufacturing processes. However, the primary
reason manufacturers use reclaimed butyl rubber is the cost savings offered
compared to virgin butyl rubber.
The Company distributes its reclaimed butyl rubber products through an internal
sales force.
The Company is the sole supplier of reclaimed butyl rubber to most of the tire
industry in the United States and has tire manufacturer customers in Canada and
Brazil.
There are three other enterprises engaged in reclaiming butyl rubber worldwide:
o The Gujarat Company in India;
o Han Cook in Korea; and
o Vrederstein N.V. in the Netherlands.
Due to the cost of transporting reclaimed butyl rubber, these enterprises are
not major competitors with the Company in the Western Hemisphere. The primary
competitive factor is price.
Two enterprises manufacture virgin butyl rubber for sale in the United States:
o Exxon Corporation; and
o Bayer AG.
Both these enterprises are much larger than the Company, well capitalized and
have larger sales staffs. The prices charged by these enterprises places an
upper limit on the prices that may be set for reclaimed butyl rubber.
The Company obtains its supply of scrap inner tubes from approximately 1000
scrap merchants worldwide. The Company's ability to produce reclaimed butyl
rubber is potentially restrained by the limited supply of scrap butyl rubber
products. Since the introduction of tubeless tires for automobiles in the 1970s,
the number of scrap inner tubes from sources in the United States has declined
substantially. In the United States, inner tubes are now primarily limited to
the agricultural and large truck tire market. In 2001, the Company began to
experiment with reclaiming scrap butyl rubber pads from the manufacturers of
other butyl rubber products. This scrap is created as a result of the
manufacturing process for molded butyl rubber products and is available at
approximately 60% of the cost of scrap inner tubes. The Company's work to date
suggests that pad scrap may be a partial substitute for inner tubes as raw
material for the Company's reclaimed butyl rubber product.
Although the Company has had a long-term relationship with its primary
customers, it does not have long-term contracts with them. Two of its reclaimed
butyl rubber customers account for a substantial portion of the sales of this
segment. Michelin and Kelley Springfield accounted for the sales of 43% and 24%
of the sales of this segment in 2002. The loss of either of these customers
would materially and adversely affect the Company. The Company's reclaimed butyl
rubber products are generally ordered by customers monthly and shipped promptly
after the order. Accounts are generally paid on 30 to 60 day terms.
TRAILER AND RELATED TRANSPORTATION EQUIPMENT MANUFACTURING
The Company manufactures service truck bodies at its facility in Hagerstown,
Maryland where the Company produces truck bodies for sale under the Morrison
trademark as well as bodies built to order for other original equipment truck
manufacturers. The finished bodies are shipped to the customer for installation
on truck body chassis. The Company markets truck bodies through an internal
sales force. It sells its private label products directly to its private label
customers and markets its proprietary "Morrison" products through a network of
approximately 300 dealers who, in turn, sell to municipalities, utility
companies, cable companies, phone companies and contractors.
Most truck body customers are in the East and Southeast United States. Slightly
less than one half of the Company's truck body revenue is accounted for by sales
to one installer. Although the Company's relationship with this manufacturer has
been long term it does not have a supply contract and is not the sole supplier
of truck bodies to that enterprise. In 2002, the manufacturer filed for
reorganization under Chapter 11 of the United States bankruptcy code and
continues to operate. The loss of the Company's relationship with the truck
manufacturer could have a material adverse effect on the Company.
There are a significant number of companies engaged in the manufacture of
service truck bodies in the United States. While many of these companies are
relatively small and do not possess the Company's technical capacity, a number
of its competitors are much larger and possess equal or greater technical and
financial resources. Four such competitors are: Knapheide Manufacturing Co.,
Omaha Standard, Inc., Reading Body Works, Inc., and Stahl, a Scott Fetzer Co.,
which is a wholly owned subsidiary of Berkshire Hathaway, Inc. The Company
competes with others for truck body sales through price and service, with price
being the most important factor, and offers truck bodies made to the
individually specified requirements of its customers.
In order to fully utilize the manufacturing capacity available at its facility
in Hagerstown and meet demand for cargo trailers, the Company initiated cargo
trailer production in this facility during 2002.
The Company manufactures specialty racing, cargo and ATV trailers at a facility
owned by the Company in Bristol, Indiana and at another facility owned by the
Company in White Pigeon, Michigan. In addition, as a means of increasing
capacity to meet demands, the Company also began leasing a facility in Elkhart,
Indiana. The business is somewhat seasonal with fewer orders during the months
from November through January. The trailers are marketed under the names "United
Expressline," "United Trailers," "Southwest Expressline," and "Southwest
Trailers." While the Company markets some trailers under these brands at prices
up to $75,000.00, the average price for these trailers is approximately
$3,900.00.
The Company sells "United Trailers," "United Expressline," "Southwest Trailers,"
and "Southwest Expressline" product lines through two dealer networks comprised
of an aggregate of approximately 300 dealers in the United States and Canada,
most of whom are located in the Midwest United States. The Company's sales
activities are conducted through an internal sales force. While the Company has
formal agreements with a few of the dealers, most of the dealership arrangements
are informal and are nonexclusive.
The trailers are built to order to dealer specifications. The terms of sale for
the "United Trailers," "United Expressline," "Southwest Trailers," and
"Southwest Expressline" products are FOB the plant with payment generally due
upon the dealer taking delivery of the trailer. A few dealers have 30- or 60-day
terms.
There are a significant number of companies engaged in the manufacture of
specialty racing, cargo and ATV carriers in the United States. While many of
these companies are relatively small and do not possess the Company's technical
capability, a number of its competitors are much larger and possess equal or
greater technical and financial resources. Four such competitors are: Haulmark
Industries, Pace American, U.S. Cargo and Wells Cargo. The Company competes with
others for specialty racing, cargo and ATV trailer sales through price, quality
and availability, with price an important factor.
The Company purchases its raw materials for the trailer and related
transportation equipment segment from numerous suppliers and has not had any
difficulty in obtaining components or raw materials.
The Company generally warrants its product to be free from defects in material
and workmanship and performance under normal use and service for a period of
twelve months after shipment. The obligation of the Company is generally limited
to the repair or replacement of the defective product.
At October 31, 2002, the backlog of the trailer and related transportation
segment was approximately $2,634 composed of approximately $300 for truck bodies
and $2,334 for specialty racing, cargo and ATV trailers. The October 31, 2002
backlog is expected to be filled within the 2003 fiscal year.
COACH LEASING
The Company leases high-end luxury entertainment coaches from its facility
located in Joelton, Tennessee. The leases are for both short-term (weekly or
monthly) and long-term periods. The leases are generally on a net basis, with
the customer responsible for fuel and drivers and other personnel.
At October 31, 2002, the Company had 32 coaches in its fleet under management.
In addition, the Company subleases coaches from other coach owners on a
short-term basis, from time to time.
Prior to the Reorganization all of the coaches under management by Pyramid were
owned by DW Leasing, LLC ("DW Leasing"), a company controlled by Mr. Durham.
During 2002 and as contemplated by the Reorganization, twenty-seven of these
coaches were transferred to the Company's subsidiary, Obsidian Leasing, and the
remainder continued to be owned by DW Leasing and managed by the Company.
The Company leases the coaches through an internal sales force. The coaches are
leased primarily to the country, rock-n-roll, pop and traveling Broadway show
entertainment industries. The coaches are also leased to various corporations.
During the year ended October 31, 2002, the Company leased coaches to a number
of touring groups in connection with their tours including Ozzie Osbourne, Brad
Paisley and the Broadway Show "Stomp." The Company's corporate customers include
the Golf Channel.
There are several other companies that lease luxury coaches. Some of the larger
competitors include Entertainer Coaches of America, Florida Coach, Senators
Coach and Hemphill Brothers. The Company believes that amenities are an
important factor in leasing coaches to its target market and equips its coaches
with a full complement of amenities. The Company competes with other luxury
coach providers based on a combination of quality, amenities, availability and
price.
GOVERNMENT REGULATION
The Company is subject to regulation by federal, state, and local agencies that
have jurisdiction over areas such as environmental and fire hazard control
issues and regulate the work place to insure safe working conditions for the
Company's employees. The trailers and truck bodies manufactured by the Company
must meet standards set by state and federal transportation authorities and the
coaches leased by the Company must comply with those standards and regulations.
These regulatory bodies could take actions that would have a material adverse
affect upon the Company's ability to do business. The business of the Company
does not subject it to any special regulatory authority.
EMPLOYEES
As of October 31, 2002, the Company had 417 employees. The Company has a labor
contract through January 2004 with United Brotherhood of Carpenters and Joiners
of America for the approximately 40 production workers at its truck body
manufacturing facility in Hagerstown, Maryland. None of the employees at the
other facilities of the Company is represented by a labor union. The Company
believes its employee relations are satisfactory.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company does not rely on any patents, registered trademarks, or special
licenses to give it a competitive advantage. The "Morrison," "Danzer,"
"Pyramid," "United Trailer," "United Expressline," "Southwest Trailer," and
"Southwest Expressline" brand names have brand recognition in the relevant
market.
RESEARCH AND DEVELOPMENT
The Company did not incur, during any of its last three fiscal years, and does
not contemplate incurring, any material research and development expenses.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report on Form 10-K contains
forward-looking statements that involve risks and uncertainties that could cause
actual results to differ materially. Factors that might cause or contribute to
such differences include, but are not limited to, those discussed in the section
entitled "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations." Readers should carefully review the risks described
in this and other documents that the Company files from time to time with the
Securities and Exchange Commission, including the quarterly reports on Form 10-Q
to be filed by the Company in 2002. Readers are cautioned not to place undue
reliance on the forward-looking statements, which speak only to the date of this
Annual Report on Form 10-K. The Company undertakes no obligation to publicly
release any revisions to the forward-looking statements or reflect events or
circumstances after the date of this document.
ITEM 2. PROPERTIES
The following describes the Company's properties:
Identification Location Ownership/Description Segment
------------------------------- ---------------------------- -------------------------------- ------------------------
Headquarters 111 Monument Circle, Suite 3,700 square feet leased N/A
4800, Indianapolis, IN commercial office space
46204
Butyl Rubber Processing Vicksburg, Mississippi Two adjacent plants Butyl Rubber
Plants aggregating 87,000 square Processing
feet, each owned by the
Company and encumbered by a
mortgage to PNC Bank
Truck Body Plant Hagerstown, Maryland 75,000 square foot plant owned Trailer and related
by the Company and encumbered transportation
by a mortgage to Bank of equipment
America Commercial Finance manufacturing
United Expressline Plant Bristol, Indiana Several buildings aggregating Trailer and related
49,000 square feet owned by transportation
the Company and encumbered by equipment
a mortgage to First Indiana manufacturing
Bank NA
United Expressline Plant Elkhart, Indiana 35,000 square foot plant Trailer and related
leased by the Company transportation
equipment
manufacturing
Southwest Expressline Plant
White Pigeon,
Michigan 47,000
square foot plant
owned Trailer and
related by the
Company and
encumbered
transportation by a
mortgage to First
Indiana equipment
manufacturing Bank
NA
Pyramid Coach Office Joelton, Tennessee 12,000 square feet of office Coach Leasing
space and other facilities
leased by the Company
Champion Facility Lewisville, Texas 30,000 square foot plant Discontinued operations
leased by the Company
The Company believes that its property, plant and equipment are well maintained
and adequate for its requirements. The Company also believes that all of its
assets are adequately covered by insurance.
ITEM 3. LEGAL PROCEEDINGS
All dollar amounts in Item 3 are in thousands (except for share and per share
information).
On April 29, 2002, Markpoint Equity Fund J.V. ("Markpoint"), a Texas joint
venture of which The Markpoint Company serves as Managing Partner, filed an
action in the Texas District Court, Dallas County, seeking payment of $1,250
owed by Champion, a subsidiary subsequently divested, under the subordinated
credit facility described in Note 9 to the Consolidated Financial Statements. On
January 27, 2003, the Company reached an agreement to settle this liability for
a cash payment of $675 and issuance to Markpoint of 32,143 shares of the
Company's Series D preferred stock. In addition, the agreement provides
Markpoint the option to require the Company to repurchase these shares at a
price of $21 per share. The repurchase option is available to Markpoint as
follows: 16,072 shares during the period May 1, 2003 to June 1, 2003 and 16,071
shares during the period November 1, 2003 to December 1, 2003. The repurchase
options expire if not exercised during the specified periods. The Company's
repurchase obligation is guaranteed by Mr. Durham.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's Annual Meeting of Stockholders was held on September 27,
2002.
(b) The following individuals were elected to the Company's Board of Directors
to hold office until the next annual meeting of stockholders or until their
successors have been duly elected and qualified:
Against or Broker
Nominee For Withhold Abstain Non-Votes
--- ----------- ------- ---------
Timothy S. Durham 105,816,120 0 3,247 0
Terry G. Whitesell 105,816,220 0 3,147 0
Jeffrey W. Osler 105,815,790 0 3,577 0
Goodhue W. Smith, III 105,816,220 0 3,147 0
John A. Schmit 105,816,120 0 3,147 0
D. Scott McKain 105,816,220 0 3,147 0
Daniel S. Laikin 105,816,220 0 3,147 0
(c) In addition to the election of Directors described in (b) above, the
following matters were voted upon:
Broker
For Against Abstain Non-Votes
Ratify the appointment of 105,773,522 680 45,165 0
McGladrey & Pullen, LLP as the independent auditors for fiscal year ending
October 31, 2002.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is currently traded on the Over-the-Counter
Electronic Bulletin Board and on October 17, 2001, the symbol was changed from
"DNZR" to "OBSD." The following table sets forth the high and low bid quotations
for the common stock for the fiscal quarters indicated.
FISCAL 2002 FISCAL 2001
High Low High Low
1st Quarter $0.25 $0.12 $0.30 $0.09
2nd Quarter $0.36 $0.12 $0.20 $0.0063
3rd Quarter $0.27 $0.11 $0.30 $0.14
4th Quarter $0.27 $0.10 $0.41 $0.08
The above quotations reflect inter-dealer prices, and may not include retail
mark-up, mark down or commissions and may not necessarily represent actual
transactions. At October 31, 2002, there were approximately 900 holders of
record of the Company's common stock. Most of the shares of common stock are
held in street name for an unknown number of beneficial owners. To date the
Company has not paid a cash dividend on its common stock. The payment and amount
of any future cash dividends would be restricted by the Company's lenders and
will necessarily depend upon conditions such as the Company's earnings,
financial condition, working capital requirements and other factors.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth certain selected consolidated financial
information concerning the Company. This information is not covered by the
independent auditor's report. For further information, see the accompanying
Consolidated Financial Statements of Obsidian Enterprises, Inc. and subsidiaries
for the year ended October 31, 2002, ten-month period ended October 31, 2001 and
the year ended December 31, 2000 and the information set forth in Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and in Item 8, "Financial Statements and Supplementary Data" below.
The information for the year ended December 31, 2000 is for that of U.S. Rubber
Reclaiming only, the accounting acquirer in the reverse merger further described
in Items 7 and 8.
OPERATING DATA, AS RESTATED:
(Amounts in thousands, except per share data)
Year Ended Ten Months Ended
October 31, October 31, Year Ended December 31,
---------------------------------------
2002 2001 2000 1999 1998
--------------------------------------------------------------------------
Net sales $ 57,274 $ 24,689 $ 12,583 $ 11,439 $ 12,575
Income from operations 449 981 184 413 107
Discontinued operations, net of tax (1,040) (3,376) -- -- --
Cumulative effect of change in accounting
principle (2,015) -- -- -- --
Net income (loss) (6,330) (4,395) 48 216 74
Basic and diluted earnings (loss) per
share:
From continuing operations (.09) (.04) -- -- --
Discontinued operations (.03) (.13) -- -- --
Cumulative effect of change in
accounting principle (.06) -- -- -- --
Net income (loss) per share (.18) (.17) -- -- --
BALANCE SHEET DATA:
October 31, October 31, December 31,
-------------------------------------
2002 2001 2000 1999 1998
---------------------------------------------------------------------
Working capital (deficit) $ 1,591 $ (2,528) $ 864 $ 1,896 $ 2,864
Total assets 45,923 48,850 9,633 11,633 11,914
Long-term debt, including current portion and
mandatory redeemable preferred stock 36,464 35,382 3,846 5,914 6,365
Stockholders' equity (deficit) (689) 1,331 4,939 4,890 4,674
No dividends have been declared or paid in any period presented.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
All dollar amounts in this Item 7 are in thousands (except for share and per
share information).
INTRODUCTION
Obsidian Enterprises, Inc. ("Company"), on June 21, 2001, closed a series of
transactions pursuant to the Acquisition and Plan of Reorganization
("Reorganization") by and among the Company, Danzer Industries, Inc., a wholly
owned subsidiary, and Obsidian Capital Partners, LP ("Partners"), Timothy S.
Durham, and other individual owners of Partners controlled entities. At that
time, the Company acquired: all of the outstanding capital stock of Pyramid
Coach, Inc., in exchange for 810,099 shares of Company Series C Preferred Stock
("Series C Preferred"); all of the outstanding capital stock of Champion
Trailer, Inc., for 135,712 shares of Company Preferred, and all of the
outstanding capital stock of U.S. Rubber Reclaiming, Inc., for 1,025,151 shares
of Series C Preferred. On July 31, 2001, the Company acquired all of the
outstanding capital stock of United Expressline, Inc. from Partners for
2,593,099 shares of Series C Preferred.
After these transactions, the Company had the following subsidiaries:
o U.S. Rubber Reclaiming, Inc. ("U.S. Rubber"), engaged in reclaiming scrap
butyl reclaim for resale to manufacturers of rubber products, located in
Vicksburg, Mississippi.
o Danzer Industries, Inc. ("Danzer Industries") then principally engaged in
the design, manufacture and sale of truck bodies, located in Hagerstown,
Maryland. During 2002 Danzer Industries has expanded its activities to
include the manufacture of cargo trailers.
o Pyramid Coach, Inc. ("Pyramid") engaged in the leasing of coaches, designed
and fitted for use for travel by country, rock bands and other business
enterprises, primarily on weekly to monthly leases, located in Nashville,
Tennessee.
o Champion Trailer, Inc. ("Champion"), which manufactured and sold transport
trailers to be used primarily in the auto racing industry, located in
Lewistown, Texas. In 2002, the Company agreed to sell Champion to an entity
owned by Messrs. Durham and Whitesell (Officers of the Company) and closed
the sale in January 2003. Therefore, Champion is accounted for as a
discontinued operation.
o United Expressline, Inc. ("United") manufactures and sells general use
cargo trailers and specialty trailers used for special purposes and in the
racing industry, located in Bristol, Indiana; Elkhart, Indiana; and White
Pigeon, Michigan.
During fiscal year 2002, management focused on the process of operational
integration of the subsidiaries. This included the identification and
implementation of individual subsidiary manufacturing and administrative
efficiencies as well as marketing and cross-selling opportunities. In addition,
management concentrated on ensuring adequate capital was available to operate
and that liquidity issues did not detract from the operating entities.
While each of the subsidiaries markets its products or services independently,
management has taken advantage of cross-selling opportunities for each of the
subsidiaries, as well as manufacturing and other operational efficiencies that
can be achieved between the subsidiaries. For example, Danzer Industries, which
prior to fiscal year 2002, had not manufactured cargo trailers produced cargo
trailers at the rate of two per day at October 31, 2002, with a goal of
producing eight per day by the end of fiscal year 2003.
RESULTS OF OPERATIONS
The following table details the Company's results of operations as a percentage
of sales:
Year Ended October 31, Ten Months Ended Year Ended December
October 31, 31,
2002 2001 2000
---------------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of sales 83.5 78.8 90.5
Selling, general and administrative expenses 15.0 17.2 8.0
Loss on asset impairment 1.3 -- --
Loss from discontinued operations 1.8 13.7 --
Interest expense 6.2 9.4 3.5
Interest income -- -- (2.8)
-----------------------------------------------------------------------------------------------------------------------------------
The Company operates in three industry segments, comprised of trailer and
related transportation equipment manufacturing, butyl rubber reclaiming, and
coach leasing. Trailer and related transportation equipment manufacturing
includes the operations of United and Danzer Industries. Butyl rubber reclaiming
includes the operations of U.S. Rubber and coach leasing includes the operations
of Pyramid, DW Leasing, and Obsidian Leasing. The results of discontinued
operations relate to Champion Trailer, which the Company agreed to sell in 2002
to an entity owned by Messrs. Durham and Whitesell and closed the sale in
January 2003.
The following is a discussion of the major elements impacting the Company's
operating results by segment for the year ended October 31, 2002 and the
ten-month period ended October 31, 2001. The comments that follow should be read
in conjunction with the Company's consolidated financial statements and related
notes contained in this Form 10-K.
The results of operations of the Company for 2001 are not comparable to 2002
because the results of operations in 2001 include only ten months of operations,
which affects the comparability of the two periods.
In addition, the results of operations for the trailer manufacturing segment in
2001 do not include the operations of United and Danzer Industries for the
entire ten-month period. Under accounting principles generally accepted in the
United States of America, U.S. Rubber is treated as the acquirer in the June 21,
2001 Reorganization, and U.S. Rubber is treated as having acquired Champion and
Pyramid at the beginning of 2001. Thus, the results of operations for the
ten-month period ended October 31, 2001 include the operations of the following
subsidiaries from the date shown below through October 31, 2001:
Subsidiary Date
Danzer Industries June 21, 2001
Pyramid January 1, 2001
U.S. Rubber January 1, 2000
United July 31, 2001
Since Champion is accounted for as a discontinued operation, its results of
operations and cash flow have been removed from the Company's continuing
operations for all periods presented.
The following table shows net sales by product segment:
Ten Months Ended Year Ended
Year Ended October 31, October 31, December 31,
2002 2001 2000
---------------------------------------------------------------
Trailer manufacturing $ 40,775 $ 10,650 $ --
Butyl rubber reclaiming 10,125 9,874 12,583
Coach leasing 6,374 4,165 --
---------------------------------------------------------------
Total $ 57,274 $ 24,689 $ 12,583
===============================================================
TRAILER AND RELATED TRANSPORTATION EQUIPMENT MANUFACTURING
The following table shows sales, cost of sales and gross profit for this segment
for the periods indicated (in thousands):
Year Ended October Ten Months Ended
31, October 31,
2002 2001
--------------------- --------------------
Net sales $ 40,775 $ 10,650
Cost of sales 35,077 8,955
--------------------- --------------------
Gross profit $ 5,698 $ 1,695
===================== ====================
Gross profit % 14.0% 15.9%
===================== ====================
YEAR ENDED OCTOBER 31, 2002 COMPARED TO THE TEN MONTHS ENDED OCTOBER 31, 2001
For the reasons noted above, operating results between these periods are not
comparable. During the year ended October 31, 2002, this segment has seen
increasing sales in cargo trailers due to additional demand driven by marketing
efforts and availability of the product. These increases have been partially
offset by a continued reduction in the demand for truck bodies.
The primary reason for truck body sales at levels below historic amounts is the
continued depressed condition of the telecommunications industry that
historically purchased a significant volume of this product line. Management
anticipates that the overall general economic conditions and the economic state
of the telecommunications industry will continue to adversely impact sales of
truck bodies through the first quarter of fiscal year 2003. In addition, future
sales may be adversely impacted by a Chapter 11 bankruptcy filing in 2002 by a
truck body customer, who accounted for approximately $1.7 million of sales in
this segment for the year ended October 31, 2002. Management has integrated the
production of cargo trailers into its truck body production facility as a means
to increase production capacity of the cargo trailer product and absorb excess
capacity at the truck body facility. As of October 31, 2002, the truck body
facility was producing two trailers per day with plans to produce up to eight
trailers per day by October 2003.
Gross profit for the year ended October 31, 2002 was impacted by the reduced
volume of truck bodies sold and only partially offset by reductions in personnel
at these facilities and increased volume in the cargo trailer product line.
BUTYL RUBBER RECLAIMING
The following table shows sales, cost of sales and gross profit for this segment
for the periods indicated (in thousands):
Year Ended October Ten Months Ended Year Ended December
31, October 31, 31,
2002 2001 2000
--------------------- -------------------- ---------------------
Net Sales $ 10,125 $ 9,874 $ 12,583
Cost of Sales 9,407 8,884 11,390
--------------------- -------------------- ---------------------
Gross Profit $ 718 $ 990 $ 1,193
===================== ==================== =====================
Gross Profit % 7.1% 10.0% 9.5%
===================== ==================== =====================
YEAR ENDED OCTOBER 31, 2002 COMPARED TO THE TEN MONTHS ENDED OCTOBER 31, 2001
For the reason noted above, operating results between fiscal year 2002 and
fiscal year 2001 are not comparable.
Net sales in this segment for the year ended October 31, 2002 as compared to the
ten-month period ended October 31, 2001 increased 2.5%. However, sales in this
segment were lower than anticipated for the year ended October 31, 2002 compared
to the year ended December 31, 2000 due to damage at a production facility in
May 2002 as a result of a fire at an adjacent property. The damage caused the
facility to be closed for approximately two months and resulted in the Company
being unable to fill all outstanding customer orders. This facility resumed
production during July 2002. During 2002, the Company recorded an insurance
recovery for business interruption of $325 as a reduction of general and
administrative costs. In addition to the effects of the fire, sales for 2002
were below historical levels due to the factors enumerated below.
Significant portions of sales in this segment are to tire manufacturing
companies. The tire manufacturers have continued to see lower volumes of tire
production during 2002. Accordingly, sales to these customers are below
historical levels, and current demand does not indicate a return to sales levels
from the year ended December 31, 2000 in the immediate future.
The lack of consistent sources of raw materials has also been a constraint on
generating additional sales volume. The primary material used in reclaiming is
scrap inner tubes. Since the introduction of the tubeless tire for automobiles
in the 1970s, sources of material have declined substantially. Management has
been testing other materials including butyl pad scrap as a replacement material
for the past several years with some success. In addition, alternative sources
of material, including overseas sources, are being pursued to provide a
consistent supply of material in the future. Until such time that consistent
sources of raw materials are available, sales growth in this segment will be
limited.
Gross profit percentage decreased from 10% for the ten months ended October 31,
2001 to 7.1% for the year ended October 31, 2002 as a result of constraints on
achieving operating efficiency including lack of consistent raw material supply
and the fire discussed above.
TEN MONTHS ENDED OCTOBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31, 2000
Operating results between fiscal year 2001 are not comparable as fiscal 2000 was
for a twelve-month period.
Net sales in this segment for the ten months ended October 31, 2001 as compared
to the year ended December 31, 2001 decreased 21.5% in the amount of $2,709. The
reduction in sales is due primarily to considering only a ten-month period for
fiscal year 2001 and to reduced sales to tire manufacturers and pipeline mastic
manufacturers. The Company had scheduled a complete renovation of its 12"
extruder (a key element of its manufacturing process) that began in June 2001.
During this time period, widespread tire recalls increased demand for the
Company's reclaimed butyl products. The 12" extruder was not fully operational
until late October 2001 after the increased demand had subsided. Tire customers
built up large inventories in anticipation of demand under the recalls, however,
the number of tires submitted by consumers to be replaced was lower than
anticipated and, as a result, tire manufacturers accumulated a large inventory
of tires. Tire manufacturers reduced production in response to the inventory
problem and this caused a substantial decrease in reclaimed butyl demand
starting in September 2001.
The decline in the price of crude oil in September and October 2001 caused a
decline in new oil exploration. As a result, the demand for pipeline mastic
wraps produced with reclaim butyl rubber supplied by the Company also fell
dramatically beginning in October 2001.
Gross profit percentage for the ten months ended October 31, 2001 was 10%
compared to 9.5% for the year ended December 31, 2000 as a result of the
improved operating efficiency. Gross profit for the year ended December 31, 2000
was slightly below historical levels as the result of an inventory obsolescence
charge recorded in December 2000.
COACH LEASING
The following table shows sales, cost of sales and gross profit for this segment
for the periods indicated (in thousands):
Year Ended Ten Months Ended
October 31, October 31,
2002 2001
--------------------- --------------------
Net Sales $ 6,374 $ 4,165
Cost of Sales 3,357 1,618
--------------------- --------------------
Gross Profit $ 3,017 $ 2,547
===================== ====================
Gross Profit % 47.3% 61.1%
===================== ====================
For the reason noted above, operating results between these periods are not
comparable.
YEAR ENDED OCTOBER 31, 2002 COMPARED TO THE TEN MONTHS ENDED OCTOBER 31, 2001
Sales for the year ended October 31, 2002 increased 53% in the amount of $2,209
over the ten-month period ended October 31, 2001. The increase in sales is
attributable to an additional two months in the period, an increase in the size
of the coach fleet, additional revenue from the increased use of employee coach
drivers versus independent contractors paid directly by the customer and due to
increased utilization of the fleet in 2002. Management believes the increased
utilization is a result of its marketing efforts to rock and roll, pop, touring
Broadway shows and corporate customers. These customers are in addition to the
traditional country and western performers who have historically been this
segment's primary customer base. This business is seasonal in nature and
historically is stronger in the spring, summer and fall months.
Gross profit for this segment was 47.3% for the year ended October 31, 2002
compared to 61.l% for the comparable ten-month period ended October 31, 2001.
The reduction is primarily attributable to two factors. First, during the
summer, additional coaches were leased from unrelated third parties to meet
current demand. The additional lease cost has been recorded as a component of
cost of sales and represents an increase of approximately 5% as a percentage of
sales. This segment had no lease cost for outside coaches in the comparable
period of 2001. Second, additional drivers have been added as employees during
2002 adding approximately 7% as a percentage of sales to the costs of direct
wages and benefits for the quarter. In the comparable period ended October 31,
2001, a larger percentage of coach drivers were independent contractors paid
directly by the customer. In addition, the two additional months of activity for
the year ended October 31, 2002 include the months of November and December
which are historically slower months, resulting in lower gross profits for this
segment.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES
For the reasons noted above, results between periods presented are not
comparable.
The Company's selling, general and administrative expenses are higher for the
year ended October 31, 2002 versus the ten-month period ended October 31, 2001
due to the trailer manufacturing operations added in 2002, as previously
discussed.
In addition, selling, general and administrative expenses are higher for the
year ended October 31, 2002 than would be expected on an ongoing basis. This is
due primarily to increased administrative costs that were necessary to continue
the process of creating better subsidiary reporting, the use of outside
professionals for services in assisting in post acquisition activities, the cost
to obtain prior year audits to meet regulatory filing requirements, and the cost
of providing accounting and related services to management, that will normally
be performed by Company personnel on a going forward basis. The additional costs
were partially offset by a business interruption claim related to the fire at
the butyl rubber reclaiming facility in the amount of $325. In addition, on
February 1, 2002, the Company changed its estimates with regard to depreciation
of coaches owned by DW Leasing and Obsidian Leasing by establishing a salvage
value of approximately 38%. The depreciable lives of the coaches of 15 years was
not changed. This change in estimate resulted in a reduction of selling, general
and administrative expenses in the year end October 31, 2002 of approximately
$200.
INTEREST EXPENSE
For the reasons noted above, results between periods presented are not
comparable.
While the interest expense increased over the prior period primarily as a result
of the transactions that occurred in June and July 2001, interest expense for
the year ended October 31, 2002 as a percentage of average debt borrowings of
$37,158 was 9.6%. Interest expense for the ten months ended October 31, 2001 as
a percentage of average debt borrowings of $24,964 was 9.3% (11.2% on an annual
basis). The decrease is primarily due to the reduction of the prime rate as well
as the refinancing debt and equity transactions discussed below in "Liquidity
and Capital Resources," "Refinancing Activities," and "Partners Equity
Transactions."
ASSET IMPAIRMENT
The Company adopted the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of fiscal 2002. The Company
completed its transitional impairment test in conjunction with the adoption of
Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other
Intangible Assets during the quarter ended July 31, 2002. The impairment test
indicated that a portion of the goodwill of Danzer Industries was impaired.
Accordingly, $2,015 has been recorded as a cumulative effect of change in
accounting principle.
During the fourth quarter of 2002, the Company evaluated the recoverability of
Danzer Industries' long-lived assets, including remaining goodwill, due to
Danzer Industries' significant operating loss in 2002 and the Chapter 11
bankruptcy filing of a significant customer. Danzer Industries determined the
estimated future undiscounted cash flows were below the carrying value of
certain long-lived assets. As a result, remaining goodwill was written off and a
charge of $720 as loss on asset impairment was recorded as an operating expense.
DISCONTINUED OPERATIONS
On October 30, 2002, the Company's Board of Directors agreed to sell
substantially all assets of Champion to an entity controlled by Messrs. Durham
and Whitesell in exchange for assumption of all liabilities of Champion,
excluding its subordinated debt. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 144, Accounting for Impairment of Long-Lived
Assets, the operating results of Champion have been classified as discontinued
operations. The losses from discontinued operations for the year ended October
31, 2002 and ten months ended October 31, 2001 of $1,040 and $3,376,
respectively, represent the losses of Champion during these periods, net of tax
benefit of $438 and $0, respectively. The loss in 2001 includes a charge for
asset impairment of $2,305. Champion was not included in the financial
statements for the year ended December 31, 2000. Sales of Champion in the year
ended October 31, 2002 were $2,884 as compared to $3,365 for the ten months
ended October 31, 2001. The decrease of $481 or 14.3% is attributable to lower
order volume during 2002.
To facilitate the sale of substantially all assets of Champion, on January 27,
2003, the Company agreed to a settlement with Markpoint of its outstanding
subordinated debt with Champion. In return for cancellation of the indebtedness
and release of a pending legal action against the Company and Champion, the
Company made a cash payment to Markpoint of $675 and issued to Markpoint 32,143
shares of the Company's Series D preferred stock. In addition, the agreement
provides Markpoint the option to require the Company to repurchase these shares
at a price of $21 per share. The repurchase option is available to Markpoint as
follows: 16,072 shares during the period May 1, 2003 to June 1, 2003 and 16,071
shares during the period November 1, 2003 to December 1, 2003. The repurchase
options expire if not exercised during the specified periods. The Company's
repurchase obligation is guaranteed by Mr. Durham.
INCOME TAX PROVISION
There was income tax benefit of $33 for the year ended October 31, 2002 due to
the utilization of previously reserved net operating loss (NOL) carryforwards
offset by taxable gains on debt forgiveness. The income tax benefit is created
primarily through NOL carryforwards recognized to the extent they are available
to offset the Company's net deferred tax liability.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY AND WORKING CAPITAL
Each of the subsidiaries of the Company have separate revolving credit
agreements and term loan borrowings through which the subsidiary finances its
operations together with cash generated from operations. The principal balances
of some of these loans reflect the fact that Partners, from whom four of the
five subsidiaries were purchased, entered into highly leveraged acquisitions of
Champion (subsequently divested), U.S. Rubber, Pyramid, and United.
This high level of debt created liquidity issues for the Company and the
stringent financial covenants that are common for this type of debt increase the
probability that the Company's subsidiaries may from time to time be in
technical default under these loans. These risks are mitigated, in part, for the
Company's United and U.S. Rubber subsidiaries by the right described below under
"Guarantees of Partners." They are also mitigated by the divestiture of
Champion, and the completed refinancing efforts with respect to U.S. Rubber and
the coach leasing segment.
The Company's working capital position (current assets over current liabilities)
was positive at October 31, 2002 by $1,591. At the end of fiscal year 2001, the
working capital position was $(2,528). The increase in working capital is
primarily attributable to the factors below.
The Company continues to address liquidity and working capital issues in a
number of ways. Management believes that the following steps started in early
2002 and currently underway will improve the Company's working capital,
strengthen its equity and place the Company in a position to successfully
enhance its liquidity. These steps include:
o The transactions described below under "Partners Equity Transactions" which
converted approximately $2,834 of long-term liabilities to equity. Of this
amount, $1,290 was converted to Series C Preferred Stock during the second
fiscal quarter of 2002. Additionally, $1,545 was converted to Series D
Preferred Stock in October 2002.
o The divestiture of Champion described below under "Champion Transactions"
which improved the Company's overall equity and working capital position.
o The transactions described below under "Refinancing Activities" which
reduced the Company's interest costs and decreased the proportion of debt
which has been classified as a current liability. The Company completed the
refinancing of the United line of credit and reduced the principal payments
on a term note. In addition, refinancing was completed at U.S. Rubber and
on several coaches in the coach leasing group.
As a result of the actions described above, Management believes that the Company
has financing agreements in place to provide adequate liquidity and working
capital for fiscal 2003. However, there can be no assurance that such working
capital and liquidity will in fact be adequate. Therefore, the Company may be
required to draw upon other liquidity sources. The Company has therefore secured
an increased financial commitment from Fair Holdings, Inc. ("Fair Holdings"), an
entity controlled by the Company's Chairman, to provide, as needed, additional
borrowings under a $5 million line of credit agreement, which expires on January
9, 2005. Currently, availability under the agreement is approximately $3.2
million.
FINANCIAL COVENANTS
The Company and certain of its subsidiaries did not meet certain requirements
and covenants in their debt agreements relating to maintenance of minimum ratios
and levels of earnings to funded debt and fixed charge coverage rate. The
lenders have waived or modified the covenants not in compliance as of October
31, 2002.
The Company has taken a number of actions which eliminated its defaults under
agreements with certain of its lenders:
o At October 31, 2002, U.S. Rubber had violated negative covenants with its
primary lender and received a waiver of the violation and an amendment of
the Credit Agreement.
o Pyramid was a guarantor of DW Leasing's debt to Regions Bank, Nashville,
Tennessee. DW Leasing and Pyramid had been in violation of the Funded Debt
to EBITDA ratio in the Regions Bank Credit Facility since the inception of
the loan. At the time of the Acquisition, Regions Bank granted a waiver of
this violation. The covenant had not been rewritten, and Regions Bank
waived the violation as of October 31, 2001. The Company refinanced the
Regions Bank debt with a related party on December 19, 2002.
o At October 31, 2002, the Company was in violation of negative covenants
with Renaissance US Growth & Income Trust PLC and BFSUS Special
Opportunities Trust PLC, the holders of debentures that completed the
financing of United. The Company received a waiver of the violations as of
October 31, 2002 and obtained modifications of terms with the debenture
holders to provide for less stringent covenants. In exchange for the waiver
and modifications, the Company issued warrants to the debenture holders to
purchase up to 16,000 shares of the Company's common stock at an exercise
price of $.20 per share.
o Danzer Industries was notified by letter dated May 28, 2002 that it was in
technical default of its revolving note and term note due to nonreceipt of
certain documentation and noncompliance with the debt service ratio. A
forbearance agreement was completed in October 2002. As part of the
forbearance agreement, the Company received a waiver through March 31,
2003, when the entire debt is due. As of October 31, 2002, $867 of
long-term debt related to these obligations has been reclassified as a
current liability due to the forbearance agreement. Management is currently
exploring options with regard to refinancing the outstanding debt of Danzer
Industries, including extension of the current agreement with Bank of
America. Should refinancing or an extension of the current agreement not be
obtained by the expiration date of the forbearance agreement, the debt will
be repaid through current sources of availability including borrowings
under the Company's line of credit with Fair Holdings.
o Champion has remained in default of its subordinated debt agreement in the
amount of $1,250, and the subordinated lender sued to obtain payment. On
January 27, 2003, the Company settled this liability in exchange for a cash
payment of $675 and issuance of 32,143 shares of the Company's Series D
Preferred Stock. The settlement also provides for a repurchase obligation
of these shares on the part of the Company at a price of $21 per share
within a specified period ending December 1, 2003. Accordingly, $1,013 has
been classified as a current liability. Champion was sold to a company
owned by Messrs. Durham and Whitesell on January 30, 2003.
o At October 31, 2002, United had violated financial covenants with First
Indiana Bank and Huntington Capital Investment Company. United has received
waivers of these violations through November 1, 2003 from First Indiana and
a modification of covenants with Huntington Capital Investment Corporation.
o Various subsidiary companies were in violation of requirements to provide
year-end financial statements to various lenders within 90 days of the
close of the 2002 year end. Management has received extensions of time from
the lenders.
FUNDS AVAILABILITY
CASH AVAILABILITY
On a consolidated basis, at October 31, 2002, the Company had approximately $920
of cash and cash equivalents. Danzer Industries, U.S. Rubber, United, and
Obsidian Enterprises each have revolving credit lines available for working
capital at each individual entity. Borrowings under the credit facilities are
available to the lesser of the maximum amount or the borrowing base as defined
in the credit agreement. At October 31, 2002, additional current availability
under these credit lines and maximum availability if supported by their
individual borrowing base are:
Company Current Availability Maximum Availability
Danzer Industries $ 0 $ 0(1)
U.S. Rubber 701 2,472
United 607 662
Obsidian Enterprises 3,202(2) 3,202(2)
(1) Additional borrowings only at the bank's discretion under the forbearance
agreement
(2) Includes additional availability of $2,000 from an increase in the line
subsequent to year end
The Company generated net cash flow of $322 from continuing operations during
the year ended October 31, 2002. Cash provided by operations during the year is
primarily due to increases in accounts payable and customer deposits, offset by
increases in inventories.
REFINANCING ACTIVITIES
Management refinanced certain of the currently outstanding debt of the Company:
o U.S. Rubber refinanced its debt with a new lender on October 24, 2002 on
more favorable terms than the terms with the prior lender.
o On August 28, 2002, the Company obtained a renewal and increased maximum
borrowing limit of the revolving line of credit of United with First
Indiana Bank and an additional one year of amortization of its previous
2-year term debt.
o The Company refinanced certain coaches transferred from DW Leasing to
Obsidian Leasing with DC Investments, LLC ("DC Investments"), an entity
owned 50% by the Company's Chairman, and its various existing lenders. Two
senior lenders representing approximately 80% of Obsidian Leasing Company's
debt have refinanced their respective loans which included a substantial
reduction in the interest rates and a longer amortization of the debt. The
debt was refinanced by the existing lenders for 80% of the current amount
outstanding. The remaining 20% was financed through a note payable to Fair
Holdings. In addition to the above refinancing, on December 17, 2002,
Obsidian Leasing sold four coaches to DC Investments Leasing, LLC ("DC
Investments Leasing"), a newly created entity owned 50% by the Company's
Chairman, in exchange for DC Investments Leasing's satisfaction of the debt
outstanding on such coaches. DC Investments Leasing paid this debt through
a refinancing at terms that included a reduction in interest rates. In
addition, DC Investments Leasing also acquired five additional coaches that
were previously to be purchased by the Company thereby eliminating the
Company's existing purchase commitment for such coaches. DC Investments
Leasing also entered into a management agreement with Pyramid under which
all nine coaches described above will be leased by Pyramid.
PARTNERS EQUITY TRANSACTIONS
Partners, the major shareholder of the Company, was required under the Plan of
Reorganization to fund through the purchase of additional preferred stock
certain ongoing administrative expenses of the Company to complete the Plan of
Reorganization, complete all required current and prior year audits to meet the
regulatory filing requirements, and ensure all annual and quarterly SEC filings
are completed to enable the registration of the preferred stock issued to
Partners. Such amounts expended through October 31, 2002 approximated $1,275.
Pursuant to the agreement with Partners, the Company converted these amounts to
equity in exchange for issuance to Partners of convertible preferred stock in
October 2002. Additional expenses of $270 in excess of amounts Partners was
obligated to pay were funded by Fair Holdings, Inc. and subsequently converted
to Series D Preferred Stock. The total liability of $1,545 converted to equity
was incurred as follows: $364 capitalized in the reverse merger transaction;
$376 as expenses incurred in 2001; and $805 as expenses incurred in 2002.
In 2002, Partners converted $1,290 of notes payable and accrued interest from
Partners to the Company to 402,906 shares of Series C Preferred Stock of the
Company.
GUARANTEES OF PARTNERS
The Company has an agreement with Partners that gives the Company the right to
mandate a capital contribution from the Partners if the lenders to U.S. Rubber
or United were to declare a default. In either of those events, the Company has
the right to enforce a capital contribution agreement with Partners up to $1,620
on U.S. Rubber and $1,000 on United to fund the respective subsidiary's
shortfall. These payments, if any, would be applied directly to reduce the
respective subsidiary's debt obligations to the lender.
CHAMPION TRANSACTIONS
In 2002, the Board of Directors authorized the Chairman of the Board of the
Company to explore various options to divest Champion Trailer or, at a minimum,
restructure this operation of the business. As a result, DC Investments
negotiated the purchase of the loans of Bank One to Champion.
In 2002, Champion was also indebted to Markpoint under a subordinated credit
facility in the amount of $1,250 and was in violation of certain covenants
related to the loan. Subsequent to DC Investments purchasing the Bank One debt
in a nonrecourse assignment, Markpoint filed a lawsuit in Texas state court
seeking payment in full for their subordinated debt from Champion or the Company
under a guarantee agreement.
On January 27, 2003, Markpoint settled their lawsuit in exchange for a cash
payment of $675 and the issuance to Markpoint of 32,143 shares of the Company's
Series D preferred stock. In addition, the agreement provides Markpoint the
option to require the Company to repurchase these shares at a price of $21 per
share. The repurchase option is available to Markpoint as follows: 16,072 shares
during the period May 1, 2003 to June 1, 2003 and 16,071 shares during the
period November 1, 2003 to December 1, 2003. The repurchase options expire if
not exercised during the specified periods. The Company's repurchase obligation
is guaranteed by Mr. Durham. Subsequent to the settlement, the Company's Board
of Directors authorized the sale of Champion, which was completed January 30,
2003.
CASH FLOWS (EBITDA)
A summary of our contractual cash obligations for the fiscal years ending 2003
through 2006 and 2007 and thereafter at October 31, 2002 is as follows:
2007 and
Contractual Obligations Total 2003 2004 2005 2006 Thereafter
--------------------------------------- ------------ ------------- ------------ ------------ ------------ ------------
Long-term debt, with covenant
violations and classified as current $ 1,863 $ 1,863 $ -- $ -- $ -- $ --
Long-term debt, and all debt service
interest payments 45,831 7,099 6,882 15,395 8,467 7,988
Operating leases 1,397 450 353 274 189 131
Mandatory redeemable preferred stock 1,400 -- -- -- 1,400 --
------------ ------------- ------------ ------------ ------------ ------------
Total contractual cash obligations $ 50,491 $ 9,412 $ 7,235 $ 15,669 $ 10,056 $ 8,119
============ ============= ============ ============ ============ ============
Cash flow and liquidity are discussed further below, and the footnotes to our
financial statements discuss cash flow, liquidity and the current classification
of debt due to loan covenant violations.
We also have a commercial commitment as described below:
Other Commercial Commitment Total Amount Committed Outstanding at October 31, Date of Expiration
2002
------------------------------- ---------------------------- ---------------------------- ----------------------------
Line of credit, bank $ 1,000 $ 875 March 31, 2003
Line of credit, bank 3,750 3,088 February 1, 2004
Line of credit, bank 4,000 1,528 October 1, 2005
Line of credit, related party 5,000* 1,798 January 1, 2005
* Credit line with Fair Holdings increased from $3,000 to $5,000 subsequent
to year end.
The Company's net cash provided by continuing operations for the year ended
October 31, 2002 was $322. This is comprised of a loss from continuing
operations of $4,852, offset by noncash depreciation and amortization and loss
on asset impairment of $3,288 and goodwill impairment loss of $2,015, increases
in inventories of $1,752 and deferred taxes of $40 and decreases in accounts
receivable of $264 and other assets of $336, and increases in accounts payable
of $545, and customer deposits of $473, and decreases in accrued expenses of
$339. In addition, the Company had noncash losses on debt refinancing, sale of
equipment and accretion of interest of $181, $41, and $162, respectively.
Net cash flow provided from financing activities for the year ended October 31,
2002 was $618. This is comprised of borrowings of long-term debt and net
borrowings of short-term debt of $3,583 and borrowings from related parties of
$628, offset by principal repayments of long-term debt of $3,258. The Company
also paid debt issuance costs of $248 and distributions to members of DW Leasing
of $107, offset by the exercise of warrant of $20.
Cash flow was used in investing activities for the year ended October 31, 2002
of $587. This is comprised of purchases of property and equipment of $909 and
proceeds from the sale of property and equipment of $322.
The total increase (decrease) in cash is summarized as follows:
Year Ended Ten Months Ended Year Ended
October 31, October 31, December 31,
2002 2001 2000
------------------- ------------------ ------------------
Net cash provided by continuing operations $ 322 $ 1,763 $ 762
Net cash provided by (used in) investing activities (588) (17,772) 1,156
Net cash provided by (used in) financing activities 618 16,321 (2,186)
Net cash flow provided by discontinued operations 39 -- --
------------------- ------------------ ------------------
Increase (decrease) in cash and cash equivalents $ 391 $ 312 $ (268)
=================== ================== ==================
EBITDA is a measure of the Company's ability to generate cash flow and should be
considered in addition to, but not as a substitute for, other measures of
financial performance reported in accordance with accounting principles
generally accepted in the United States of America.
EBITDA by business segment and reconciliation to net income or loss under
accounting principles generally accepted in the United States of America by
segment for the applicable periods is as follows:
Year Ended October 31, 2002
--------------------------------------------------------------------------
Income
Income (Loss)
Tax from
Interest Expense Depreciation Continuing
EBITDA Expense (Benefit) & Amortization Operations
------------- ------------ ------------ ------------------- --------------
Trailer and related transportation
equipment manufacturing $ 735 $ 1,400 $ 404 $ 1,425* $ (2,494)
Coach leasing 1,830 1,468 (59) 779 (358)
Butyl rubber reclaiming 967 684 (152) 1,084 (649)
Corporate -- -- (226) -- 226
------------- ------------ ------------ ------------------- --------------
Total Company $ 3,532 $ 3,552 $ (33) $ 3,288 $ (3,275)
============= ============ ============ =================== ==============
* includes impairment charge of $720
Ten Months Ended October 31, 2001
--------------------------------------------------------------------------
Income
Income (Loss)
Tax from
Interest Expense Depreciation Continuing
EBITDA Expense (Benefit) & Amortization Operations
------------- ------------ ------------ ------------------- --------------
Trailer and related transportation
equipment manufacturing $ 638 $ 369 $ 98 $ 365 $ (194)
Coach leasing 1,481 1,266 -- 785 (570)
Butyl rubber reclaiming 857 677 (135) 905 (590)
Corporate -- -- (335) -- 335
------------- ------------ ------------ ------------------- --------------
Total Company $ 2,976 $ 2,312 $ (372) $ 2,055 $ (1,019)
============= ============ ============ =================== ==============
Year Ended December 31, 2000
--------------------------------------------------------------------------
Income
Income from
Interest Tax Depreciation Continuing
EBITDA Expense Expense & Amortization Operations
------------- ------------ ------------ ------------------- --------------
Butyl rubber reclaiming $ 1,094 $ 442 $ 50 $ 554 $ 48
============= ============ ============ =================== ==============
The Company allocates selling, general and administrative expenses to the
respective subsidiaries primarily based on a percentage of sales. Amounts
allocated by segment are as follows:
Year Ended Ten Months Ended
October 31, October 31,
2002 2001
----------------------------------------
Trailer manufacturing $ 934 $ 245
Coach leasing 146 96
Butyl rubber reclaiming 232 275
----------------------------------------
Total $ 1,312 $ 616
========================================
EBITDA by segment, exclusive of the allocation of the above selling, general and
administrative expenses, is as follows:
Year Ended Ten Months Ended
October 31, October 31,
2002 2001
----------------------------------------
Trailer manufacturing $ 1,669 $ 883
Coach leasing 1,976 1,577
Butyl rubber reclaiming 1,199 1,132
----------------------------------------
Total $ 4,844 $ 3,592
========================================
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are summarized in the footnotes to our
financial statements. Some of the most critical policies are also discussed
below.
As a matter of policy, we review our major assets for impairment. Our major
operating assets are accounts receivable, inventory, intangible assets and
property and equipment. We have not historically experienced significant bad
debts expense, although the filing of Chapter 11 bankruptcy during 2002 of a
customer resulted in a bad debt charge of $379. However, we believe our reserve
for doubtful accounts of $495 should be adequate for any exposure to loss in our
October 31, 2002 accounts receivable. We have also established reserves for
slow-moving and obsolete inventories and believe the reserve of $466 is
adequate. We depreciate our property and equipment and amortize intangible
assets (except for goodwill) over their estimated useful lives. We have
identified items that are impaired, and during the quarter ended July 31, 2002,
the Company completed its transitional impairment test in conjunction with the
adoption of SFAS 142. The impairment test indicated that certain goodwill
related to the trailer manufacturing segment was impaired. Accordingly $2,015
has been recorded as a cumulative effect of change in accounting principle.
During the fourth quarter, an additional review for asset impairment was
conducted because of changes in circumstances that indicated potential
impairment. Continuing operating losses at Danzer Industries and the filing of
Chapter 11 bankruptcy by Danzer Industries' largest customer in the fourth
quarter resulted in an additional impairment review. As a result, an additional
$720 of goodwill was determined to be impaired at the trailer manufacturing
segment.
The realization of the remaining goodwill of $6,434 is primarily dependent on
the future operations of the operating entity where the goodwill is allocated
(primarily United). Historical operating results, current product demand and
estimated future results indicate the results of operations at United should be
adequate to continue to realize this amount. However, future results may not
meet expectations due to economic or other factors, and failure to meet
expectations may result in the goodwill not being fully realizable.
The initial cost of coaches acquired is depreciated over a straight-line basis
over 15 years to a salvage value of 38% of original cost. Subsequent
enhancements and refurbishments of coaches are depreciated over five years using
the straight-line method. The current depreciation policy is a change in
estimate that was effective February of 2002. Prior to this date, coaches were
depreciated over fifteen years on a straight line basis with no salvage value.
Had the prior depreciation policy been in effect for the entire year of 2002,
depreciation expense would have increased by approximately $200. The age of
coaches in our fleet range from less than one year to ten years, with an average
age of approximately four years. Actual value of coaches after 15 years is
dependent on several factors including the level of maintenance and the market
conditions at the time of disposal. We have not disposed of a material number of
coaches, and our estimate of depreciation is based on information other than
actual disposal experience. Accordingly, we continue to evaluate our estimates
with respect to the actual depreciation of such vehicles based on market
conditions and our experience in disposals when they occur. Should future
factors indicate the current depreciation policy is not adequate, we will adjust
the depreciation rates, and such adjustments may have an adverse impact on our
results of operations.
In conjunction with financing of the acquisition of United, the Company issued
386,206 shares of Series C preferred stock to Huntington Capital Investment
Corporation ("Huntington"). The note purchase agreement includes a provision
that gives Huntington the option to require the Company to repurchase these
shares at 90% of market value upon the earlier of: a) fifth anniversary of
issuance of such shares, b) default under the subordinated debt agreement, c)
other factors related to a sale of substantially all assets of the Company as
defined in the agreement. Increases in the value of the Company's stock will
result in a corresponding increase to this repurchase requirement. Accordingly,
a substantial increase in stock price at the repurchase date may have an adverse
impact on the Company's liquidity. At October 31, 2002, the Company had violated
certain financial covenants defined in the subordinated debt agreement with
Huntington. The Company received a waiver of these violations as of October 31,
2002 and a modification to the covenants.
CONTINGENCIES
The Company is party to ordinary litigation incidental to its business. No
current pending litigation is expected to have a material adverse effect on
results of operations, financial condition or cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to interest rate changes on its
debt. The disclosures in Item 7 above are incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Obsidian Enterprises, Inc.
Indianapolis, Indiana
We have audited the accompanying consolidated balance sheets of Obsidian
Enterprises, Inc. and Subsidiaries as of October 31, 2002 and 2001, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for the year ended October 31, 2002, and the ten months ended
October 31, 2001, and the year ended December 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Obsidian
Enterprises, Inc. and Subsidiaries as of October 31, 2002 and 2001, and the
results of their operations and their cash flows for the year ended October 31,
2002, the ten months ended October 31, 2001, and the year ended December 31,
2000 in conformity with accounting principles generally accepted in the United
States of America.
As described in Note 2 to the financial statements, the Company adopted
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets in 2002.
Our audit of the consolidated financial statements of Obsidian Enterprises, Inc.
and Subsidiaries included Schedule II, contained herein, for the year ended
October 31, 2002, the ten months ended October 31, 2001, and the year ended
December 21, 2000. In our opinion, such schedule presents fairly the information
required to be set forth therein, in conformity with accounting principles
generally accepted in the United States of America.
As described in Note 3 to the financial statements, the previously issued 2002
and 2001 financial statements have been restated for errors in the application
of accounting principles.
/s/ McGladrey & Pullen, LLP
Elkhart, Indiana
February 10, 2003, except for Note 3,
as to which the date is August 15, 2003
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
October 31, October 31,
2002 2001
----------------------------------
Assets
Current assets:
Cash and cash equivalents $ 920 $ 529
Marketable securities 137 223
Accounts receivable, net of allowance for doubtful accounts
of $495 for 2002 and $80 for 2001 (Note 9) 3,307 3,571
Accounts receivable, related parties (Note 16) 206 217
Inventories, net (Notes 7 and 9) 7,315 5,563
Prepaid expenses and other assets 384 514
Deferred income tax assets (Note 15) 665 673
----------------------------------
Total current assets 12,934 11,290
Property, plant and equipment, net (Notes 8 and 9) 23,048 23,384
Other assets:
Intangible assets (Notes 4 and 6):
Goodwill not subject to amortization 6,434 5,829
Goodwill, less accumulated amortization of $76 -- 3,381
Noncompete agreements, less accumulated amortization
of $222 for 2002 and $44 for 2001 664 842
Trade name and customer relations, less accumulated
amortization of $208 for 2002 and $125 for 2001 719 802
Deferred debt costs, less accumulated amortization
of $97 in 2002 and $44 in 2001 470 369
Other 116 579
Assets of subsidiary held for sale (Note 5) 1,538 2,374
----------------------------------
$ 45,923 $ 48,850
==================================
The accompanying notes are an integral part of the
condensed consolidated financial statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
October 31, October 31,
2002 2001
----------------------------------
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Current portion of long-term debt (Note 9) $ 5,667 $ 7,871
Accounts payable, trade 3,450 3,126
Accounts payable, related parties (Note 16) 668 925
Accrued compensation 810 560
Accrued expenses 514 1,040
Customer deposits 234 296
----------------------------------
Total current liabilities 11,343 13,818
Long-term debt, net of current portion (Note 9) 23,879 26,076
Long-term debt, related parties (Note 9 and 16) 5,518 --
Deferred income tax liabilities (Note 15) 1,624 1,672
Accounts payable, related parties (Note 16) -- 2,170
Liabilities of subsidiary held for sale (Note 5) 2,848 2,348
Commitments and contingencies (Note 17)
Mandatory redeemable preferred stock (Note 12):
Class of Series C Preferred Stock: 386,206 shares outstanding 1,400 1,435
Stockholders' equity (deficit) (Note 13):
Common stock, par value $.0001 per share; 40,000,000 shares authorized;
36,007,855 shares outstanding 3 3
Preferred stock, 5,000,000 shares authorized; Class of Series C Preferred
Stock, par value $.001, 4,600,000
authorized, 4,368,399 shares issued and outstanding in 2002 and
3,739,169 shares issued and outstanding in 2001; 200,000 shares of
undesignated Preferred Stock authorized 5 4
Preferred stock, 200,000 shares authorized; Class of Series D
convertible preferred stock, par value $.001, 88,330 shares issued and
outstanding in 2002; 0 shares issued and outstanding in 2001 -- --
Additional paid-in capital 10,184 5,682
Accumulated other comprehensive income (loss) (49) 37
Retained earnings (accumulated deficit) (10,832) (4,395)
----------------------------------
Total stockholders' equity (deficit) (689) 1,331
----------------------------------
$ 45,923 $ 48,850
==================================
The accompanying notes are an integral part of the
condensed consolidated financial statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share and share data)
Year Ended Ten Months Ended Year Ended
October 31, October 31,
2002 2001 December 31, 2000
--------------------------------------------------------
(as restated,
see Note 3)
Net sales $ 57,274 $ 24,689 $ 12,583
Cost of sales 47,841 19,457 11,390
--------------------------------------------------------
GROSS PROFIT 9,433 5,232 1,193
Selling, general and administrative expenses (8,589) (4,251) (1,009)
Loss on asset impairment (Note 4) (720) -- --
Insurance settlement 325 -- --
--------------------------------------------------------
Income from operations 449 981 184
Other income (expense):
Interest expense (Note 9) (3,552) (2,312) (442)
Interest income 12 -- 356
Other expense (217) (60) --
--------------------------------------------------------
Income (loss) before income taxes, discontinued
operations, and cumulative effect of change in accounting
principle (3,308) (1,391) 98
Income tax (expense) benefit (Note 15) 33 372 (50)
--------------------------------------------------------
Income (loss) from continuing operations before
discontinued operations and cumulative effect of change
in accounting principle (3,275) (1,019) 48
Loss from discontinued operations, net of tax (Note 5) (1,040) (3,376) --
--------------------------------------------------------
Income (loss) before cumulative effect of change in
accounting principle (4,315) (4,395) 48
Cumulative effect of change in accounting principle, net
of tax (Note 4) (2,015) -- -
--------------------------------------------------------
Net income (loss) $ (6,330) $ (4,395) $ 48
========================================================
Basic and diluted earnings (loss) per share attributable to common shareholders
(Note 2):
From continuing operations $ (.09) $ (.04) $ --
Discontinued operations, net of tax (.03) (.13) --
Cumulative effect of accounting change, net of tax (.06) -- --
--------------------------------------------------------
Net income (loss) per share $ (.18) $ (.17) $ --
========================================================
Weighted average common and common equivalent shares
outstanding, basic and diluted: 36,007,855 25,830,856 --
========================================================
The accompanying notes are an integral part of the
condensed consolidated financial statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(dollars in thousands)
Series C Series D
Convertible Convertible Accumulated
Preferred Preferred Addi- Other Retained
Comprehensive Common Stock Stock Stock tional Compre- Earnings
Income -------------------------------------------- Paid-in hensive (Accumulated
(Loss) Shares Amount Shares Amount Shares Amount Capital Income Deficit) Total
-----------------------------------------------------------------------------------------
Balance at December 31, 1999 $ -- 17,588,348 $ 1 -- $-- -- $-- $ -- $ -- $ 4,890 $ 4,891
Issuance of stock under
incentive plan and Parent
note conversion -- 1,747,946 -- -- -- -- -- -- -- -- --
2000 net income -- -- -- -- -- -- -- -- -- 48 48
----------------------------------------------------------------------------------------
Balance at December 31, 2000 -- 17,760,015 1 -- -- -- -- -- -- 4,938 4,939
Conversion of debt to common stock -- 1,750,000 -- -- -- -- -- 355 -- -- 355
To record the effect of the
reverse merger June 21, 2001
(Note 6) -- -- 1 1,970,962 2 -- -- 3,760 (103) (4,938) (1,278)
Conversion of Series C Preferred
Stock to common stock -- 16,497,840 1 (824,892) (1) -- -- -- -- -- --
Issuance of 2,593,099 shares of
Series C Preferred Stock
associated with the acquisition
of United and capital contribution
(Note 6) -- -- -- 2,593,099 3 -- -- 1,497 -- -- 1,500
Unrealized gain on available-for-sale
marketable securities 140 -- -- -- -- -- -- -- 140 -- 140
Fair value adjustment on redeemable
preferred stock -- -- -- -- -- -- -- 70 -- -- 70
2001 net loss (4,395) -- -- -- -- -- -- -- -- (4,395) (4,395)
----------------------------------------------------------------------------------------
Total comprehensive loss $(4,255)
==========
Balance at October 31, 2001 36,007,855 $ 3 3,739,169 4 -- -- 5,682 37 (4,395) 1,331
Issuance of 30,000 shares of
Series C Preferred Stock associated
with U.S. Rubber, net of tax $ -- -- -- 30,000 -- -- -- 1,017 -- -- 1,016
Issuance of 589,230 shares of
Series C Preferred Stock associated
with Fair Holdings and Obsidian
Capital Partners, LP -- -- -- 589,230 1 -- -- 1,885 -- -- 1,886
Issuance of 88,330 shares of Series
D Preferred Stock associated with
Fair Holdings and Obsidian
Capital Partners, LP -- -- -- -- -- 88,330 -- 1,545 -- -- 1,545
Exercise of stock warrants in exchange
for 10,000 shares of Series C
Preferred Stock -- -- -- 10,000 -- -- -- 20 -- -- 20
Distributions to members of DW
Leasing -- -- -- -- -- -- -- -- -- (107) (107)
Unrealized loss on available-for-
sale marketable securities (86) -- -- -- -- -- -- -- (86) -- (86)
Fair value adjustment on redeemable
preferred stock -- -- -- -- -- -- -- 35 -- -- 35
2002 net loss (6,330) -- -- -- -- -- -- -- -- (6,330) (6,330)
-----------------------------------------------------------------------------------------
Total comprehensive loss $ (6,416)
=============
Balance at October 31, 2002 36,007,855 $ 3 4,368,399 $ 5 88,330 $-- $10,184 $(49) $(10,832) $ (689)
===============================================================================
The accompanying notes are an integral part of the
condensed consolidated financial statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended Ten Months Year Ended
Ended
October 31, October 31, December 31,
2002 2001 2000
---------------------------------------------
Cash flow from operating activities from continuing operations:
Income (loss) from continuing operations $ (4,852) $ (1,019) $ 48
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by operating
activities:
Cumulative effect of change in accounting principle 2,015 -- --
Loss on asset impairment 720 -- --
Depreciation and amortization 2,568 2,055 554
Loss on debt refinancing 181 -- --
Loss (gain) on sale of equipment 41 (4) --
Loss on sale of marketable securities -- 81 --
Accretion of interest 162 35 --
Deferred income taxes (40) (408) 216
Changes in operating assets and liabilities net of
effect of acquisitions:
Accounts receivable, net 264 767 (414)
Inventories, net (1,752) (630) 641
Other assets 336 71 (284)
Accounts payable, trade 545 810 --
Accrued expenses (339) 321 1
Customer deposits 473 (316) --
---------------------------------------------
Net cash provided by operating activities from continuing operations 322 1,763 762
---------------------------------------------
Cash flows from investing activities from continuing operations:
Capital expenditures (910) (1,185) (1,052)
Proceeds from sale of equipment 322 1,321 --
Acquisition-related closing costs -- (146) --
Purchase of marketable equity securities -- (213) --
Cash received in reverse merger and other acquisitions -- 26 --
Cash payments in connection with the purchase of
U.S. Rubber, net of cash acquired -- (5,730) --
Cash payments in connection with the purchase of assets
of United, net of cash acquired -- (12,040) --
Proceeds from sale of marketable equity securities -- 195 --
Repayment of affiliated company payable -- -- 2,208
---------------------------------------------
Net cash provided by (used in) investing activities from continuing
operations (588) (17,772) 1,156
---------------------------------------------
The accompanying notes are an integral part of the
condensed consolidated financial statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Ten Months
Year Ended Ended Year Ended
October 31, October 31, December 31,
2002 2001 2000
---------------------------------------------
Cash flows from financing activities from continuing operations:
Advances from (repayments to) related parties 628 (238) --
Net borrowings on lines of credit 1,265 5,226 --
Borrowings on long-term debt 2,318 11,220 --
Principal repayments on long-term debt, including related parties (3,258) (2,255) (2,186)
Debt issuance costs (248) (105) --
Distributions to members of DW Leasing (107) -- --
Exercise of warrant 20 -- --
Proceeds from capital contributions and
sale of common stock -- 2,473 --
---------------------------------------------
Net cash provided by (used in) financing activities from continuing
operations 618 16,321 (2,186)
Net cash flow provided by discontinued operations 39 -- --
---------------------------------------------
Increase (decrease) in cash and cash equivalents 391 312 (268)
Cash and cash equivalents, beginning of year 529 217 485
---------------------------------------------
Cash and cash equivalents, end of year $ 920 $ 529 $ 217
=============================================
Interest paid $ 3,415 $ 2,241 $ 485
=============================================
Interest received $ -- $ -- $ 356
=============================================
Taxes paid $ 22 $ 44 $ 8
=============================================
Noncash:
Refinancing of debt, including related-party amounts $ 12,122 $ -- $ --
Conversion of contributed amounts to equity $ 5,104 $ 355 $ --
Equipment purchased with debt $ 1,220 $ 1,059 $ 95
Fair value changes of mandatory redeemable preferred stock $ 35 $ 70 $ --
Purchase price adjustment and conversion of
accounts payable to debt $ 225 $ -- $ --
Seller note on acquisition of United $ -- $ 1,500 $ --
Seller note on acquisition of U.S. Rubber $ -- $ 2,573 $ --
The accompanying notes are an integral part of the
condensed consolidated financial statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
1. DESCRIPTION OF BUSINESS AND CHANGE OF NAME
Obsidian Enterprises, Inc. (the "Company"), formerly named Danzer Corporation
("Danzer") and previously Global Environmental Corp., was incorporated on
October 6, 1987. Effective August 1, 1988, the Company acquired all of the
issued and outstanding common shares of Global Environmental Holdings, Inc.
("Global Holdings"). On October 7, 1999, the Company changed its name from
Global Environmental Corp. to Danzer Corporation.
Danzer 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. In addition, Danzer changed its name to
Obsidian Enterprises, Inc. However, the operating company, Danzer Industries,
Inc., retained its name. The operating company will continue to be referred to
as Danzer Industries, Inc. The Acquisition and Plan of Reorganization of Danzer
with U.S. Rubber Companies (see Note 6, 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.
Accordingly, the fiscal 2000 financial information presented herein represents
only the financial results of U.S. Rubber Reclaiming, Inc.
Pursuant to the Plan of Acquisition and Reorganization described further in Note
6, United Expressline, Inc. was acquired July 31, 2001.
The resulting entities, considered accounting subsidiaries of U.S. Rubber
Reclaiming, Inc. (the accounting acquirer) and legal subsidiaries of Obsidian
Enterprises, Inc. (formerly 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.
Obsidian Enterprises, Inc. (formerly 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 and cargo trailers.
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 of Pyramid are presented on a combined basis. The combined financial
statements of Pyramid also include the assets, liabilities, equity and results
of operations of DW Leasing, LLC ("DW Leasing") and Obsidian Leasing Co., Inc.
("Obsidian Leasing"). DW Leasing is controlled by individuals which are also
controlling shareholders of Obsidian Enterprises, Inc. and, accordingly,
Pyramid. All coaches owned by DW Leasing are operated by Pyramid. Obsidian
Leasing is also a wholly owned subsidiary of the Company. As part of the Plan of
Reorganization, certain assets and liabilities of DW Leasing were to be
transferred to Obsidian Leasing; however, the transfers could not be completed
without lender approvals. On November 1, 2001, the Company completed the
tax-free exchange contemplated by the Acquisition Agreement whereby all but
seven coaches and the liabilities thereon were transferred to Obsidian Leasing.
All intercompany transactions are eliminated in combination of this entity.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
1. DESCRIPTION OF BUSINESS AND CHANGE OF NAME, CONTINUED
Champion Trailer, Inc. ("Champion"), which manufactures and sells transport
trailers to be used primarily in the auto racing industry. Effective October
2002, the Company's Board of Directors agreed to a plan to dispose of Champion
as further described in Note 5. The sale of Champion was completed January 30,
2003. Accordingly, the operations of Champion are classified as discontinued
operations in the accompanying financial statements.
United Expressline, Inc. ("United") manufactures and sells general use cargo
trailers and specialty trailers used in the racing industry and for other
special purposes.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION:
The accompanying 2002 consolidated financial statements present the accounts of
Obsidian Enterprises, Inc. and its wholly owned subsidiaries described in Note 1
for the fiscal year ended October 31, 2002. The entities are collectively
referred to herein as the "Company." All significant intercompany transactions
and balances have been eliminated in consolidation. The accompanying 2001
financial statements include the operations of U.S. Rubber, Champion, Pyramid
and its related entity (DW Leasing) for the ten-month period ended October 31,
2001. January 1, 2001 was the beginning of the calendar year of the accounting
acquirer U.S. Rubber. U.S. Rubber changed its fiscal year end to adopt Danzer's
(legal acquirer and previous registrant) year end. The 2001 financial statements
also include the operating results of Obsidian Enterprises, Inc. (formerly
Danzer Corporation) and Danzer Industries, its wholly owned subsidiary, from
June 21, 2001 (date of acquisition) through October 31, 2001. In addition, they
include the results of United from July 31, 2001 (date of acquisition) through
October 31, 2001. See Note 6 for further discussion.
BASIS OF PRESENTATION:
During 2002, the Company has undertaken various actions to improve its
operations and liquidity. Such actions as described below include the sale of
Champion, conversion of debt to equity and refinancing of certain of its debt
agreements as described in Note 9. Management believes that the Company has
financing agreements in place to provide adequate liquidity and working capital
throughout fiscal 2003. However, there can be no assurance that such working
capital and liquidity will in fact be adequate. Therefore, the Company may be
required to draw upon other liquidity sources. The Company has therefore secured
an increased financial commitment from Fair Holdings, Inc. ("Fair Holdings"), an
entity controlled by the Company's Chairman, to provide, as needed, additional
borrowings under a $5 million line of credit agreement, which expires January 9,
2005. Currently, availability under the agreement is approximately $3.2 million.
The Company incurred a net loss in 2002 of $6,330, which included an asset
impairment charge of $720, cumulative effect of change in accounting principle
of $2,015 and a loss from discontinued operations of $1,040. Several of the
Company's subsidiaries were acquired in highly leveraged transactions and this
factor combined with the loss has contributed to its failure to meet certain
financial covenants required by the lenders. As a result of these covenant
violations, $1,863 of long-term debt has been reclassified as a current
liability as of October 31, 2002.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
In view of these matters realization of assets and satisfaction of liabilities
in the ordinary course of business is dependent on the Company's ability to
generate sufficient cash flow to satisfy its obligations on a timely basis,
maintain compliance with its financing agreements and continue to receive
financing support from Fair Holdings, Inc. ("Fair Holdings") an entity
controlled by the Company's Chairman, to provide liquidity if needed.
Management, as a part of its plan towards resolving these issues and generating
positive cash flow and earnings, has taken the actions as described below during
and subsequent to the year ended October 31, 2002. Although management believes
these actions will improve operations and liquidity, there can be no assurance
that such actions will sufficiently improve operations or liquidity.
o On March 7, 2002, the Company completed a series of transactions with the
subordinated lender at U.S. Rubber resulting in an increase in equity and a
decrease in liabilities of $1,017. The subordinated lender received 30,000
shares of Series C Preferred Stock in this transaction.
o On March 20, 2002, DC Investments LLC ("DC Investments"), an entity
controlled by the Company's Chairman, acquired all outstanding debt due to
the senior lender of Champion in the amount of $602 in a nonrecourse
assignment. Under the terms of the Company's agreement with DC Investments,
this amount has been reclassified as a long-term liability.
o On April 30, 2002, the Company converted $1,290 of debt and accrued
interest due to Obsidian Capital Partners, LP ("Partners"), majority owner
of the Company, to equity in exchange for 402,906 shares of Series C
Preferred Stock.
o On April 30, 2002, the Company converted $596 of debt and accrued interest
due to Fair Holdings to equity in exchange for 186,324 shares of Series C
Preferred Stock.
o On August 28, 2002, the Company completed refinancing of the Line of Credit
facility and a term loan at United. The amount of maximum borrowings on the
line of credit facility was increased and the maturity date extended to
February 1, 2004. In addition, the maturity date of the term note was
extended to July 1, 2004 and monthly principal payments were reduced by
approximately 50%.
o On October 24, 2002, the Company refinanced the outstanding bank debt at
U.S. Rubber with a new lender at terms more favorable than the previous
lender.
o During 2002, the Board of Directors authorized the Chairman of the Board to
explore various options regarding the operations at Champion. Options
included divestiture, restructuring of operations or closing the facility.
It was determined in the best interests of the Company to sell Champion. On
January 30, 2003, the Company completed the sale of substantially all
assets of Champion to an entity owned by Messrs. Durham and Whitesell,
Chairman and President of the Company, respectively.
o During the months of September through December 2002, the Company
refinanced certain coaches of Obsidian Leasing with existing lenders and DC
Investments at terms more favorable than the previous terms.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
o On October 24, 2002, the Company converted $1,275 of debt to Partners in
exchange for 72,899 shares of Series D Convertible Preferred Stock.
o On October 24, 2002, the Company converted $270 of debt to Fair Holdings in
exchange for 15,431 shares of Series D Convertible Preferred Stock.
o On January 2, 2003, the Company obtained an increase in its available line
of credit with Fair Holdings to $5,000 from $3,000.
o During January 2003, United and U.S. Rubber obtained modifications to
provide less stringent requirements on certain financial covenants with
their respective lenders.
The above factors combined with additional actions by management at the
operating subsidiaries have contributed to a reduction in the Company's working
capital deficit from $2,528 at October 31, 2001 to a positive $1,591 at October
31, 2002.
REVENUE RECOGNITION:
Sales are recorded when title passes to the customer (FOB shipping point) or
when services are performed in accordance with agreements with customers. The
Company accumulates costs of trailers in work-in-process inventory until
completion. The Company recognizes repair revenue when services are provided to
the customer. Shipping and handling charges billed to the customers are included
in net sales. Shipping and handling costs incurred by the Company are included
in cost of sales.
For operating leases, income is recognized on a straight-line basis over the
lease term. Recognition of income is suspended when management determines that
collection of future income is not probable (generally after 90 days past due).
Recognition is resumed if the receivable becomes contractually current and the
collection of amounts is again considered probable. Operating lease equipment is
carried at cost less accumulated depreciation and is depreciated to estimated
residual value using the straight-line method over the lease term or projected
economic life of the asset.
FAIR VALUE OF FINANCIAL INVESTMENTS:
The carrying amounts of cash and cash equivalents, receivables, accounts
payable, and accrued liabilities approximate fair value because of the short
maturity of these instruments. The carrying amounts of long-term receivables
approximates fair value as the effective rates for these instruments are
comparable to market rates at year end. The carrying amount of investments
approximates fair market value. The carrying amount of debt approximates fair
value, as a result of the current interest rates paid on the Company's
borrowings being at market. The carrying value of mandatory redeemable preferred
stock approximates market value determined based on the thirty-day average
closing price of the Company's common stock.
MARKETABLE SECURITIES:
The Company classifies its marketable securities as available for sale. The
securities consist of equity securities, which are stated at fair value, with
net unrealized gains or losses on the securities recorded as accumulated other
comprehensive income (loss) in stockholders' equity (deficit). Realized gains
and losses are included in earnings and are derived using the specific
identification method for determining the cost of the securities.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
PROPERTY, PLANT AND EQUIPMENT:
Building, equipment, furniture and fixtures are recorded at historical cost with
depreciation taken using primarily the straight-line method over their estimated
useful lives. Life ranges for property and equipment are as follows:
Buildings and improvements 30 - 39 years
Plant machinery and equipment 5 - 7 years
Furniture and fixtures 5 - 7 years
Coach fleet 15 years
Coach refurbishments 5 years
Vehicles 5 - 10 years
Effective February 1, 2002, the Company changed its estimate with regard to
depreciation of coaches owned by Obsidian Leasing and DW Leasing by establishing
a salvage value for the coaches of approximately 38% of original cost. The
depreciable lives of the coaches of fifteen years was not changed. This change
in estimate resulted in a reduced depreciation expense during the year ended
October 31, 2002 of approximately $200.
The Company's coach leasing business consists of a fleet of luxury coaches
(generally a 45 foot bus shell converted to a luxury coach) that are leased to
entertainment personalities, corporate groups and other traveling programs. The
coach fleet is comprised of a mixture of vehicles ranging from new (the most
recent acquired in December 2002) to approximately 10 years old. The average age
of the coaches is four years. They can be segregated as follows:
Age
1-3 years 15 coaches
4-6 years 13 coaches
6-10 years 9 coaches
The initial cost of coaches acquired is depreciated over a straight-line basis
to a salvage value of 38% of original cost. Subsequent enhancements and
refurbishments of coaches are depreciated over five years using the
straight-line method. The age of coaches in our fleet range from less than one
year to ten years, with an average age of approximately four years. Actual value
of coaches after 15 years is dependent on several factors including the level of
maintenance and the market conditions at the time of disposal. We have not
disposed of a material number of coaches, and our estimate of depreciation is
based on information other than actual disposal experience. Accordingly, we
continue to evaluate our estimates with respect to the actual depreciation of
such vehicles based on market conditions and our experience in disposals when
they occur. Should future factors indicate the current depreciation policy is
not adequate, we will adjust the depreciation rates, and such adjustments may
have an adverse impact on our results of operations.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
CONCENTRATION OF CREDIT RISK:
The Company maintains cash balances at a bank, which at various times throughout
the year exceeded the Federal Deposit Insurance Corporation (FDIC) limit.
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of trade receivables. The Company's customers
are not concentrated in any one specific geographic region. The credit risk
associated with trade receivables within the various industries may be affected
by changes in economic or other conditions and may, accordingly, impact the
Company's overall credit risk. The Company reviews a customer's credit history
before extending credit. Allowances for doubtful accounts are established based
on specific customer risk, historical trends and other information. Also see
major customers described below.
Certain of Danzer Industries' employees, which represent 10% of total employees,
are currently represented by the United Brotherhood of Carpenters and Joiners of
America, Local Union No. 340, whose contract is in effect to January 2004. The
contract contains provisions that affect compensation to be paid to employees
included in the union.
GOODWILL, INTANGIBLE ASSETS AND DEFERRED COSTS:
Goodwill, net was $6,434 and $9,210 at October 31, 2002 and 2001, respectively.
Accumulated amortization amounted to $76 at October 31, 2001. In accordance with
Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other
Intangible Assets, goodwill associated with acquisitions consummated after June
30, 2001 in the amount of $5,829 was not being amortized in the 2001 financial
statements. All other goodwill was being amortized on a straight-line basis over
15 years through October 31, 2001. Effective November 1, 2001, the Company
adopted SFAS No. 142 and completed transitional impairment testing during the
third quarter. This transitional test resulted in an impairment charge of $2,015
that has been recorded as a change in accounting principle as discussed in Note
4.
Other intangible assets, net were $1,383 and $1,644 at October 31, 2002 and
2001, respectively. These amounts include trade names, customer relations and
backlogs and other items, which are being amortized on a straight-line basis
over lives ranging from three months to 15 years. At October 31, 2002 and 2001,
accumulated amortization amounted to $430 and $169, respectively.
Deferred debt issuance costs are amortized over the term of the related debt,
primarily four to five years.
Amortization of goodwill and other intangible assets described above for the
year ended October 31, 2002 and the ten months ended October 31, 2001 was $440
and $303, respectively. Accumulated amortization on goodwill in the amount of
$76 was written off in 2002 with the impairment discussed in Note 4.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
INCOME TAXES:
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes, as required. Under SFAS No. 109, deferred tax
assets and liabilities are recorded for any temporary differences between the
financial statement and tax bases of assets and liabilities, using the enacted
tax rates and laws expected to be in effect when the taxes are actually paid or
received. (See Note 15.)
USE OF ESTIMATES:
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect reported amounts of
assets, liabilities, revenues and expenses and the related disclosures of
contingent assets and liabilities. Significant items subject to such estimates
and assumptions include valuation allowances for accounts receivable,
inventories and deferred tax assets, the fair values of assets and liabilities
when allocating the purchase price of acquisitions, and the carrying value of
property and equipment and goodwill. Actual results may differ from those
estimates.
CASH EQUIVALENTS:
For purposes of the statement of cash flows presentation, cash equivalents are
unrestricted, highly liquid short-term cash investments with an original
maturity of three months or less.
IMPAIRMENT OF LONG-LIVED ASSETS, INCLUDING INTANGIBLES:
The Company evaluates the carrying value of long-lived assets whenever
significant events or changes in circumstances indicate the carrying value of
these assets may be impaired. The Company evaluates potential impairment of
long-lived assets by comparing the carrying value of the assets to the expected
future cash flows resulting from the use of the assets. In addition, the Company
adopted SFAS No. 142 effective November 1, 2001 and completed transitional
impairment testing that resulted in an impairment charge of $2,015, which is
recorded as a cumulative effect of change in accounting principle. In addition,
the Company completed additional impairment testing in the fourth quarter, as
further discussed in Note 4, resulting in an impairment charge of $720.
MAJOR CUSTOMERS:
The following is a list of the Company's customers that represent 10% or more of
consolidated net sales:
Year Ended October Ten Months Ended Year Ended
31, October 31, December 31,
2002 2001 2000
------------------------------------------------------------------
Butyl rubber sales:
Customer (1) -- 13% 34%
Customer (2) -- 8% 22%
There were no sales to individual customers in 2002 that accounted for more than
10% of consolidated net sales.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
EARNINGS PER SHARE, AS RESTATED, SEE NOTE 3:
Basic per-share amounts are computed, generally, by dividing net income or loss
attributable to common shareholders by the weighted-average number of common
shares outstanding. Diluted per-share amounts are computed similar to basic
per-share amounts except that the weighted-average shares outstanding are
increased to include additional shares for the assumed exercise of stock options
and warrants, if dilutive.
The weighted average common shares outstanding for the year ended December 31,
2000 have been reflected as zero, as no common shares were exchanged in the
reverse merger.
As described in Note 9, the Company has a note payable agreement which is
convertible by the holder to common stock totaling 5,000,000 shares at a
conversion rate of $0.10 per share. In addition, and as described in Note 13,
the Company has options outstanding to purchase a total of 800,000 shares of
common stock, at a weighted average exercise price of $0.09. However, because
the Company incurred a loss for the periods ended October 31, 2002 and 2001,
respectively, the inclusion of those potential common shares in the calculation
of diluted loss per share would have an antidilutive effect.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Basic and diluted earnings (loss) per share have been computed as follows:
Year Ended Ten Months Ended Year Ended
October 31, 2002 October 31, 2001 December 31, 2000
------------------ ------------------ -------------------
Income (loss) before discontinued operations and cumulative
effect of accounting change $ (3,275) $ (1,019) $ 48
Change in fair value of mandatory redeemable preferred stock 35 70 --
------------------ ------------------ -------------------
Income (loss) attributable to common shareholders before
discontinued operations and cumulative effect of accounting
change (3,240) (949) 48
Loss from discontinued operations, net of tax (1,040) (3,376) --
Cumulative effect of change in accounting principle (2,015) -- --
------------------ ------------------ -------------------
Net income (loss) attributable to common shareholders $ (6,295) $ (4,325) $ 48
================== ================== ===================
Weighted average common and common equivalent shares
outstanding, basic and diluted 36,007,855 25,830,856 17,733,603
================== ================== ===================
Earnings (loss) per share, basic and diluted, attributable to common
shareholders:
From continuing operations $ (.09) $ (.04) $ --
Discontinued operations (.03) (.13) --
Cumulative effect of accounting change (.06) -- --
------------------ ------------------ -------------------
Net income (loss) per share $ (.18) $ (.17) $ --
================== ================== ===================
The Company's Series C Preferred Stock and Series D Preferred Stock, which have
all the rights and privileges of the Company's common stock, are convertible at
rates of 20 to 1 and 175 to 1, respectively. The inclusion of these potential
common shares in the calculation of loss per share would have an antidilutive
effect. However, pursuant to the Acquisition Agreement and Plan of
Reorganization Agreement entered into in connection with the reorganization
described in Note 1, these shares will be converted to common stock immediately
upon approval by the stockholders. Accordingly, we are presenting the following
pro forma information to indicate the effect on earnings per share had such
shares been converted to common shares for the periods presented.
Pro forma basic and diluted loss per share have been computed below as if the
Series C and Series D Preferred Stock were converted to common stock. For the
year ended October 31, 2002 and the ten months ended October 31, 2001,
respectively, the Series C Preferred Stock has been reflected on a weighted
average basis outstanding as common shares of 81,194,826 and 75,212,925
respectively. There were no Series C Preferred Stock shares issued or
outstanding during the year ended December 31, 2000. The Series D Preferred
Stock has been reflected on a weighted average basis outstanding as common
shares of 297,264 for the year ended October 31, 2002. There were no Series D
Preferred Stock shares issued or outstanding during the ten months ended October
31, 2001 or the year ended December 31, 2000.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Year Ended Ten Months Ended Year Ended
October 31, 2002 October 31, 2001 December 31, 2000
------------------- ------------------ -------------------
Pro forma weighted average common shares outstanding, basic
and diluted 117,499,946 73,809,790 --
=================== ================== ===================
Pro forma net loss per share, basic and diluted, attributable
to common shareholders $ (.05) $ (.06) $ (.00)
=================== ================== ===================
The pro forma net loss per share is presented for informational purposes only
and is not indicative of the weighted average common shares outstanding or net
loss per share presented in accordance with accounting principles generally
accepted in the United States of America.
INSURANCE RECOVERY:
On May 16, 2002, U.S. Rubber was damaged by a fire at an adjacent property. The
Company completed processing its claims with its insurance carrier for damaged
equipment and facilities and business interruption losses on August 16, 2002.
There was no material gain or loss on involuntary conversion as a result of this
fire. An insurance recovery related to the business interruption claim, net of
incurred and anticipated costs, in the amount of $325 has been recognized as
reduction of operating costs.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Comprehensive Income:
SFAS No. 130, Reporting Comprehensive Income, establishes standards for
reporting and display of comprehensive income and its components in financial
statements. It requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. Comprehensive income consists of net earnings, the net
unrealized gains or losses on available-for-sale marketable securities and is
presented in the consolidated statement of stockholders' equity.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In June 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No.
142, Goodwill and Other Intangible Assets. SFAS No. 141 requires all business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method. In addition, companies are required to review goodwill and
intangible assets reported in connection with prior acquisitions, possibly
disaggregate and report separately previously identified intangible assets and
possibly reclassify certain intangible assets into goodwill. SFAS No. 142
establishes new guidelines for accounting for goodwill and other intangible
assets. In accordance with SFAS No. 142, goodwill associated with acquisitions
consummated after June 30, 2001 is not amortized. The Company implemented the
remaining provisions of SFAS No. 142 on November 1, 2001. Since adoption,
existing goodwill is no longer amortized but instead will be assessed for
impairment at least annually. The adoption of this pronouncement resulted in
$5,829 of goodwill not being amortized and the elimination of approximately $225
of amortization annually on another $3,381 of goodwill previously being
amortized. The adoption of SFAS No. 142 also resulted in an impairment charge of
$2,015 recorded as cumulative effect of change in accounting principle as
further described in Note 4.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 addresses accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. This statement is effective for fiscal years beginning
after June 15, 2002. The Company is currently assessing the impact of this new
standard.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of
Long-Lived Assets," which requires a single accounting model to be used for
long-lived assets to be sold and broadens the presentation of discontinued
operations to include a "component of an entity" (rather than a segment of a
business). A component of an entity comprises operations and cash flows that can
be clearly distinguished, operationally and for financial reporting purposes,
from the rest of the entity. A component of an entity that is classified as held
for sale, or has been disposed of, is presented as a discontinued operation if
the operations and cash flows of the component will be (or have been) eliminated
from the ongoing operations of the entity and the entity will not have any
significant continuing involvement in the operations of the component.
The Company adopted SFAS No. 144 effective October 31, 2002. Consequently, the
operating results of Champion, which were held for sale at October 31, 2002, are
included as discontinued operations. Assets and liabilities of Champion are
included in "Assets of subsidiaries held for sale" and "Liabilities of
subsidiaries held for sale," respectively, at October 31, 2002 and 2001, as
discussed in Note 5.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
SFAS No. 145, among other technical corrections, rescinds SFAS No's. 4 and 64
which required gains and losses from the early extinguishment of debt be
classified as extraordinary items in the statement of operations. This statement
is effective for fiscal years beginning after May 15, 2002 although early
application is encouraged. The Company adopted SFAS No. 145 effective August 1,
2002. Accordingly, losses on early extinguishment of debt in the amount of $181
have been included in other expense in 2002.
In June 2002, the FASB issued Statement 146, Accounting for Costs Associated
with Exit or Disposal Activities. This Statement requires the recognition of a
liability for a cost associated with an exit or disposal activity when the
liability is incurred versus the date the Company commits to an exit plan. In
addition, this Statement states the liability should be initially measured at
fair value. The Statement is effective for exit or disposal activities that are
initiated after December 31, 2002. The Company does not believe that the
adoption of this pronouncement will have a material effect on its financial
statements.
In January 2003, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure. This statement provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this Statement
also amends the disclosure requirements of SFAS No. 123 to require more
prominent and frequent disclosures in the financials statements about the
effects of stock-based compensation. The transitional guidance and annual
disclosure provisions of this Statement is effective for the October 31, 2003
financial statements. The interim reporting disclosure requirements will be
effective for the Company's January 31, 2003 10-Q. Because the Company continues
to account for employee stock-based compensation under APB opinion No. 25, the
transitional guidance of SFAS No. 148 has no effect on the financial statements
at this time.
3. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
In December 2002, the Company became aware of an error related to the accounting
for the redeemable preferred stock issued in connection with subordinated debt
pertaining to the United acquisition on July 31, 2002. The Company is restating
its previously issued financial statements for the ten months ended October 31,
2001 for this error. In addition, we have also determined the weighted average
common and common equivalent shares outstanding as previously reported should
not have included Series C and Series D preferred stock as they have not yet
been converted to common shares and thus are antidilutive. The Company is
restating its previously issued financial statements for the year ended October
31, 2002 and the ten months ended October 31, 2001 for these errors. The
restatements also include additional disclosures regarding depreciation of the
coach fleet in the significant accounting policies.
Below is a comparison of previously reported and restated balances included in
the Consolidated Balance Sheet and Statement of Operations as of and for the ten
months ended October 31, 2001, as well as changes in the weighted average common
shares outstanding and earnings per share for 2002 and 2001. The amounts
included as previously reported exclude the effect of classification of Champion
in discontinued operations.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
3. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS, CONTINUED
October 31, 2001 Previously Change As Restated
---------------- Reported
------------------- ------------------ ------------------
Income Statement:
Interest expense $ 2,277 $ 35 $ 2,312
Loss from continuing operations (984) (35) (1,019)
Net loss (4,360) (35) (4,395)
Weighted average common shares outstanding basic and
diluted 63,367,140 (37,536,284) 25,830,856
Earnings (loss) per share from continuing
operations (.02) (.02) (.04)
Net loss per share (.07) (.10) (.17)
Balance Sheet:
Net deferred tax assets 538 14 552
Deferred tax valuation reserve (1,537) (14) (1,551)
Long-term debt 27,546 (1,470) 26,076
Mandatory redeemable preferred stock -- 1,435 1,435
Additional paid-in capital 5,612 70 5,682
Retained earnings (deficit) (4,360) (35) (4,395)
Previously
October 31, 2002 Reported Change As Restated
---------------- ------------------- ------------------ ------------------
Basic and diluted earnings (loss) per share attributable to common shareholders:
From continuing operations $ (.02) $ (.07) $ (.09)
Discontinued operations, net of tax (.01) (.02) (.03)
Cumulative effect of accounting change,
net of tax (.02) (.04) (.06)
------------------- ------------------ ------------------
Net income (loss) per share $ (.05) $ (.13) $ (.18)
=================== ================== ==================
Weighted average common and common equivalent shares
outstanding, basic and diluted: 117,499,946 (81,492,091) 36,007,855
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
3. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS, CONTINUED
The restated balances arise from the allocation of the proceeds to Series C
Preferred Stock issued in conjunction with the related debt. The change in
interest expense is related to accretion of interest resulting from the
allocation of the mandatory redeemable preferred stock. The change in additional
paid-in capital is the result of fair value changes on the redeemable preferred
stock.
4. CHANGE IN ACCOUNTING PRINCIPLES, GOODWILL AND INTANGIBLE ASSETS, AND
IMPAIRMENT OF LONG-LIVED ASSETS
As discussed in Note 2, the Company adopted the new rules on accounting for
goodwill and other intangible assets beginning in the first quarter of fiscal
2002. Accordingly, effective with the November 1, 2001 adoption of SFAS No. 142,
goodwill is no longer amortized but is instead subject to an annual impairment
test. The Company completed its transitional impairment test in conjunction with
the adoption of SFAS No. 142 during the quarter ended July 31, 2002. The
impairment test indicated that a portion of the goodwill related to the trailer
manufacturing segment was impaired. Accordingly, $2,015 has been recorded as a
cumulative effect of change in accounting principle. This charge was reflected
in the first quarter pursuant to the implementation guidelines.
The Company reviews the recoverability of the carrying value of long-lived
assets, primarily property, plant and equipment and related goodwill and other
intangible assets, for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be fully recoverable.
Impairment losses are recognized when the fair value is less than the asset's
carrying value. When indicators of impairment are present, the carrying values
of the assets are evaluated in relation to the operating performance and future
undiscounted cash flows of the underlying business. The net book value of the
underlying assets is adjusted to fair value if the sum of expected future
undiscounted cash flows is less than book value. Fair values are based on quoted
market prices and assumptions concerning the amount and timing of estimated
future cash flows and assumed discount rates, reflecting varying degrees of
perceived risk.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
4. CHANGE IN ACCOUNTING PRINCIPLES, GOODWILL AND INTANGIBLE ASSETS, AND
IMPAIRMENT OF LONG-LIVED ASSETS, CONTINUED
During October 2002, the Company also evaluated the recoverability of the
long-lived assets, including the remaining goodwill associated with Danzer.
Deteriorating performance, including reduced sales and the bankruptcy of a major
customer, brought the recoverability of those assets into question. The
evaluation resulted in an additional goodwill impairment charge of $720.
During October 2001, the Company completed an evaluation of the recoverability
of the assets (primarily goodwill) of Champion. Certain events occurred during
the period ended October 31, 2001 which caused the full recoverability of those
assets to be brought into question. Deterioration of the performance of
Champion, including lower overall sales demand and difficulties in achieving
manufacturing efficiencies, resulted in the investment in Champion becoming
impaired. Accordingly, during fiscal 2001, Champion recorded charges of $2,305
related to the impairment of goodwill. This charge was based on the estimated
fair value of the long-lived assets of Champion. Operations of Champion have
been classified as discontinued operations as further described in Note 5.
The changes in the carrying amounts of goodwill related to continuing operations
are as follows:
Trailer Holding
Manufacturing Company Total
--------------------- ---------------- ------------------
Balance as of January 1, 2001 $ -- $ -- $ --
Goodwill arising from 2001 acquisitions 8,636 650 9,286
2001 amortization (76) -- (76)
--------------------- ---------------- ------------------
Balance, October 31, 2001 8,560 650 9,210
Purchase price adjustment (41) -- (41)
Impairment charges (720) -- (720)
Cumulative effect of change in
accounting principle (2,015) -- (2,015)
--------------------- ---------------- ------------------
Balance, October 31, 2002 $ 5,784 $ 650 $ 6,434
===================== ================ ==================
Had SFAS No. 142 been effective at the beginning of 2001, the nonamortization
provisions would have reduced the net loss for the ten months ended October 31,
2001 by $76, resulting in an adjusted net loss of $4,319 and no change in
earnings per share.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
5. DISCONTINUED OPERATIONS
On October 30, 2002, the Company's Board of Directors agreed to sell the assets
of Champion to an entity controlled by Messrs. Durham and Whitesell (Officers of
the Company) for the assumption of all liabilities of Champion excluding its
subordinated debt. The decision to divest Champion was based on the entity's
inability to achieve profitable operations in the foreseeable future without
substantial cash infusion. The Company also agreed in principal to settle the
outstanding subordinated debt of Champion in exchange for a cash payment of $675
and issuance to the debt holder of 32,143 shares of the Company's Series D
Preferred Stock. In addition, the agreement provides Markpoint the option to
require the Company to repurchase these shares at a price of $21 per share. The
repurchase option is available to Markpoint as follows: 16,072 shares during the
period May 1, 2003 to June 1, 2003 and 16,071 shares during the period November
1, 2003 to December 1, 2003. The repurchase options expire if not exercised
during the specified periods. The Company's repurchase obligation is guaranteed
by Mr. Durham. The sale of Champion was completed on January 30, 2003. Champion
is accounted for as a discontinued operation and therefore the results of
operations and cash flows have been removed from the Company's continuing
operations for all periods presented. In addition, assets and liabilities of
Champion are included in the consolidated balance sheet as of October 31, 2002
and 2001 as "Assets of subsidiary held for sale" and "Liabilities of subsidiary
held for sale," respectively.
A summary of the Company's discontinued operations for the year ended October
31, 2002 and ten months ended October 31, 2001 follows. There were no
discontinued operations for the year ended December 31, 2000.
Year Ended Ten Months Ended
October 31, 2002 October 31, 2001
------------------- ------------------
Net sales $ 2,882 $ 3,365
Operating expenses 4,066 4,148
Impairment loss -- 2,305
Interest 290 288
Net loss (1,040) (3,376)
A summary of assets and liabilities of subsidiary held for sale at October 31,
2002 and 2001 are as follows:
October 31, 2002 October 31, 2001
------------------- ------------------
Assets of subsidiary held for sale:
Inventories $ 551 $ 1,131
Other current assets 177 261
Property and equipment, net 715 848
Other 95 134
------------------- ------------------
$ 1,538 $ 2,374
=================== ==================
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
5. DISCONTINUED OPERATIONS, CONTINUED
Liabilities of subsidiary held for sale
Accounts payable and accrued expenses $ 709 $ 603
Customer deposits 313 383
Long-term debt -- 1,362
Long-term debt, related parties 1,826 --
------------------- ------------------
$ 2,848 $ 2,348
=================== ==================
6. ACQUISITIONS AND PLAN OF REORGANIZATION
As previously discussed in Notes 1 and 2, on June 21, 2001, a change of control
of the Registrant occurred through an Acquisition Agreement and Plan of
Reorganization by and among Danzer, Danzer Industries, Inc., a wholly owned
subsidiary of Danzer, and Partners, 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
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
Acquisition, Inc. ("UAI"), the holding company formed to acquire assets of
United, from Partners for 2,593,099 shares of Danzer Preferred.
After the series of transactions were completed on July 31, 2001, Partners owned
75.42% of the total voting, convertible capital stock (Preferred) of Danzer. The
preacquisiton Danzer shareholders and their successors owned the remaining
capital stock representing 24.58% of the total voting capital stock (Common).
Since the U.S. Rubber Companies are so much larger than Danzer, and the existing
U.S. Rubber shareholders obtained a majority interest in the stock of Danzer,
they have been treated, for accounting purposes, as the acquirer in the
Reorganization (reverse merger). In addition, on July 31, 2001, Partners,
through UAI, acquired substantially all of the assets of United, an
Indiana-based manufacturer of enclosed cargo and specialty trailers, for
approximately $15,358. The purchase price and purchase accounting has been
allocated to the assets and liabilities of United based on their fair values.
Partners exchanged 100% of its shares of UAI for shares of Series C Preferred
Stock of Danzer. As a result, UAI became a wholly owned subsidiary of Danzer and
will operate under the name of "United Expressline, Inc."
ACQUISITION OF DANZER AND SUBSIDIARY:
The purchase price and purchase accounting was allocated to the assets and
liabilities of Danzer based on their fair values. The purchase price was based
on the value of Danzer's equity determined by an appraisal company of $3,257
plus acquisition costs of $964.
An appraisal company conducted a valuation of Danzer's stock. The valuation
allocation to tangible assets included $2,300 and $1,536 of net liabilities
assumed. The excess of the purchase price over the fair value of the
identifiable tangible and intangible net assets of $3,457 was allocated to
goodwill. Of this amount, $650 was allocated to Danzer and $2,807 allocated to
Danzer Industries, its subsidiary.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
6. ACQUISITIONS AND PLAN OF REORGANIZATION, CONTINUED
ACQUISITION OF UNITED EXPRESSLINE, INC.:
An appraisal company conducted a valuation of United's intangible assets. These
intangibles include existing brand name, noncompete, and the customer base. The
valuation of intangibles included $822 for brand name, $886 for noncompete, and
$105 for the customer base. The excess of the purchase price of $15,358 over the
fair value of the identifiable tangible and intangible net assets of $5,821 has
been allocated to goodwill. The value assigned to tangible assets totaled
$7,563.
The following schedule is a description of acquisition costs of Danzer and
United Expressline, Inc. and the respective purchase price allocations:
Danzer United
---------------------------------------
Purchase price:
Preferred stock $ 3,257 $ --
Cash to seller -- 11,050
Seller note -- 1,500
Liabilities assumed -- 1,670
Acquisition costs, including amounts to related
parties (see Note 16) 964 1,138
---------------------------------------
Total purchase price $ 4,221 $ 15,358
=======================================
Purchase price allocation:
Current assets, including accounts receivable
and inventory, net of current liabilities
assumed $ 329 $ 5,559
Land, property and equipment 2,300 2,004
Goodwill 3,457 5,829
Intangible assets -- 1,813
Other assets 65 153
Less debt assumed (1,930) --
---------------------------------------
Total purchase price allocation $ 4,221 $ 15,358
=======================================
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:
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
6. ACQUISITIONS AND PLAN OF REORGANIZATION, CONTINUED
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, DW Leasing and Obsidian Leasing on a combined
basis. Champion has been excluded from the amounts below, as it is currently
shown as discontinued operations. In addition, United is 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.
Ten Months Ended Year Ended
October 31, December 31,
2001 2000
----------------------------------------
Net sales $ 49,830 $ 61,320
Income (loss) from continuing
operations $ (491) $ 150
Income (loss) from continuing
operations per share - basic and
diluted $ (.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.
7. INVENTORIES
Inventories are stated at the lower-of-cost (first-in, first-out method) or
market and are comprised of the following components:
October 31, October 31,
2002 2001
------------------ -------------------
Raw materials $ 3,655 $ 3,470
Work-in-process 709 604
Finished goods 3,417 2,322
Valuation reserve (466) (833)
------------------ -------------------
Total $ 7,315 $ 5,563
================== ===================
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
7. INVENTORIES, CONTINUED
The Company provides valuation reserves for inventory considered obsolete or not
currently available for use in production. Inventory reserves at U.S. Rubber are
related to excess scrap butyl rubber not currently available for use without
further processing; therefore, it has minimal value. Changes in the valuation
reserve are as follows:
U.S. Rubber United Total
------------------ ------------------ ------------------
Balance at January 1, 2001 $ (1,338) $ -- $ (1,338)
Provision for losses (60) (13) (73)
Use of reserved inventory 578 -- 578
------------------ ------------------ ------------------
Balance at October 31, 2001 (820) (13) (833)
Provision for losses (50) -- (50)
Use of reserved inventory 404 13 417
------------------ ------------------ ------------------
Balance at October 31, 2002 $ (466) $ -- $ (466)
================== ================== ==================
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized by major classification as follows:
October 31, October 31,
2002 2001
------------------ -------------------
Land and improvements $ 488 $ 488
Buildings and improvements 3,520 3,557
Plant machinery and equipment 9,767 8,016
Furniture and fixtures 334 247
Coach fleet and vehicles 12,971 13,187
Coach refurbishments 341 220
------------------ -------------------
Total 27,421 25,715
Less accumulated depreciation (4,373) (2,331)
------------------ -------------------
Net property, plant and equipment $ 23,048 $ 23,384
================== ===================
Depreciation expense of property, plant and equipment for the year ended October
31, 2002, the ten months ended October 31, 2001, and the year ended December 31,
2000 included in continuing operations was $2,128, $1,752, and $548,
respectively.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
9. FINANCING ARRANGEMENTS
The Company has the following outstanding debt as of October 31, 2002 and 2001:
Debt Amount
-------------------------------------
October 31, October 31,
2002 2001
------------------ ------------------
U.S. Rubber
Line of credit to a bank, bearing interest at prime (4.75% at October 31, 2002),
borrowings not to exceed the greater of $4,000 or the borrowing base (85% of
eligible accounts receivable and 42% of eligible inventories), interest payable
monthly, balance due October 2005, collateralized by
substantially all assets of U.S. Rubber* $ 1,528 $ --
Note payable to a bank, interest payable monthly at prime plus .50% (5.25% at
October 31, 2002), monthly principal payments of $48, due October 2005,
collateralized by substantially all assets of U.S. Rubber.* 4,000 --
Note payable to DC Investments, LLC, interest payable monthly at 15%, balloon
payment due March 2007, subordinate to bank debt. 700 --
Other 76 88
Line of credit -- 1,732
Notes payable to a bank -- 2,861
Notes payable to former owner (SerVaas, Inc.) -- 2,480
------------------ ------------------
Subtotal U.S. Rubber 6,304 7,161
------------------ ------------------
* U.S. Rubber was in technical default of a loan covenant with its primary
lender at October 31, 2002. The Company has obtained a waiver of the
violation from its lender and a modification to the covenant requirements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
9. FINANCING ARRANGEMENTS, CONTINUED
Debt Amount
-------------------------------------
October 31, October 31,
2002 2001
------------------ ------------------
Champion
Note payable to The Markpoint Company, interest payable monthly at 13.50%,
commencing June 1, 2000, balloon payment of outstanding principal balance due
May 2005, collateralized by substantially all assets of Champion and
subordinate to notes payable to DC Investments LLC * $ 1,250 $ 1,250
Notes payable to DC Investments, LLC, interest payable monthly at rates
ranging from 5.25% to 5.50%, balloon payments due January 2004 and June 2005 1,794 --
Other 32 15
Line of credit, to bank -- 200
Notes payable to a bank -- 1,147
------------------ ------------------
Subtotal Champion 3,076 2,612
------------------ ------------------
* Champion was in technical default of all its debt with The Markpoint
Company in 2002. The Company has reached agreement with The Markpoint
Company to settle the debt as further discussed in Note 17. As a result of
this agreement, $1,013 of the debt due The Markpoint Company has been
classified as current.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
9. FINANCING ARRANGEMENTS, CONTINUED
Debt Amount
-------------------------------------
October 31, October 31,
2002 2001
------------------ ------------------
Pyramid, DW Leasing and Obsidian Leasing
Various installment loans, repayable in monthly installments totaling $135
including interest ranging from the three-month LIBOR rate plus .12% (1.82% at
October 31, 2002) to 13.1% through November 2007 and applicable balloon
payments thereafter through December 2007, less unamortized discount ($387 at
October 31, 2002) first lien on assets financed (finance acquisition and asset
purchases). A portion of the borrowings guaranteed by the members of
DW Leasing. $ 10,170 $ 12,929
Former shareholders of Pyramid and related companies installment loans,
repayable in monthly installments of interest at 9% through December 2002 with
a balloon payment in January 2003, collateralized by Security Agreements for
Pyramid, DW Leasing and the members of DW Leasing (finance
acquisition), refinanced subsequent to year end. 928 928
Note payable to Fair Holdings, Inc., repayable in monthly installments of
interest ranging from 10% to 14% through October 2012 and applicable balloon
payments through November 2012. 2,138 --
Other 37 31
------------------ ------------------
Subtotal Pyramid, DW Leasing, and Obsidian Leasing 13,273 13,888
------------------ ------------------
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
9. FINANCING ARRANGEMENTS, CONTINUED
Debt Amount
-------------------------------------
October 31, October 31,
2002 2001
------------------ ------------------
Danzer Industries
Line of credit to a bank, maximum borrowing equal to $1,000, with a base of 80%
of eligible accounts receivable; plus 50% of raw material, work-in-process and
finished goods inventory. Interest payable monthly at the LIBOR Daily Floating
Rate plus 3.2% (4.94% at October 31, 2002), due March 2002, collateralized by
substantially all assets of Danzer Industries
and guaranteed by Obsidian Enterprises, Inc.* $ 875 $ 75
Note payable to a bank, requires monthly principal installments of $6 plus
interest at the LIBOR Daily Floating Rate plus 3.2% (4.94% at October 31,
2002), due August 15, 2006. Collateralized by substantially all assets of
Danzer Industries and guaranteed by Obsidian Enterprises, Inc.* 917 983
Term loans payable to US Amada, Ltd. Monthly payments currently aggregating $13
including interest at 10%, loans due January 2003, collateralized by
equipment financed 157 285
Equipment loans payable--monthly payments currently aggregating $2 including
interest of 9.50% to 11.30% through November 2006. Collateralized by
equipment financed. 88 53
Other 27 10
------------------ ------------------
Subtotal Danzer Industries 2,064 1,406
------------------ ------------------
* In 2002, Danzer Industries was in technical default of certain loan
covenants, as well as being in excess of borrowing base amounts in its
credit agreement related to the line of credit and $1,000 note payable.
Danzer and the bank have entered into a forbearance agreement which
requires payment of these amounts by March 31, 2003. Accordingly, all
related debt has been classified as current.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
9. FINANCING ARRANGEMENTS, CONTINUED
Debt Amount
-------------------------------------
October 31, October 31,
2002 2001
------------------ ------------------
United
Line of credit to a bank, maximum borrowing equal to $3,750, with a base of 80%
of eligible accounts receivable plus 50% of raw material, work-in-process and
finished goods inventory. Interest payable monthly at prime plus .75% (5.50% at
October 31, 2002), due February 1, 2004. Collateralized by substantially all
assets of United and guaranteed by
Obsidian Enterprises, Inc.* $ 3,088 $ 3,111
Notes payable to a bank, requires monthly principal installments of $48 plus
interest ranging from prime plus 1% (5.75% at October 31, 2002) to prime plus
2% (6.75 at October 31, 2002), due through July 2006, collateralized by
substantially all assets of United and guaranteed by Obsidian Enterprises,
Inc.* 2,054 2,989
Subordinated note payable to Huntington Capital Investment Company, interest
payable quarterly at 14% per annum, balloon payment of outstanding principal
balance due July 26, 2006, less unamortized discount ($1,309 and $1,470 at
October 31, 2002 and 2001, respectively). Unsecured and subordinate to line
of credit and notes payable above.* 2,191 2,030
Note payable to former shareholder, interest payable monthly at 9% per annum,
balloon payment of outstanding principal balance due July 27, 2006. Unsecured
and subordinate to line of credit, notes payable and Huntington
debt above.* 1,500 1,500
Note payable to Renaissance (formerly parent Danzer Corporation), interest
payable monthly at 8% per annum, with monthly principal payments beginning July
2004 at a rate of $10 for each $1,000 of outstanding principal, due July 2008.
Convertible at the option of the holder to common stock of Obsidian Enterprises
at a conversion price of $.10 per share. The loan agreement also restricts
dividend payments without the prior consent of the
lender.* 500 500
Note payable to a former shareholder, requires monthly principal installments
of $16 including interest at 9%, due March 2003* 77 --
Other 83 112
------------------ ------------------
Subtotal United 9,493 10,242
------------------ ------------------
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
9. FINANCING ARRANGEMENTS, CONTINUED
Debt Amount
-------------------------------------
October 31, October 31,
2002 2001
------------------ ------------------
United, continued
*United was in technical default of certain loan covenants with its senior and
subordinated lender at October 2002. United has obtained waivers of the
violations from the lenders and modifications of various covenants with these
lenders.
Obsidian Enterprises, Inc.
Line of credit to Fair Holdings, maximum borrowing equal to $5,000, interest
payable monthly at 10%, due January 2005 1,798 --
Note payable to Fair Holdings, interest payable monthly at 15%, balloon
payment due March 2007 774 --
Note payable to Fair Holdings, interest payable monthly at 5.25%, due October
2005 108 --
------------------ ------------------
Subtotal Obsidian Enterprises, Inc. 2,680 --
------------------ ------------------
Total all companies 36,890 35,309
Less liabilities of subsidiary held for sale (1,826) (1,362)
Less related-party amounts presented separately (5,518) --
Less current portion (5,667) (7,871)
------------------ ------------------
$ 23,879 $ 26,076
================== ==================
Following are the maturities of long-term debt for each of the next five years
and thereafter:
2003 $ 5,329***
2004 5,588
2005 11,977
2006 6,581
2007 2,050
Thereafter 3,539
-------------------
$ 35,064
===================
*** The current portion of long-term debt includes $1,863 of amounts in default
and classified as current.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
9. FINANCING ARRANGEMENTS, CONTINUED
Various subsidiary companies were in violation of requirements to provide
year-end financial statements to various lenders within 90 days of the close of
the 2002 year end. Management received an extension of time from the lenders.
At October 31, 2002, the Company was in violation of negative covenants with
Renaissance US Growth & Income Trust PLC and BFSUS Special Opportunities Trust
PLC, the holders of debentures that completed the financing of United. The
Company received a waiver of the violations as of October 31, 2002 and obtained
modifications of terms with the debenture holders to provide for less stringent
covenants. In exchange for the waiver and modifications, the Company issued
warrants to the debenture holders to purchase up to 16,000 shares of the
Company's common stock at an exercise price of $.20 per share.
The Company has an agreement with Partners that gives the Company the right to
mandate a capital contribution from Partners if the lenders to U.S. Rubber
and/or United were to declare a default. In that event, the Company has the
right to enforce a capital contribution agreement with Partners up to $1,620 on
U.S. Rubber and $1,000 on United to fund the respective subsidiary's shortfall.
Those payments, if any, would be applied directly to reduce the respective
subsidiary's debt obligations to the lender.
The following details significant changes in debt during the year ended October
31, 2002:
U.S. RUBBER:
During February 2002, U.S. Rubber entered into a "Second Amendment to Credit
Agreement" with its then primary lender. The terms of the amendment required
scheduled debt service payments under substantially the same terms through
November 1, 2002 when all debt outstanding with the primary lender was to become
due. The agreement also modified the terms of an operating lease with the lender
requiring payment in full of the remaining lease obligation as of November 1,
2002.
During October 2002, this debt was refinanced with a new lender. In addition,
the equipment that related to the operating lease was repurchased and the
equipment, the unamortized loss related to the 2001 transaction, as discussed in
Note 10, and its related debt has been recorded at October 31, 2002.
On March 7, 2002, the Company completed a series of transactions with U.S.
Rubber, SerVaas, Inc. ("SerVaas"), the former owner of U.S. Rubber, and DC
Investments, LLC ("DC Investments"), an entity controlled by the Company's
Chairman, whereby certain existing debt of U.S. Rubber was acquired from
SerVaas. DC Investments acquired the SerVaas interest in the debt agreement with
a remaining balance of $730, plus accrued interest of $123, for $700. U.S.
Rubber then acquired this agreement in exchange for a new note payable to DC
Investments with a face amount of $700. The note requires monthly interest
payments at 15% per annum with the principal payable March 2007. The note is
subordinate to debt outstanding with the senior lender of U.S. Rubber.
The Company also acquired the SerVaas interest in the U.S. Rubber $1,750
subordinated note payable, plus accrued interest of $255, in exchange for $700
and 30,000 shares of Series C Preferred Stock. The cash portion of the
transaction was from the proceeds of a note payable in the amount of $700 issued
to DC Investments. The note requires monthly interest payments at 15% per annum
with the principal payable March 2007.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
9. FINANCING ARRANGEMENTS, CONTINUED
No gain or loss was recognized in the SerVaas transactions because of the
involvement of related parties. The transaction resulted in an increase in
equity of the Company of $1,016, consisting of a $1,463 reduction of
liabilities, offset by a tax impact of $447.
CHAMPION:
After October 31, 2001, Champion was in violation of its Senior Credit facility
with Bank One. Champion was working under a forbearance agreement through March
15, 2002. Champion paid down the Bank One debt by $570 to Champion as
consideration for such agreements. The Company made a capital contribution of
$570 from loan proceeds from DC Investments. On March 20, 2002, DC Investments
acquired the senior lender's loan to Champion in the amount of $602 in a
nonrecourse assignment of the debt.
PYRAMID, DW LEASING AND OBSIDIAN LEASING:
During October 2002, Obsidian Leasing refinanced debt in the amount of $4,666
with Old National Bank. The refinancing was completed through both the existing
lender at 80% of the then-outstanding balance and Fair Holdings. The new terms
with the existing lender include interest at rates ranging from LIBOR plus .12 %
to LIBOR plus 5.65% and a maturity of December 2004. The remaining 20% of the
then-outstanding term notes was paid by borrowings from Fair Holdings of
approximately $1,004. The transaction resulted in a discount on the new term
loans in the amount of $387 and a loss on refinancing of $182.
During October 2002, Obsidian Leasing also refinanced debt in the amount of
$2,836 with Edgar County Bank through borrowings from both Edgar County and Fair
Holdings. Terms of the new term note with Edgar County include an 80% payoff of
the then-outstanding term notes, interest at a rate of prime plus 2.75% and a
maturity of September 2007. The remaining 20% of the then-outstanding term notes
was paid by borrowings from Fair Holdings of approximately $584. The transaction
did not result in a gain or loss.
UNITED:
On August 28, 2002, the agreements for one of the notes payable and the
revolving line of credit were amended to extend the final maturities from July
1, 2003 to July 1, 2004 for the note payable and July 1, 2002 to February 1,
2004 for the revolving line of credit. In addition, the monthly principal
installments on the note payable were decreased by $36 to $36 and maximum
borrowings on the revolving line of credit were increased from $3,500 to $3,750.
10. LEASING ARRANGEMENTS
In October 2001, the Company entered into a sales-leaseback arrangement. Under
the arrangement, the Company sold equipment and leased it back for a period of
five years. The leaseback has been accounted for as an operating lease. The loss
of $218 realized in the transaction was deferred and was being amortized to
income in proportion to rental expense over the term of the lease. Proceeds from
the sale of $1,050 were used to reduce borrowings under the line of credit.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
10. LEASING ARRANGEMENTS, CONTINUED
During October 2002, in conjunction with the refinancing described in Note 9,
the Company repurchased the equipment. The unamortized loss of $175 as of
October 24, 2002 was included as part of the equipment purchase price
capitalized.
The Company has various operating lease commitments, principally related to
machinery and equipment, office equipment, and facilities. The approximate
future minimum annual rentals for the years under the terms of these leases,
which expire on various dates through the year ending October 31, 2008, are as
follows:
Year Ending October 31,
2003 $ 450
2004 353
2005 274
2006 189
2007 124
Thereafter 7
-------------------
$ 1,397
===================
Rental expense under operating leases for the year ended October 31, 2002, ten
months ended October 31, 2001 and year ended December 31, 2000, in thousands,
was $562, $514 and $130, respectively.
11. EMPLOYEE BENEFIT PLANS
The Company, through certain of its subsidiaries, has defined contribution
401(k) plans which permit voluntary contributions up to 20% of compensation and
which provide Company-matching contributions of up to 10% of employee
contributions not to exceed 6% of employee compensation. 401(k) plan expense for
the year ended October 31, 2002, the ten-month period ended October 31, 2001 and
the year ended December 31, 2000 was approximately $148, $35 and $25,
respectively.
12. MANDATORY REDEEMABLE PREFERRED STOCK
In conjunction with the United acquisition described in Note 6, the Company
issued 386,206 shares of Series C Preferred Stock to Huntington Capital
Investment Corporation ("Huntington"), the senior subordinated lender of United.
The note purchase agreement included a provision giving Huntington the option to
require the Company to repurchase the Series C Preferred Stock. Under the terms
of the agreement, Huntington has the option of requiring the Company to
repurchase these shares at 90% of market value at the date of redemption upon
the earlier of: a) fifth anniversary of issuance of such shares, b) default
under the subordinated debt agreement, c) other factors related to a sale of
substantially all assets of the Company as defined in the agreement. At October
31, 2002, the Company had violated certain financial covenants defined in the
subordinated debt agreement with Huntington. The Company received a waiver of
these violations as of October 31, 2002 and a modification to the covenants.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
12. MANDATORY REDEEMABLE PREFERRED STOCK, CONTINUED
A portion of the note purchase agreement proceeds of $3,500 was allocated to the
stock issued based on the thirty day average closing value of the Company's
common stock prior to the transaction. As the redemption value is variable, the
Company recognizes changes in the estimated fair value each quarter. Changes in
fair value are adjusted through additional paid in capital. At October 31, 2002,
the estimated redemption requirement is $1,400 to be paid July 2006.
13. STOCKHOLDERS' EQUITY
PREFERRED STOCK:
The original capital structure of Danzer prior to the merger was comprised of
the following: 5,000,000 authorized shares of $.001 par value preferred stock;
10,500 shares authorized of the Class of 10% Cumulative Senior Preferred Stock
(Series A) with no shares issued or outstanding as 7,650 shares were retired;
(Series B) Cumulative Convertible Senior Preferred Stock with 16,000 shares
authorized and no shares issued or outstanding as 16,000 shares were retired. In
addition, the Company had 20,000,000 authorized shares of common stock with
17,760,015 shares outstanding at December 31, 2000.
In June 2001, Danzer issued an aggregate of 1,750,000 shares of Danzer
unregistered common stock in connection with the exchange of $355 of debt. On
June 21, 2001, Danzer amended its articles of incorporation to authorize up to
4,500,000 shares of Series C Preferred Stock. In conjunction with the merger and
acquisitions (described in Note 6) of June 21, the Company issued 1,970,962 of
Series C Preferred Stock. The shareholders of Pyramid and Champion then
converted 824,892 shares of preferred stock to 16,497,840 of common stock. In
addition, on July 5, 2001, the Company increased the authorized shares of common
stock by 20,000,000 to 40,000,000. On July 31, 2001, the Company issued
2,593,099 shares of additional Series C Preferred Stock related to the United
acquisition.
As a result of the reverse merger, U.S. Rubber became the accounting acquirer
and accordingly, under purchase accounting, became the Registrant. Therefore,
the 2000 financial statements became those of U.S. Rubber. However, under
purchase accounting for a reverse merger, the stockholders' equity section of
the Registrant (formerly Danzer Corporation) became the equity of the merged
entity. Accordingly, the statement of changes in stockholders' equity reflects
that purchase accounting.
On October 4, 2001, the Company changed its name from Danzer Corporation to
Obsidian Enterprises, Inc. In addition, 5,000,000 shares of Preferred Stock were
authorized with the domestication of Obsidian Enterprises, Inc. in Delaware. On
October 9, 2001, the Company filed designation of preferences, rights and
limitations of 4,600,000 shares of Series C Preferred Stock. This transaction
results in 400,000 shares of authorized but undesignated preferred stock and
cancellation of the Series A and B shares.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
13. STOCKHOLDERS' EQUITY, CONTINUED
The Series C Preferred Stock is convertible at the option of the holder at any
time, unless previously redeemed, into shares of common stock of the Company at
an initial conversion rate of 20 shares of common stock for each share of
convertible stock. However, the convertible preferred stock may not be converted
prior to the corporation filing a registration statement of such shares. Holders
of the convertible preferred stock have voting rights which entitle them to cast
on each matter submitted to a vote of the stockholders of the Company the number
of votes equal to the number of shares of common stock into which such shares of
Series C Preferred could be converted.
As previously discussed in Note 9, on March 7, 2002, the Company completed a
series of transactions with the subordinated lender at U.S. Rubber resulting in
an increase in equity and a decrease in liabilities of $1,016. The subordinated
lender received 30,000 shares of Series C Preferred Stock in this transaction.
On April 30, 2002, the Company converted $1,290 of debt and accrued interest
owed to Partners and $596 of debt and accrued interest owed to Fair to equity
through the issuance to Partners and Fair of 402,906 shares and 186,324 shares,
respectively, of Series C Preferred Stock which are convertible into an
aggregate of 11,784,600 shares of common stock of the Company.
In August 2002, warrants for 10,000 shares of Series C Convertible Stock were
exercised. The shares were issued in exchange for a cash payment of $20.
On October 24, 2002, the Company amended its Articles of Incorporation to
authorize 200,000 shares of Series D Preferred Stock. The Series D Preferred
Stock is convertible at the option of the holder at any time, unless previously
redeemed, into shares of common stock of the Company at an initial conversion
rate of 175 shares of common stock for each share of Series D Preferred Stock.
However, the stock may not be converted prior to the Company filing a
registration statement for such shares. Holders of the Series D Preferred Stock
have voting rights which entitle them to cast on each matter submitted to a vote
of the stockholders of the Company the number of votes equal to the number of
shares of common stock into which such shares of Series D Preferred could be
converted.
On October 24, 2002, 88,300 of the Series D Preferred Stock shares were sold in
the transactions described below 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.
On October 24, 2002, the Company converted $1,276 of debt to Partners in
exchange for 72,899 shares of Series D Preferred Stock. The conversion was the
result of Partners' requirement under the Plan of Reorganization to fund through
the purchase of additional preferred stock certain ongoing administrative
expenses of the Company to complete the Plan of Reorganization, complete all
required current and prior year audits to meet the regulatory filing
requirements, and ensure all annual and quarterly SEC filings are completed to
enable the registration of the preferred stock issued to Partners.
On October 24, 2002, the Company converted $270 of debt to Fair in exchange for
15,431 shares of Series D Preferred Stock. The conversion was the result of
Fair's agreement to cover similar expenses as Partners as described above in
excess of the amount Partners was obligated to pay.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
13. STOCKHOLDERS' EQUITY, CONTINUED
STOCK OPTIONS:
On May 7, 1990, Danzer's stockholders approved a stock option plan to issue both
"qualified" and "nonqualified" stock options. Under the plan, 800,000 options to
purchase shares of the Company's common stock may be issued at the discretion of
the Company's Board of Directors. The option price per share is determined by
the Company's Board of Directors, but in no case will the price be less than 85%
of the fair value of the common stock on the date of grant. Options under the
plan will have a term of not more than ten years with accelerated termination
upon the occurrence of certain events.
In April 1998, Danzer granted 600,000 stock options, exercisable at $.10 per
share, to its president. The options vest over two years and expire in April
2004. None of these options have been exercised as of October 31, 2002.
In September 1998, Danzer adopted a qualified incentive stock option plan under
Section 422 of the Internal Revenue Code. Options granted under the plan will be
granted at prices not less than fair value of the Company's stock at the date of
grant, have a term not more than ten years and have other restrictions as
determined by statute.
In September 1998, Danzer granted a total of 604,500 stock options, exercisable
at $.10 per share, to certain employees. The options expired November 2001. As a
result of voluntary termination, 75,000 options expired in 1999 and 192,000
options expired in 2000. The balance of 247,500 options outstanding expired
November 1, 2002.
On July 24, 2001, the Board adopted, and on October 5, 2001, the Company's
stockholders approved, the 2001 Long Term Incentive Plan (the "2001 Plan"). The
2001 Plan authorizes the granting to the Company's directors, key employees,
advisors and consultants of options intended to qualify as Incentive Options
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), options that do not so qualify ("Non-Statutory Options"),
restricted stock and Other Stock-Based Awards that are not Incentive Options or
Non-Statutory Options. The awards are payable in Common Stock and are based on
the formula which measures performance of the company. There was no performance
award expense in 2002 or 2001. No options under this plan were granted to any
employees. Options are exercisable for up to 10 years from the date of grant.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. Accordingly, no compensation expense
has been recognized for the stock option plans. Had compensation expense for the
Company's stock option plans been determined based on the fair value at the
grant date for awards consistent with the provisions of SFAS No. 123, the
Company's net income (loss) for the year ended October 31, 2002, ten months
ended October 31, 2001, and the year ended December 31, 2000 would have been
$(6,330), $(4,395), and $3, respectively. Basic and diluted net income (loss)
per share as reported would not have changed in any period presented had such
compensation expense been recorded.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
13. STOCKHOLDERS' EQUITY, CONTINUED
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 2000 (no options were granted during the year
ended October 31, 2002 and the ten months ended October 31, 2001), respectively:
risk-free interest rates of 6.4 and 5.5 percent; dividend yield of 0 percent in
both years; expected lives of 5 years; and volatility of 978 and 170 percent.
The estimated weighted average fair value of options granted during 2000 and
1999 were $0.10 and $0.05 per share, respectively.
Following is a summary of transactions of granted shares under option for the
year ended October 31, 2002, the ten months ended October 31, 2001, and year
ended December 31, 2000:
2002 2001 2000
----------------------------- ---------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------------- -------------- -------------- ------------- -------------- -------------
Outstanding, beginning of year 1,047,500 .09 1,137,500 .09 1,029,500 .09
Issued during the year -- -- -- -- 450,000 .10
Canceled or expired during the
year (247,500) .10 (90,000) .10 (192,000) .09
Exercised during the year -- -- -- -- (150,000) .10
-------------- -------------- -------------- ------------- -------------- -------------
Outstanding, end of year 800,000 .09 1,047,500 .09 1,137,500 .09
============== ============== ============== ============= ============== =============
Eligible, end of year for
exercise 800,000* .09 1,047,500 .09 1,137,500 .09
============== ============== ============== ============= ============== =============
A further summary about fixed options outstanding at October 31, 2002 is as
follows:
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Outstanding Life Price Exercisable Price
---------------- ---------------- ------------- ---------------- -------------
Exercise price of $.10 600,000* 1.5 yr. .10 600,000 .10
Exercise price of $.05 200,000 1.2 yr.** .05 200,000 .05
* In accordance with the Plan of Reorganization and Merger and the related
"Letter agreements," the above options cannot be exercised until the
Company amends its articles of incorporation to authorize shares of
approximately 120,000,000 and has registered such shares.
** Includes extension of expiration date from December 31, 2002 to December
31, 2003 approved by the Company's Board of Directors on December 13, 2002.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
13. STOCKHOLDERS' EQUITY, CONTINUED
STOCK WARRANTS:
Danzer issued warrants to purchase common stock to several parties. The
following table summarizes the outstanding warrants for the year ended October
31, 2002 and the ten-month period ended October 31, 2001:
Outstanding Outstanding
Warrants Issued Warrants Warrants
October 31, During the Exercised October 31,
2001 Year Exercise Price in Period 2002
--------------- ------------ ----------------- ------------ ---------------
Common Stock:
Renaissance US Growth & Income Trust PLC -- 8,000 $.20 -- 8,000
BFSUS Special Opportunities Trust PLC -- 8,000 $.20 -- 8,000
Series C Preferred Stock:
Duncan-Smith Co., 10,000 shares, expired
August 31, 2002 10,000 -- $2.00 (10,000) --
Markpoint financing agreement expiring May
2008 associated with Champion** Zero** -- $.01 -- Zero**
** The number of warrants available under the agreement with Markpoint is
based on twenty-five percent of the fair market value of Champion to be
determined based on a formula including a multiple of EBITDA. No warrants
are currently available under this agreement based on the operating results
and stockholder's deficit of Champion. As discussed in Notes 5 and 17, the
Company has agreed to a settlement with Markpoint. Accordingly, these
warrants have been terminated.
In January 2003, the Company agreed to a modification of terms with the
debenture holders to provide for less stringent covenants. In exchange for this
modification, the Company issued warrants to each of the debenture holders to
purchase up to 8,000 shares of the Company's common stock at an exercise price
of $.20 per share. These warrants expire January 24, 2006. The issuance of the
warrants had no material impact on earnings.
CONVERTIBLE DEBT:
As described in Note 9, the Company has a note payable agreement which is
convertible by the holder to common stock totaling 5,000,000 shares at a
conversion rate of $0.10 per share.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
14. BUSINESS SEGMENT DATA AND GEOGRAPHIC DATA
The Company operates in three industry segments comprised of trailer and related
transportation equipment manufacturing; coach leasing; and butyl rubber
reclaiming. All sales are in North and South America primarily in the United
States, Canada and Brazil. Selected information by segment follows (in
thousands):
Year Ended October 31, 2002
------------------------------------------------------------------------------
Trailer Butyl Rubber
Manufacturing Coach Leasing Reclaiming Total
------------------------------------------------------------------------------
Sales:
Domestic $ 38,911 $ 6,374 $ 9,336 $ 54,621
Foreign 1,864 -- 789 2,653
------------------------------------------------------------------------------
Total $ 40,775 $ 6,374 $ 10,125 $ 57,274
Cost of goods sold $ 35,077 $ 3,357 $ 9,407 $ 47,841
Loss before taxes $ (2,089) $ (417) $ (802) $ (3,308)
Identifiable assets $ 20,155 $ 11,760 $ 11,391 $ 43,306*
Depreciation and amortization expense $ 705 $ 779 $ 1,084 $ 2,568
*Identifiable assets, as stated above $ 43,306
Assets of subsidiary held for sale 1,538
Corporate-level goodwill 650
Other corporate-level assets 429
--------------------
Total assets $ 45,923
====================
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
14. BUSINESS SEGMENT DATA AND GEOGRAPHIC DATA, CONTINUED
Ten Months Ended October 31, 2001
------------------------------------------------------------------------------
Trailer Butyl Rubber
Manufacturing Coach Leasing Reclaiming Total
------------------------------------------------------------------------------
Sales:
Domestic $ 10,100 $ 4,165 $ 9,253 $ 23,518
Foreign 550 -- 621 1,171
------------------------------------------------------------------------------
Total $ 10,650 $ 4,165 $ 9,874 $ 24,689
Cost of goods sold $ 8,955 $ 1,618 $ 8,884 $ 19,457
Loss before taxes $ (96) $ (570) $ (725) $ (1,391)
Identifiable assets $ 22,941 $ 13,330 $ 10,205 $ 46,476*
Depreciation and amortization expense $ 365 $ 785 $ 905 $ 2,055
*Identifiable assets, as stated above $ 46,476
Assets of subsidiary held for sale 2,374
--------------------
Total assets $ 48,850
====================
For the calendar year ended December 31, 2000, the Company operated in only one
segment (butyl rubber reclaiming), which was the segment of the accounting
acquirer U.S. Rubber. U.S. Rubber had foreign sales of $943 for 2000.
Obsidian Enterprises, Inc. (legal parent) allocates selling, general and
administrative expenses to the respective companies primarily based on a
percentage of sales. For the year and ten months ended October 31, 2002 and
2001, respectively, allocated corporate expenses by segment were as follows:
Year Ended Ten Months Ended
October 31, 2002 October 31, 2001
------------------- ------------------
Trailer manufacturing $ 934 $ 245
Coach leasing 146 96
Butyl rubber reclaiming 232 275
------------------- ------------------
$ 1,312 $ 616
=================== ==================
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
15. INCOME TAXES
The Company files a consolidated federal tax return. The parent and each
subsidiary record their share of the consolidated federal tax expense on a
separate-return basis. Any additional income tax expense on recovery realized as
a result of filing a consolidated tax return is recorded in consolidation. The
Company and each subsidiary file separate state income tax returns. The Company
accounts for income taxes in compliance with SFAS No. 109, Accounting for Income
Taxes. Under SFAS No. 109, deferred tax assets and liabilities are recorded for
any temporary differences between the financial statement and tax bases of
assets and liabilities, using the enacted tax rates and laws expected to be in
effect when the taxes are actually paid or recovered.
The provision for (expenses) benefit for income taxes consists of the following:
2002 2001 2000
------------------------------------------------
Current:
Federal $ -- $ -- $ 152
State (15) (36) 14
------------------------------------------------
(15) (36) 166
------------------------------------------------
Deferred:
Federal 41 350 (187)
State 7 58 (29)
------------------------------------------------
48 408 (216)
------------------------------------------------
Total $ 33 $ 372 $ (50)
================================================
A reconciliation of income tax benefit (expense) from continuing operations at
U.S. statutory rates to actual income tax benefit (expense) is as follows:
2002 2001 2000
------------------------------------------------
Benefit (tax) at statutory rate (34%) $ 1,125 $ 1,609 $ (33)
Effect of nontaxable combined entity (18) (166) --
State income tax (15) (36) (5)
Goodwill amortization -- (26) --
Non-deductible goodwill (245) -- --
Valuation reserve applied to equity (1,267)* -- --
(Increase) decrease in valuation reserve 380 (1,038) --
Other 73 29 (12)
------------------------------------------------
$ 33 $ 372 $ (50)
================================================
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
15. INCOME TAXES, CONTINUED
*On November 1, 2001, 27 coaches owned by DW Leasing were transferred to
Obsidian Leasing in a tax-free exchange, as further described in Note 1. DW
Leasing recorded a charge to equity as a deemed distribution of $1,590 on the
date of the transaction, representing the deferred tax liability associated with
the coaches transferred. A reduction of deferred tax valuation reserve of
$(1,267) was also recorded in the consolidated financial statements as an
increase in equity, as the addition of the above deferred tax liability resulted
in the Company's ability to realize additional deferred tax assets on a
consolidated basis.
Deferred income taxes represent the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and for income tax purposes. Significant components of the Company's
deferred tax assets and liabilities are as follows:
2002 2001 2000
------------------------------------------------
Deferred tax assets (liabilities):
Accounts receivable $ 199 $ 32 $ --
Inventories 307 472 517
Accrued expenses 158 117 15
Intangibles 1,004 791 --
Operating loss carryforwards 2,961 1,474 --
Property and equipment (4,497) (2,267) (171)
Other 80 (81) --
------------------------------------------------
212 538 361
Less valuation reserves (1,171) (1,537) --
------------------------------------------------
Deferred tax assets (liabilities), net $ (959) $ (999) $ 361
================================================
Included in the accompanying balance sheet under the following:
2002 2001 2000
------------------------------------------------
Deferred tax assets $ 665 $ 673 $ 532
Deferred tax liabilities (1,624) (1,672) (171)
------------------------------------------------
$ (959) $ (999) $ 361
================================================
The amount of federal tax net operating loss carryforwards available at October
31, 2002 was $8,100. Certain of these loss carryforwards were generated by
certain subsidiaries prior to the reverse merger transaction in June 2001 and
have expiration dates through the year 2021. The use of preacquisition operating
losses is subject to limitations imposed by the Internal Revenue Code.
Utilization of these loss carryforwards is impacted by such limitations.
Accordingly, the deferred tax assets related to premerger operating losses have
been reserved with a valuation allowance to the extent they are not offset by
deferred liabilities.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
15. INCOME TAXES, CONTINUED
Federal tax net operating loss carryforwards and expiration dates as of October
31, 2002 are as follows:
Premerger Expiration Dates Postmerger Expiration Dates
---------------- ----------------------- ---------------- ------------------
$ 3,105 2008 through 2021 $ 4,995 2021 through 2022
================ ================
Cash payments of income taxes for the year ended October 31, 2002, ten months
ended October 31, 2001 and for the year 2000 were $22, $44 and $8, respectively.
16. RELATED PARTIES
The Company makes advances, receives loans and conducts other business
transactions with affiliates resulting in the following amounts for the periods
ended:
October 31, October 31,
2002 2001
------------------ ------------------
Balance sheets:
Current assets:
Accounts receivable, Obsidian Capital Partners $ 181 $ --
Accounts receivable, Obsidian Capital Company 13 217
Accounts receivable, other affiliated entities 12 --
Long-term portion:
Investment banking fees, purchase accounting* -- 1,960
------------------ ------------------
Total assets $ 206 $ 2,177
================== ==================
Current liabilities:
Accounts payable, Obsidian Capital Company $ 279 $ 625
Accounts payable, stockholders 338 300
Accounts payable, DC Investments and Fair Holdings 42 --
Accounts payable, other affiliated entities 9 --
Long-term portion:
Accounts payable, Obsidian Capital Partners -- 2,170
Notes payable, DC Investments 700 --
Notes payable, Fair Holdings 3,020 --
Line of credit, Fair Holdings 1,798 --
------------------ ------------------
Total liabilities $ 6,186 $ 3,095
================== ==================
Statements of Operations:
Interest expense, DC Investments and Fair Holdings $ 322 $ --
Interest expense, Obsidian Capital Partners 58 --
Rent expense, Obsidian Capital Company 56 15
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
16. RELATED PARTIES, CONTINUED
Related-party amounts classified as current reflect those portions of the total
receivable or payable that were currently due in accordance with the terms, or
were collected or paid subsequent to year end. Amounts classified as long term
represent amounts not currently due or amounts that were converted to equity
subsequent to year end as discussed in Note 18.
On February 13, 2002, DC Investments, LLC, a related party 50% owned by Mr.
Durham (Chairman of the Company), purchased accounts receivable from DW Leasing,
recorded by DW Leasing as deposits on trailers, in the amount of $1,051. DW
Leasing used the proceeds from the purchase of the accounts receivable to pay
off the accounts payable due Obsidian Capital Company in the amount of $624 and
the amount due shareholders and other related parties in the approximate amount
of $300.
The Company was obligated to the stockholders and certain employees (that were
formerly stockholders of subsidiary companies) under note payable agreements
acquired as part of the acquisitions. In addition, the Company has entered into
note payable agreements with other affiliated entities. The details of these
notes payable are included in Note 9.
*Subsidiaries of the Company paid Obsidian Capital Company, an entity controlled
by Mr. Durham (Chairman of the Company), investment banking fees associated with
the acquisitions and related financing on the Danzer and U.S. Rubber merger and
the United acquisition. Amounts paid by U.S. Rubber, United, and Danzer in 2001
were $760, $600, and $600, respectively. 17. COMMITMENTS AND CONTINGENCIES
On April 29, 2002, Markpoint Equity Fund J.V. ("Markpoint"), a Texas joint
venture for which The Markpoint Company serves as Managing Venturer, filed an
action in the Texas District Court, Dallas County seeking payment of $1,250 owed
by Champion under the subordinated credit facility described in Note 9. On
January 27, 2003, the Company reached an agreement to settle this liability for
a cash payment in the amount of $675 and the issuance to Markpoint of 32,143
shares of the Company's Series D Preferred Stock. In addition, the agreement
provides Markpoint the option to require the Company to repurchase these shares
at a price of $21 per share. The repurchase option is available to Markpoint as
follows: 16,072 shares during the period May 1, 2003 to June 1, 2003 and 16,071
shares during the period November 1, 2003 to December 1, 2003. The repurchase
options expire if not exercised during the specified periods. The Company's
repurchase obligation is guaranteed by Mr. Durham. The sale of Champion was
completed on January 30, 2003.
It is customary practice for companies in the cargo trailer industry to enter
into repurchase agreements with lending institutions which have provided
wholesale floor-plan financing to dealers. A portion of the wholesale sales of
United are made pursuant to these agreements, which generally provide for
purchase of United's products from the lending institutions for the balance due
them in the event of repossession upon a dealer's default. The contingent
liability is spread over many dealers and financial institutions and is reduced
by the resale value of the products, which are required to be repurchased.
Expenses incurred in connection with these agreements have been immaterial. The
maximum potential repurchase commitment at October 31, 2002 was approximately
$2,000.
In the normal course of business, the Company is liable for contract completion
and product performance. In the opinion of management, such obligations will not
significantly affect the Company's financial position or results of operations.
18. SUBSEQUENT EVENTS
On October 30, 2002, the Company's Board of Directors agreed to sell the assets
of Champion to an entity controlled by Messrs. Durham and Whitesell for the
assumption of all liabilities of Champion. The sale of Champion was completed on
January 30, 2003.
Subsequent to year end, United amended its credit agreement to provide
additional working capital during the winter months. The amendment included a
"temporary overline" line of credit with maximum borrowings not to exceed the
lesser of $650 or the remainder of the borrowing base less the outstanding
principal amount of the revolving line of credit. Interest is payable monthly at
a rate of prime plus 3/4%. The temporary overline line of credit matures on
March 31, 2003.
During January 2003, Obsidian Leasing refinanced debt in the amount of $928 to
former shareholders of Pyramid and related companies. Terms of the new note with
Fair Holdings include monthly interest payments of 13% of the outstanding
principal amount and a balloon principal payment in January 2006. Accordingly,
this debt has been classified as long term at October 31, 2002.
On December 17, 2002, Obsidian Leasing sold four coaches to DC Investments
Leasing, LLC ("DC Investments Leasing"), a newly created entity owned 50% by Mr.
Durham (Chairman of the Company) in exchange for DC Investments Leasing's
satisfaction of the debt outstanding on such coaches. In addition, DC
Investments Leasing also acquired five additional coaches that were previously
to be purchased by the Company thereby eliminating the Company's existing
purchase commitment for such coaches. DC Investments Leasing also entered into a
management agreement with Pyramid under which all nine coaches described above
will be leased by Pyramid.
On January 2, 2003, Obsidian Enterprises, Inc.'s line of credit with Fair
Holdings was amended. Maximum borrowings were increased from $3,000 to $5,000.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED), AS RESTATED, SEE NOTE 3
(dollars in thousands, except per share amounts)
YEAR ENDED OCTOBER 31, 2002
First Qtr. Ended Second Qtr. Ended Third Qtr. Ended Fourth Qtr.
1/31/02 4/30/02 7/31/02 Ended 10/31/02
------------------ ------------------- ------------------ ------------------
Net sales $ 11,466 $ 15,598 $ 15,239 $ 14,971
Gross profit 1,518 2,625 2,839 2,653
Income (loss) from continuing
operations*** (1,207) (570) 471 (1,531)**
Income (loss) from continuing
operations per basic common and common
equivalent share*** (.03) (.02) .00 (.04)
TEN MONTHS ENDED OCTOBER 31, 2001
First Qtr.* Second Qtr. Ended Third Qtr. Ended Fourth Qtr.
Ended 1/31/01 4/30/01 7/31/01 Ended 10/31/01
------------------ ------------------- ------------------ ------------------
Net sales $ 3,626 $ 4,014 $ 4,685 $ 14,474
Gross profit 408 911 1,260 2,764
Loss from continuing operations*** (218) (408) (196) (541)
Loss from continuing operations per
common and common equivalent share*** (.01) (.02) (.01) (.02)
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
YEAR ENDED DECEMBER 31, 2000
First Qtr. Ended Second Qtr. Ended Third Qtr. Ended Fourth Qtr.
3/31/00 6/30/00 9/30/00 Ended 12/31/00
------------------ ------------------- ------------------ ------------------
Net sales $ 3,059 $ 3,024 $ 3,233 $ 3,267
Gross profit (loss) 301 372 373 147
Net income (loss) 86 (118) 146 (66)
Net income (loss) per common and common
equivalent share -- -- -- --
* The first quarter for U.S. Rubber includes the first and second month
(November and December) of 2000.
** The fourth quarter includes the charge for the impairment of goodwill of
$720 for October 31, 2002.
*** Income (loss) from continuing operations for the quarter ended October 31,
2001 and for the quarters ended January 31, 2002, April 30, 2002, and July
31, 2002 have been restated due to factors discussed in Note 3. Changes in
the income (loss) in each of these quarters ranged from $33 to $42.
Earnings per share have been restated for each of the quarters in the years
ended October 31, 2002 and 2001 as a result of changes discussed in Note 3.
SCHEDULE II--VALUATION AND QUALIFYING OF ACCOUNTS
Year Ended October 31, 2002
(in thousands)
Column C--Additions
-----------------------------------
Column A--Description Column (1)--Charged to (2)--Charged to Column Column
B--Balance at r
Beginning of Costs and Other ibE--Balance at
Period Expenses Accounts--Describe D--Deductions--Desc End of Period
----------------------------- ---------------- ----------------- ----------------- ----------------- -----------------
Allowance for doubtful
accounts $ 80 $ 415 $ -- $ -- $ 495
================ ================= ================= ================= =================
Inventory valuation
allowances $ 833 $ 50 $ -- $ 417* $ 466
================ ================= ================= ================= =================
Deferred tax valuation
reserve $ 1,551 $ -- $ -- $ 380*** $ 1,171
================ ================= ================= ================= =================
Ten Months Ended October 31, 2001
(in thousands)
Column C--Additions
---------------------------------
Column A--Description Column B--Balance (1)--Charged (2)--Charged to Column Column
at Beginning of to Costs and Other ribE--Balance at
Period Expenses Accounts--Describe D--Deductions--Desc End of Period
----------------------------- ------------------ --------------- ----------------- ----------------- -----------------
Allowance for doubtful
accounts $ -- $ 80 $ -- $ -- $ 80
================== =============== ================= ================= =================
Inventory valuation
allowances $ 1,338 $ 73 $ -- $ 578* $ 833
================== =============== ================= ================= =================
Deferred tax valuation
reserve $ -- $ 1,038 $ 513** $ -- $ 1,551
================== =============== ================= ================= =================
* Use of inventory previously reserved.
** Valuation reserve of acquired companies recorded in purchase accounting.
*** Realization of operating losses against deferred tax liabilities.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
As previously reported in a Current Report Form 8-K filed on November 13, 2001,
the Audit Committee of the Company's Board of Directors decided on November 7,
2001, to dismiss Linton, Shafer & Company, P.A. ("Linton Shafer") as the
Company's independent auditors. The audit reports of Linton Shafer on the
consolidated financial statements of the Company as of and for the years ended
October 31, 2000 and 1999 did not contain any adverse opinion or disclaimer of
opinion, nor were they qualified or modified as to uncertainty, audit scope or
accounting principles. During the fiscal years ended October 31, 2000 and 1999
and the period following October 31, 2000, there were no disagreements between
the Company and Linton Shafer on any matter regarding accounting principles or
practices, financial statement disclosure, or auditing scope or procedure. A
letter from Linton Shafer confirming the statements set forth in this Item 9 was
attached as Exhibit 16 to the Current Report on Form 8-K filed on November 13,
2001.
On November 7, 2001, the Board of Directors engaged McGladrey & Pullen, LLP
("McGladrey") as the Company's new independent auditors. During the fiscal years
ended October 31, 2000 and 1999 and during the period following October 31,
2000, the Company did not consult McGladrey regarding either (i) the application
of accounting principles to a specified transaction, either completed or
proposed, or the type of audit opinion that might be rendered on the Company's
financial statements, and neither a written report was provided to the Company
nor oral advice provided that McGladrey concluded was an important factor
considered by the Company in reaching a decision as to an accounting, auditing
or financial reporting issue; or (ii) any matter that was either the subject of
a disagreement or a reportable event.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information with respect to all Directors of the
Company, including their ages, present principal occupations, other business
experience during the last five years, membership on committees of the Board and
directorships in other publicly held companies.
Name Age Position Director Since
Timothy S. Durham 40 Chief Executive Officer and Chairman of the Board 2001
Terry G. Whitesell 63 President, Chief Operating Officer and Director 2001
Jeffrey W. Osler 34 Executive Vice President, Secretary, Treasurer and 2001
Director
Goodhue W. Smith, III+ 51 Director 1997
John A. Schmit*+ 33 Director 2001
D. Scott McKain* 47 Vice Chairman and Director 2001
Daniel S. Laikin+ 40 Director 2001
Barry S. Baer 59 Executive Vice President and Chief Financial Officer N/A
*Members of the Compensation Committee
+Members of the Audit Committee
Mr. Durham has served as the Chief Executive Officer and Chairman of the Board
and as a director of the Company since June 2001. He has served as a Managing
Member and Chief Executive Officer of Obsidian Capital Company LLC, which is the
general partner of Obsidian Capital Partners LP, since April 2000. Beginning in
1998, Mr. Durham founded and maintained a controlling interest in several
investment funds, including Durham Capital Corporation, Durham Hitchcock
Whitesell and Company LLC, and Durham Whitesell & Associates LLC. From 1991 to
1998, Mr. Durham served in various capacities at Carpenter Industries, Inc.,
including as Vice Chairman, President and Chief Executive Officer. Mr. Durham
also serves as a director of National Lampoon, Inc. Mr. Durham is Mr. Osler's
brother-in-law.
Mr. Whitesell has served as the President and Chief Operating Officer and as a
director of the Company since June 2001. Prior to that time he co-founded
several entities with Mr. Durham, including Obsidian Capital Company, LLC,
Durham Hitchcock Whitesell and Company LLC and Durham Whitesell & Associates
LLC. Mr. Whitesell also is a Managing Member of Obsidian Capital Company LLC.
From April 1992 until September 1998, Mr. Whitesell served as Executive Vice
President of Carpenter Industries, Inc.
Mr. Osler has served as the Executive Vice President, Secretary and Treasurer
and as a director of the Company since June 2001. He also is a Managing Member
of Obsidian Capital Company LLC. and has served as Senior Vice President at
Durham Whitesell & Associates LLC and Durham Capital Corporation since September
1998. Prior to that time, Mr. Osler served as the General Manager of Hilton Head
National Golf Club. Mr. Osler is Mr. Durham's brother-in-law.
Mr. Smith has been a director of the Company since 1997. Mr. Smith founded
Duncan-Smith Investments, Co., an investment banking firm in San Antonio, Texas,
in 1978 and since that time has served as its Secretary and Treasurer. Mr. Smith
also is a director of Citizens National Bank of Milam County, and Ray Ellison
Mortgage Acceptance Co.
John A. Schmit has been a director since July 2001. Mr. Schmit joined
Renaissance Capital Group, Inc. in 1997 and is a Vice President--Investments.
Prior to joining Renaissance Capital Group, Mr. Schmit practiced law with the
law firm of Gibson, Ochsner & Adkins in Amarillo, Texas from September 1992 to
September 1994. Between August 1994 and May 1996, Mr. Schmit attended Georgetown
University where he earned his L.L.M. in International and Comparative Law.
Mr. McKain has been a director of the Company since September 2001. He has
served as the Chairman of McKain Performance Group since 1981. Mr. McKain also
has been the Vice Chairman of Durham Capital Corporation since 1999. From 1983
to 1998, Mr. McKain was a broadcast journalist and television commentator. Mr.
McKain has also authored several books and is a keynote speaker who presents
high content workshops across the nation.
Mr. Laikin has served as a director of the Company since September 2001. Mr.
Laikin is Chief Operating Officer and a director of National Lampoon, Inc., the
owner of the "National Lampoon" trademark and engaged in the entertainment
business. He has been a Managing Member of Fourleaf Management LLC, a management
company of an investment fund that invests in technology related entities, since
1999. Mr. Laikin served as the Chairman of the Board of Biltmore Homes from 1993
to 1998.
Mr. Baer has served as the Executive Vice President and Chief Financial Officer
of the Company since April 2002. From August 2000 to December 2001, he served as
Executive Vice President and Chief Financial Officer of Apex Industries, Inc.
Prior to August 2000, he had served as Vice President and Chief Operations
Officer of Pharmaceutical Corporation of America.
EXECUTIVE OFFICERS
The Company's executive officers are appointed by the Board of Directors and
hold office at the pleasure of the Board until successors are appointed and have
qualified. Compliance with Section 16(a) of the Securities Exchange Act of 1934
requires the Company's directors, executive officers, and persons who own more
than ten percent of the Company's Common Stock ("10% Shareholders") to file
reports of ownership and reports of changes in ownership of the Company's Common
Stock with the Securities Exchange Commission ("SEC"). Officers, Directors and
Shareholders are required by SEC regulation to furnish the Company with copies
of all forms they file under Section 16 (a). Based solely on its review of the
copies of such forms received by it with respect to its fiscal year ended
October 31, 2002, and written representations from certain reporting persons
that no other reports were required to those persons, the Company believes that
its officers, directors and 10% Shareholders have complied with all Section
16(a) requirements, except that Mr. Smith was late in reporting the exercise of
a warrant.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information concerning the compensation
paid or accrued by the Company for services rendered during the Company's past
three fiscal years ended October 31, 2001 by the CEO and executive officers.
Long-Term
Annual Compensation Compensation Awards
--------------------------------------------------------------------------------------------------------------------
Name and Securities All Other
Underlying
Principal Position Year Salary Bonus Options/SARs Compensation
------------------------- ---------- ------------------- -------------------- -------------------- -----------------
Timothy S. Durham, 2002 $75,000 $0 $0 $0
Chief Executive 2001 $27,404 $0 $0 $0
Officer(1) 2000 N/A N/A N/A N/A
------------------------- ---------- ------------------- -------------------- -------------------- -----------------
------------------------- ---------- ------------------- -------------------- -------------------- -----------------
M. E. Williams, 2002 N/A N/A $0 $0
Chief Executive 2001 $110,000 $12,824 $0 $0
Officer(2) 2000 $107,609 $9,375 $0 $3,125
------------------------- ---------- ------------------- -------------------- -------------------- -----------------
(1) Mr. Durham was elected Chief Executive Officer and Chairman of the Board on
June 21, 2001.
(2) Mr. Williams resigned as Chief Executive Officer on June 21, 2001.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
No grants were made during fiscal 2002 pursuant to the Company's 1999 Stock
Option Plan or the Company's 2002 Long Term Incentive Plan.
On December 13, 2002, the Company's Board of Directors approved the extension of
options to acquire 200,000 shares of common stock from December 31, 2002 to
December 31, 2003.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
The following table sets forth information for 2002 with respect to Option/SAR
exercises by the executive officers named in the Summary Compensation Table and
the value of unexercised options and SARs as of October 31, 2002.
Number of Value of Unexercised
Unexercised In-the-Money
Shares Acquired on Options/SARs at Options/SARs at
Exercise (#) Value Realzed ($) Fiscal Year-End (#) Fiscal Year-End ($)
----------------------------- --------------------- ---------------------- --------------------- ---------------------
Name Exercisable/ Exercisable/
Unexercisable Unexercisable
----------------------------- --------------------- ---------------------- --------------------- ---------------------
M. E. Williams -0- -0- 725,000/0 $78,750/01
----------------------------- --------------------- ---------------------- --------------------- ---------------------
COMPENSATION OF DIRECTORS
Directors who are not employees of the Company are entitled to a board meeting
attendance fee of $750 plus reimbursement of expenses.
EMPLOYMENT AND CHANGE OF CONTROL AGREEMENTS
The Company currently does not have any employment agreements with any of the
Company's executive officers.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to beneficial ownership
of common stock as of January 22, 2003, by (i) all persons known to the Company
to be the beneficial owner of five percent or more of the common stock, (ii)
each director of the Company, (iii) the chief executive officer and each of the
Company's other most highly compensated executive officers whose total annual
compensation for 2002 based on salary and bonus earned during 2002 exceeded
$100,000 (the "named executive officers"); (iv) the current executive officers;
and (v) all Company directors and executive officers as a group. This table does
not include shares of common stock that may be purchased pursuant to options not
exercisable within 60 days of the record date. All persons listed have sole
voting and investment power with respect to their shares unless otherwise
indicated.
Common Stock Series C Preferred Stock Series D Preferred Stock
------------ ------------------------ ------------------------
Number of Percentage of Number of Percentage of Number of Percentage of
Shares Shares Shares Shares Shares Shares
Name and Address of Beneficially Beneficially Beneficially Beneficially Beneficially Beneficially
-
Beneficial Owner Owned Owned Owned Owned Owned Owned
---------------- ----- ----- ----- ----- ----- -----
Executive Officers and
Directors:
Timothy S. Durham (1) 103,755,219 79.6% 3,942.193 90.2% 88,330 100.0%
0
D. Scott McKain 810,10 2.2% -- -- -- --
Jeffrey W. Osler (2) 87,874,705 71.6% 3,755,869 86.0% 72,899 82.5%
0
John A. Schmit (3) 5,000,00 13.9% -- -- -- --
Goodhue W. Smith, III (4) 298,334 * 5,000 * -- --
Terry G. Whitesell (5) 94,787,685 76.5% 3,755,869 86.0% 72,899 82.5%
All current officers and 3
directors as a group (8
persons) 117,576,69 90.2% 3,947,193 90.4% 88,330 100.0%
Other 5% Owners:
Fair Holdings, Inc.(6) 6,426,905 15.1% 186,324 4.3% 15,431 17.5%
Huntington Capital -
Investment Company (7) - -- 386,206 8.8% -- --
Obsidian Capital Partners, 5
L.P. (8) 87,874,70 70.9% 3,755,869 86.0% 72,899 82.5%
7
Richard W. Snyder 1,946,66 5.4% -- -- -- --
The number of shares of common stock above also includes the preferred stock
converted to common equivalents.
*less than one percent
(1) Includes 7,338,103 shares of common stock directly owned by Mr. Durham;
2,088,366 shares held by Diamond Investments, LLC, for which Mr. Durham
serves as Managing Member and for which shares Mr. Durham may be deemed to
share voting and dispositive power; 3,755,869 shares of Series C preferred
stock and 72,899 shares of Series D preferred stock over which Mr. Durham
shares voting and dispositive power and that may be deemed to be
beneficially owned by Mr. Durham due to his position as a managing member
of Obsidian Capital Company, LLC, which is the general partner of Obsidian
Capital Partners, LP, which directly owns such shares; 186,324 shares of
Series C preferred stock and 15,431 shares of Series D preferred stock over
which Mr. Durham shares voting and dispositive power and that may be deemed
to be beneficially owned by Mr. Durham due to his position as an executive
officer and shareholder of Fair Holdings, Inc. which directly owns such
shares; and 27,140 shares of common stock over which Mr. Durham shares
voting and dispositive power and that may be deemed to be beneficially
owned by Mr. Durham due to his position as a managing member of Durham
Whitesell and Associates, LLC, which directly owns such shares. The address
of Mr. Durham is 111 Monument Circle, Suite 4800, Indianapolis, Indiana
46204.
(2) Includes 827,200 shares of common stock directly owned by Mr. Osler; and
3,755,869 shares of Series C preferred stock and 72,899 shares of Series D
preferred stock over which Mr. Osler shares voting and dispositive power
and that may be deemed to be beneficially owned by Mr. Osler due to his
position as a managing member of Obsidian Capital Company, LLC, which is
the general partner of Obsidian Capital Partners, LP, which directly owns
such shares. The address of Mr. Osler is 111 Monument Circle, Suite 4800,
Indianapolis, Indiana 46204.
(3) Represents shares that may be acquired pursuant to convertible debentures
issued by the Registrant on July 19, 2001, to Renaissance US Growth
Investment Trust PLC ("RUSGIT") and BFSUS Special Opportunities Trust PLC
("BFS"). Mr. Schmit is Vice President of Renaissance Capital Group, Inc.,
the investment manager of RUSGIT and BFS. Mr. Schmit disclaims beneficial
ownership as to the shares beneficially owned by RUSGIT and BFS. The
address of Mr. Schmit is 8080 North Central Expressway, Suite 210, Dallas,
Texas 75206.
(4) Includes 81,667 shares of common stock and 5,000 shares of Series C
Preferred Stock directly owned by Mr. Smith. The address of Mr. Smith is
711 Navarro, San Antonio, Texas 78205.
(5) Includes 6,885,840 shares of common stock directly owned by Mr. Whitesell;
3,755,869 shares of Series C preferred stock and 72,899 shares of Series D
preferred stock over which Mr. Whitesell shares voting and dispositive
power and that may be deemed to be beneficially owned by Mr. Whitesell due
to his position as a managing member of Obsidian Capital Company, LLC,
which is the general partner of Obsidian Capital Partners, LP, which
directly owns such shares; and 27,140 shares of common stock over which Mr.
Whitesell shares voting and dispositive power and that may be deemed to be
beneficially owned by Mr. Whitesell due to his position as a managing
member of Durham Whitesell and Associates, LLC, which directly owns such
shares. The address of Mr. Whitesell is 111 Monument Circle, Suite 4800,
Indianapolis, Indiana 46204.
(6) Consists of 186,324 shares of Series C preferred stock and 15,431 shares of
Series D preferred stock directly owned by Fair Holdings, Inc.
(7) Based on the information reported in a Schedule 13G filed with the SEC on
August 6, 2001.
(8) Consists of 3,755,869 shares of Series C preferred stock and 72,899 shares
of Series D preferred stock directly owned by Obsidian Capital Partners,
L.P. Voting and dispositive power over the shares may be deemed to be held
by Obsidian Capital Partners, LP, Obsidian Capital Company, LLC and the
managing members of Obsidian Capital Company LLC, which include Messrs.
Durham, Whitesell and Osler.
Equity Compensation Plan Information
The following table presents information regarding grants under all equity
compensation plans of the Company through October 31, 2002.
Number of securities
remaining available for
future issuance under
Number of securities to be Weighted-average exercise equity compensation plans
issued upon exercise of price of outstanding (excluding securities
outstanding options, options, warrants and reflected in the first
Plan Category warrants and rights rights column)
------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity compensation plans 800,000 $0.09 2,150,000
approved by security
holders(1)
------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity compensation plans not
approved by security holders 0 0 0
------------------------------- ---------------------------- ---------------------------- ----------------------------
Total 800,000 $0.09 2,150,000
------------------------------- ---------------------------- ---------------------------- ----------------------------
(1) The grants were made pursuant to the Company's 1990 Stock Option Plan and
1999 Stock Compensation Plan ("1999 Plan"). Shares remain available for
grant under the 1999 Plan and the Company's 2001 Long Term Incentive Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
All dollar amounts in this Item 13 are in thousands (except for share and per
share information).
A number of related party transactions occurred in connection with the change in
control and reorganization of the Company in 2001. The reorganization
transactions occurred in two parts:
o On June 21, 2001, the Company acquired from Obsidian Capital Partners,
L.P., Mr. Durham and certain other shareholders all of the shares of
Pyramid Coach, Inc.("Pyramid"); Champion Trailer, Inc. ("Champion") and
U.S. Rubber Reclaiming, Inc. ("U.S. Rubber").
o On July 31, 2001, the Company acquired from Obsidian Capital Partners, L.P.
and Mr. Durham substantially all of the assets of United Acquisition, Inc.,
which the Company now operates as United Expressline, Inc. ("United").
Prior to these transactions, DW Leasing, LLC ("DW Leasing"), a company owned by
Messrs. Durham and Whitesell had entered into a number of transactions with
Pyramid whereby coaches owned by DW Leasing were operated by Pyramid and the
debt on these coaches were cross guaranteed by DW Leasing and Pyramid. Although
the Company does not own any interest in DW Leasing, the accounts of DW Leasing
are included in the financial statements of the Company (see Note 1 to the
Company's Financial Statements).
The agreements entered into at the time of the Reorganization contemplated that
the coaches and related debt would be promptly transferred by DW Leasing to the
Company's subsidiary, Obsidian Leasing Co., Inc. ("Obsidian Leasing"). Twenty
seven coaches were transferred by DW Leasing to Obsidian Leasing in November
2001 in consideration of the assumption of the related debt. Pyramid continues
to operate the remaining seven coaches for DW Leasing pursuant to a management
agreement. Prior to the Reorganization described above, DW Leasing and Pyramid
were privately owned and structured in a tax-efficient manner. Because of the
nature of this structure, transfer of the remaining seven coaches owned by DW
Leasing would have adverse tax consequences to the owners of DW Leasing which
were not contemplated in the Reorganization. Accordingly, the Company has agreed
to continue to operate these coaches through DW Leasing. During 2002, the
Company received gross revenue of $674 from the coaches operated by Pyramid for
DW Leasing and paid fees of $538 to DW Leasing for the use of the coaches.
During 2002 and 2001, Obsidian Capital Partners, LP, the majority shareholder of
the Company, advanced funds to the Company. These funds were advanced to fund
losses of Champion and to fund the professional fees with respect to the filings
with the Securities and Exchange Commission in connection with the
reorganization in 2001, and closing costs in connection with the reorganization
and the closing of the purchase of United. The maximum amount outstanding during
2002, related to funding of Champion losses and funding professional fees was
$1,290 and $1,275, respectively. On April 25, 2002, $1,290 of the amounts
advanced was converted to Series C Preferred Stock. On October 24, 2002, $1,275
of the amounts advanced was converted to Series D Preferred Stock. Advances
during 2002 were as follows:
Balance at Additional Amounts Balance at
Converted to
Advances and Equity for
October 31, 2001 Interest Accrued Preferred Stock October 31, 2002
------------------ ------------------- ------------------ ------------------
Advances to fund Champion $ 1,222 $ 68 $ (1,290) $ --
Advances to fund professional fees $ 948 $ 327 $ (1,275) $ --
During 2002, Fair Holdings, Inc. advanced funds to the Company to fund a debt
reduction at Champion and to fund certain professional fees with respect to the
filing with the Securities and Exchange Commission. The maximum amount
outstanding in 2002 to Fair Holdings related to debt restructuring at Champion
and funding certain professional fees was $596 and $270, respectively. On April
25, 2002, $596 of the amounts advanced was converted to Series C Preferred
Stock. On October 24, 2002, $270 of the amounts advanced was converted to Series
D Preferred Stock. Advances during 2002 were as follows:
Amounts
Additional Converted to
Balance at Advances and Equity for Balance at
October 31, 2001 Interest Accrued Preferred Stock October 31, 2002
------------------ ------------------- ------------------ ------------------
Advances for debt reduction $ -- $ 596 $ (596) $ --
Advances for professional fees $ -- $ 270 $ (270) $ --
In addition to the advances, Fair Holdings, Inc. has provided a $5,000 line of
credit to the Company. The maximum amount outstanding in 2002 was $1,798. The
line of credit is unsecured, bears interest at 10% per annum and matures in
January 2005.
Fair Holdings, Inc. has also leased certain computer equipment to the Company on
a short-term basis commencing on August 1, 2002. The rental paid in 2002 was $1.
Fair Holdings, Inc. lent Obsidian Leasing an aggregate of $1,588 in connection
with the refinancing of coaches. The maximum amount outstanding during 2002 for
this refinancing was $1,588. The loans are ten year, interest only loans,
subordinate to the bank debt on the coaches and bear interest at 14% per annum.
The Company subleases its headquarters space from Fair Holdings, Inc. under a
sublease with a monthly rental of $3,675. Prior to the sublease with Fair, the
Company sublet space from Obsidian Capital Company and paid $56 to Obsidian
Capital Company for its space in 2002.
Fair Holdings, Inc. leased certain computer equipment to Danzer under a twelve
month lease effective August 1, 2002. The aggregate rental due under the twelve
month lease is $8.
DW Trailer, a company owned by Messrs. Durham and Whitesell, has leased a
forklift to Danzer under a 38 month lease at $1 per month.
United advanced Obsidian Capital Company $216, as a part of the closing of the
purchase of the United transaction. The amount was paid back to United in 2002.
DC Investments, a company controlled by Mr. Durham, lent U.S. Rubber $700
pursuant to a subordinated note which bears interest at 15% per annum with the
principal payable in March 2007. The loan was made to permit the Company to
complete the elimination of the interest of SerVass, Inc. in U.S. Rubber.
During 2002 DC Investments purchased the senior secured loans to Champion from
the bank which held them. The maximum amount outstanding to DC Investments in
2002 was $602. The loans bear interest at 5.5%.
On October 30, 2002, the Company entered into a Memorandum of Agreement with
Messrs. Durham and Whitesell pursuant to which Champion agreed to sell all of
its assets to an entity to be designated by Messrs. Durham and Whitesell subject
to the payment by Messrs. Durham and Whitesell of $1.00 and the assumption by
the entity acquiring the assets of all of the liabilities of Champion except for
the liability of Champion to Markpoint Equity Growth Fund IV, which was settled
by the Company. This transaction closed on January 30, 2003.
Management believes that the transactions described in this Item were on terms
no less favorable to the Company and its subsidiaries than would have been the
case for transactions with unrelated third parties.
PART IV
ITEM 14. CONTROLS AND PROCEDURES.
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the reports we file pursuant
to the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms. Such
information is accumulated and communicated to the Company's management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. The
Company's management recognizes that, because the design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events and also is subject to other inherent limitations, any controls
and procedures, no matter how well designed and operated, can provide only
reasonable, and not absolute, assurance of achieving the desired objectives. The
Company's management believes, however, that the Company's disclosure controls
and procedures provide reasonable assurance that the disclosure controls and
procedures are effective.
Within the 90 days prior to the filing of this report, the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based on this evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls subsequent to the date of the most
recent evaluation.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this Annual Report on Form 10-K:
(1) Financial Statements.
See the Financial Statements included in Item 8.
(2) Financial Statement Schedules Required to be Filed by
Item 8 on this Form.
See Item 8
(3) Exhibits.
The exhibits filed as part of this Annual Report on Form
10-K are identified in the Exhibit Index, which Exhibit
Index specifically identifies those exhibits that describe
or evidence all management contracts and compensating plans
or arrangements required to be filed as exhibits to this
Report. Such Exhibit Index is incorporated herein by
reference.
(b) Reports on Form 8-K
The following Reports on Form 8-K were filed during the last
quarter of the fiscal year ended October 31, 2001:
(1) Report on Form 8-K regarding July 31, 2001 acquisition
of substantially all of the assets of United
Expressline, Inc. (filed August 15, 2001).
(2) Report on Form 8-K regarding change in independent
auditors (filed November 13, 2001).
Signatures
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf, by the undersigned, thereunto
duly authorized.
Dated: August 25, 2003 OBSIDIAN ENTERPRISES, INC.
By: /s/ Timothy S. Durham
-----------------------------
Timothy S. Durham
Chief Executive Officer
EXHIBIT INDEX
Exhibit No. Description Incorporated by Reference/Attached
2.1 Acquisition Agreement and Plan of Reorganization, dated Incorporated by reference to Exhibit
June 21, 2001, by and among Registrant, Danzer Industries, 2.1 to the Registrant's Report on Form
Inc., Pyramid Coach, Inc., Champion Trailer, Inc., United 8-K filed on August 15, 2001
Acquisition, Inc., U.S. Rubber Reclaiming, Inc., Obsidian
Capital Partners, L.P. and Timothy S. Durham
2.2 Memorandum of Agreement between Champion Trailer, Inc. and Incorporated by reference to Exhibit
Timothy S. Durham and Terry G. Whitesell 2.1 to the Registrant's Report on Form
8-K filed on November 6, 2002
3.1 Certificate of Incorporation (filed with Delaware Incorporated by reference to Exhibit
Secretary of State on October 4, 2001) 3.1 to the Registrant's Annual Report
on Form 10-K for the Year Ended
October 31, 2001
3.2 Certificate of Designations, Preferences, Rights and Incorporated by reference to Exhibit
Limitations of Series C Preferred Stock 3.2 to the Registrant's Annual Report
on Form 10-K for the Year Ended
October 31, 2001
3.3 Bylaws of the Registrant (Restated Effective as of Attached
September 27, 2002)
3.4 Certificate of Designations, Preferences, Rights and Attached+
Limitations of Series D Preferred Stock
4.1 Registration Rights Agreement, dated June 21, 2001 Incorporated by reference to Exhibit
4.1 to the Registrant's Annual Report
on Form 10-K for the Year Ended
October 31, 2001
4.2 Amendment and Joinder to Registration Rights Agreement, Incorporated by reference to Exhibit
dated July 27, 2001 4.2 to the Registrant's Annual Report
on Form 10-K for the Year Ended
October 31, 2001
4.3 8.00% Convertible Debenture Issued by Registrant on July Incorporated by reference to Exhibit 2
19, 2001 to HSBC Global Custody Nominee Due July 19, 2008 to Schedule 13D filed September 20,
2001 by Russell Cleveland, Renaissance
Capital Group, Inc.
4.4 8.00% Convertible Debenture Issued by Registrant on July Incorporated by reference to Exhibit 3
19, 2001 to Renaissance US Growth & Income Trust PLC Due to Schedule 13D filed September 20,
July 19, 2008 2001 by Russell Cleveland, Renaissance
Capital Group, Inc.
4.5 Convertible Loan Agreement, dated July 19, 2001, Among Incorporated by reference to Exhibit
Registrant, BFSUS Special Opportunities Trust PLC, 4.5 to the Registrant's Annual Report
Renaissance US Growth & Income Trust PLC and Renaissance on Form 10-K for the Year Ended
Capital Group, Inc. October 31, 2001
10.1 2001 Long Term Incentive Plan* Incorporated by reference to Appendix
E to the Registrant's Proxy Statement
filed on September 18, 2001
10.2 Asset Purchase Agreement, dated April 20, 2000, between Incorporated by reference to Exhibit
Champion Trailer Company, L.P. and Harold Peck, Mary Peck, 10.2 to the Registrant's Annual Report
Champion Trailer, Ltd. (f/k/a) Champion Trailer, LLC, on Form 10-K for the Year Ended
Champion Collision, Ltd. (f/k/a) Champion Collision, October 31, 2001
L.L.C. and Brandonson, Inc.
10.3 Stock and Asset Purchase Agreement, dated December 20, Incorporated by reference to Exhibit
1999, among Timothy S. Durham, Terry Whitesell, DW 10.3 to the Registrant's Annual Report
Leasing, LLC, Bobby Michael, Becky Michael, Jennifer on Form 10-K for the Year Ended
George, Pyramid Coach, Inc., Precision Coach, Inc., October 31, 2001
American Coach Works, Inc., Transport Trailer Service,
Inc., Rent-A-Box, Inc. and LBJ, LLC
10.4 Assumption Agreement and Second Amendment to Credit Incorporated by reference to Exhibit
Agreement, dated June 18, 2001, among Bank One, Indiana, 10.4 to the Registrant's Annual Report
N.A., Champion Trailer, Inc. and Champion Trailer Company, on Form 10-K for the Year Ended
L.P. October 31, 2001
10.5 Credit Agreement, dated December 29, 2000, between USRR Incorporated by reference to Exhibit
Acquisition Corp. and Bank One, Indiana, N.A. 10.5 to the Registrant's Annual Report
on Form 10-K for the Year Ended
October 31, 2001
10.6 First Amendment to Credit Agreement, dated June 20, 2001, Incorporated by reference to Exhibit
between U.S. Rubber Reclaiming, Inc. and Bank One, 10.6 to the Registrant's Annual Report
Indiana, N.A. on Form 10-K for the Year Ended
October 31, 2001
10.7 Note Purchase Agreement, dated May 2, 2000, between Incorporated by reference to Exhibit
Champion Trailer, Inc. and Markpoint Equity Growth Fund, 10.7 to the Registrant's Annual Report
J.V., and Related Documents on Form 10-K for the Year Ended
October 31, 2001
10.8 Warrant, dated May 2, 2000, from Champion Trailer Company, Incorporated by reference to Exhibit
LP to Markpoint Equity Growth Fund, J.V. 10.8 to the Registrant's Annual Report
on Form 10-K for the Year Ended
October 31, 2001
10.9 Management Agreement, dated December 29, 2000, between Incorporated by reference to Exhibit
Obsidian Capital Company, LLC and USRR Acquisition Corp. 10.9 to the Registrant's Annual Report
on Form 10-K for the Year Ended
October 31, 2001
10.10 Management Agreement, dated June 16, 2001, between Incorporated by reference to Exhibit
Pyramid, Inc. and D.W. Leasing 10.10 to the Registrant's Annual
Report on Form 10-K for the Year Ended
October 31, 2001
10.11 Promissory Note, dated June 1, 2001, from Obsidian Capital Incorporated by reference to Exhibit
Company, LLC to U.S. Rubber Reclaiming, Inc. 10.11 to the Registrant's Annual
Report on Form 10-K for the Year Ended
October 31, 2001
10.12 Promissory Note, dated June 11, 2001, from Champion Incorporated by reference to Exhibit
Trailer, Inc. to Obsidian Capital Partners, LP 10.12 to the Registrant's Annual
Report on Form 10-K for the Year Ended
October 31, 2001
10.13 Purchase Agreement, dated June 5, 2001, between United Incorporated by reference to Exhibit
Expressline, Inc., United Acquisition, Inc., J.J.M. 10.13 to the Registrant's Annual
Incorporated and the Shareholders of United Expressline, Report on Form 10-K for the Year Ended
Inc. and J.J.M. Incorporated October 31, 2001
10.14 Promissory Note, dated July 27, 2001, from United Incorporated by reference to Exhibit
Acquisition, Inc. to United Expressline, Inc. 10.14 to the Registrant's Annual
Report on Form 10-K for the Year Ended
October 31, 2001
10.15 Credit Agreement, dated July 27, 2001, between United Incorporated by reference to Exhibit
Acquisition, Inc. and First Indiana Bank 10.15 to the Registrant's Annual
Report on Form 10-K for the Year Ended
October 31, 2001
10.16 Loan and Security Agreement, dated January 21, 2000, Incorporated by reference to Exhibit
between Danzer Industries, Inc. and Banc of America 10.16 to the Registrant's Annual
Commercial Finance Corp. Report on Form 10-K for the Year Ended
October 31, 2001
10.17 Warrant, dated August 1997, by Danzer Corp. to Incorporated by reference to Exhibit
Duncan-Smith Co. and Letter Agreement, dated June 21, 10.17 to the Registrant's Annual
2001, between Danzer Corp. and Duncan-Smith Co. Report on Form 10-K for the Year Ended
October 31, 2001
10.18 Stock Purchase Agreement, dated December 29, 2000, between Incorporated by reference to Exhibit
USRR Acquisition Corp. and SerVaas, Inc. 10.18 to the Registrant's Annual
Report on Form 10-K for the Year Ended
October 31, 2001
10.19 Subordinated Secured Promissory Note, dated December 29, Incorporated by reference to Exhibit
2000, from USRR Acquisition Corp. to SerVaas, Inc. 10.19 to the Registrant's Annual
10.20 Supply and Consignment Agreement, dated December 29, 2000, Incorporated by reference to Exhibit
between U.S.R.R. Acquisition and SerVaas, Inc. 10.20 to the Registrant's Annual
Report on Form 10-K for the Year Ended
October 31, 2001
10.21 Form of Installment Loan from Edgar County Bank & Trust Incorporated by reference to Exhibit
Co. to DW Leasing Company, LLC, Related Documents and 10.21 to the Registrant's Annual
Schedule Identifying Material Details Report on Form 10-K for the Year Ended
October 31, 2001
10.22 Loan Agreement, dated December 10, 1999, between Old Incorporated by reference to Exhibit
National Bank and DW Leasing Company, LLC, and Related 10.22 to the Registrant's Annual
Documents Report on Form 10-K for the Year Ended
October 31, 2001
10.23 Form of Promissory Note from DW Leasing Company, LLC, to Incorporated by reference to Exhibit
Former Shareholders of Pyramid Coach, Inc., Related 10.23 to the Registrant's Annual
Security Agreement, and Schedule Identifying Material Report on Form 10-K for the Year Ended
Details October 31, 2001
10.24 Form of Promissory Note from DW Leasing Company, LLC to Incorporated by reference to Exhibit
Star Financial Bank, Related Documents and Schedule 10.24 to the Registrant's Annual
Identifying Material Details Report on Form 10-K for the Year Ended
October 31, 2001
10.25 Form of Lock-Up Agreement, dated July 19, 2001, and Incorporated by reference to Exhibit
Schedule Identifying Material Details 10.25 to the Registrant's Annual
Report on Form 10-K for the Year Ended
October 31, 2001
10.26 Master Lease Agreement, dated May 17, 2000, between Old Incorporated by reference to Exhibit
National Bank and DW Leasing Company, LLC, and Related 10.26 to the Registrant's Annual
Documents Report on Form 10-K for the Year Ended
October 31, 2001
10.27 Loan Agreement, dated June 1, 2000, between DW Leasing Incorporated by reference to Exhibit
Company LLC and Regions Bank and Security Agreement 10.27 to the Registrant's Annual
Report on Form 10-K for the Year Ended
October 31, 2001
10.28 Business Loan Agreement (Asset Based), dated August 15, Incorporated by reference to Exhibit
2001, between Danzer Industries, Inc. and Bank of America, 10.28 to the Registrant's Annual
N.A. Report on Form 10-K for the Year Ended
October 31, 2001
10.29 1999 Stock Option Plan* Incorporated by reference to Exhibit
10.29 to the Registrant's Annual
Report on Form 10-K for the Year Ended
October 31, 2001
10.30 Amendment to Acquisition Agreement and Plan of Incorporated by reference to Exhibit
Reorganization, dated December 28, 2001, between 10.30 to the Registrant's Annual
Registrant and Obsidian Leasing Company, Inc. Report on Form 10-K for the Year Ended
October 31, 2001
10.31 Agreement and Plan of Reorganization and Corporate Incorporated by reference to Exhibit
Separation, dated December 28, 2001, between DW Leasing 10.31 to the Registrant's Annual
LLC and Obsidian Leasing Company, Inc. Report on Form 10-K for the Year Ended
October 31, 2001
10.32 Assignment and Assumption Agreement, dated February 19, Incorporated by reference to Exhibit
2002, between Champion Trailer, Inc. and DW Leasing, LLC 10.1 to the Registrant's Quarterly
Report on Form 10-Q for the Quarter
Ended April 30, 2002
10.33 Assignment and Assumption Agreement, dated February 20, Incorporated by reference to Exhibit
2002, between DW Leasing, LLC and Fair Holdings, Inc. 10.2 to the Registrant's Quarterly
Report on Form 10-Q for the Quarter
Ended April 30, 2002
10.34 Agreement to Purchase Subordinated Secured Promissory Note Incorporated by reference to Exhibit
and Supply and Consignment Agreement, dated February 26, 10.3 to the Registrant's Quarterly
2002, among SerVaas, Inc., the Beurt SerVaas Revocable Report on Form 10-Q for the Quarter
Trust, U.S. Rubber Reclaiming, Inc., Obsidian Enterprises, Ended April 30, 2002
Inc. and DC Investments, LLC
10.35 Replacement Promissory Note, dated February 26, 2002, from Attached+
Obsidian Enterprises, Inc. to Fair Holdings, Inc. in the
principal amount of $700,000 due March 1, 2007
10.36 Promissory Note from Obsidian Enterprises, Inc. in favor Incorporated by reference to Exhibit
of Fair Holdings, Inc. in the principal amount of $570,000 10.5 to the Registrant's Quarterly
due February 1, 2007 Report on Form 10-Q for the Quarter
Ended April 30, 2002
10.37 Subscription Agreement of Fair Holdings, Inc. for 186,324 Incorporated by reference to Exhibit
shares of Series C Preferred Stock 10.6 to the Registrant's Quarterly
Report on Form 10-Q for the Quarter
Ended April 30, 2002
10.38 Subscription Agreement of Obsidian Capital Partners, LP Incorporated by reference to Exhibit
for 402,906 shares of Series C Preferred Stock 10.7 to the Registrant's Quarterly
Report on Form 10-Q for the Quarter
Ended April 30, 2002
10.39 Second Amendment to Credit Agreement, dated August 28, Incorporated by reference to Exhibit
2002, between United Expressline, Inc. and First Indiana 10.1 to the Registrant's Quarterly
Bank, N.A. Report on Form 10-Q filed for the
Quarter Ended July 31, 2002
10.40 Promissory Note, dated January 17, 2002, from DW Leasing Attached+
Company, LLC, to Fair Holdings, Inc.
10.41 Promissory Note, dated September 3, 2002, from Obsidian Attached+
Enterprises, Inc., to Fair Holdings, Inc.
10.42 Promissory Note, dated January 9, 2002, from Obsidian Attached
Enterprises, Inc. to Fair Holdings, Inc.
10.43 Credit Agreement, dated October 31, 2002, between Obsidian Attached+
Leasing Company, Inc. and Old National Bank, N.A. and
Related Documents
10.44 Stock Purchase Agreement, dated July 27, 2001, between Incorporated by reference to Exhibit A
Danzer Corporation and The Huntington Capital Investment to the Schedule 13G filed by The
Company.
10.45 Loan Agreement, dated September 24, 2002, between Edgar Attached+
County Bank & Trust Co. and Obsidian Leasing Company, Inc.
10.46 Term Promissory Note, dated September 26, 2002, from Attached+
Obsidian Leasing Company, Inc. to Fair Holdings, Inc.
10.47 Note Purchase Agreement, dated July 27, 2001, between Attached+
United Acquisition, Inc. and The Huntington Capital
Investment Company.
10.48 Limited Forbearance Agreement, dated October 14, 2002, Attached+
among Danzer Industries, Inc., Obsidian Enterprises, Inc.
and Bank of America, N.A.
10.49 Revolving Credit, Term Loan and Security Agreement, dated Attached+
October 25, 2002, between PNC Bank, N.A. and U.S. Rubber
Reclaiming, Inc. and Related Documents
10.50 Term Promissory Note, dated October 31, 2002, from DW Attached+
Leasing Company, LLC to Fair Holdings, Inc.
10.51 Rental Agreement, dated October 1, 2002, between DW Attached+
Trailer, LLC and Danzer Industries, Inc.
10.52 Commercial Equipment Lease Agreement, dated August 1, Attached+
2002, between Fair Holdings, Inc. and Danzer Industries,
Inc.
10.53 Commercial Equipment Lease Agreement, dated August 1, Attached+
2002, between Fair Holdings, Inc. and Obsidian
Enterprises, Inc.
21 List of Subsidiaries Attached+
31.1 Sarbanes-Oxley Act Section 302 Certification Attached
31.2 Sarbanes-Oxley Act Section 302 Certification Attached
32.1 Sarbanes-Oxley Act Section 906 Certification Attached
32.2 Sarbanes-Oxley Act Section 906 Certification Attached
* Indicates Exhibits that describe or evidence management contracts or
compensatory plans or arrangements required to be filed as Exhibits to this
Annual Report on Form 10-K.
+ Previously filed.
APPENDIX E
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 three months ended July 31, 2003
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
OBSIDIAN ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Delaware 35-2154335
(State of other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
111 Monument Circle, Suite 4800
Indianapolis, Indiana 46204
(Address of principal executive offices) (Zip Code)
(317) 237-4122
(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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES NO X
------ --------
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, 2003
36,007,855 shares
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION:
Item 1 - Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets - July 31, 2003 and October 31, 2002
Condensed Consolidated Statements of Operations
Three Months and Nine Months Ended July 31, 2003 and 2002
Condensed Consolidated Statement of Changes of Stockholders' Deficit
And Comprehensive Loss
Condensed Consolidated Statements of Cash Flows
Nine Months Ended July 31, 2003 and 2002
Notes to Condensed Consolidated Financial Statements
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
Item 4 - Controls and Procedures
PART II - OTHER INFORMATION:
Item 1 - Legal Proceedings
Item 2 - Changes in Securities and Use of Proceeds
Item 3 - Defaults Upon Senior Securities
Item 4 - Submission of Matters to a Vote of Security Holders
Item 5 - Other Information
Item 6 - Exhibits and Reports on Form 8-K
PART I--FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
July 31, October 31,
2003 2002
----------------------------------
Assets
Current assets:
Cash and cash equivalents $ 329 $ 920
Marketable securities 80 137
Accounts receivable, net of allowance for doubtful
accounts of $492 for 2003 and $495 for 2002 4,597 3,307
Accounts receivable, related parties 229 206
Inventories, net 7,692 7,315
Prepaid expenses and other assets 903 1,049
----------------------------------
Total current assets 13,830 12,934
Property, plant and equipment, net 24,271 23,048
Other assets:
Goodwill 6,434 6,434
Other intangible assets, net of accumulated amortization of $787 for 2003 and
$555 for 2002 1,562 1,853
Other 28 116
Assets of subsidiary held for sale -- 1,538
----------------------------------
$ 46,125 $ 45,923
==================================
The accompanying notes are an integral part of the condensed consolidated financial statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
July 31, October 31,
2003 2002
----------------------------------
Liabilities and Stockholders' Deficit
Current liabilities:
Current portion of long-term debt $ 6,889 $ 5,667
Current portion of long-term debt, related parties 73 --
Accounts payable, trade 2,398 3,450
Accounts payable, related parties 805 668
Accrued expenses and customer deposits 2,473 1,558
----------------------------------
Total current liabilities 12,638 11,343
Long-term debt, related parties 13,107 5,518
Long-term debt, net of current portion 20,155 23,879
Deferred income tax liabilities 599 1,624
Liabilities of subsidiary held for sale -- 2,848
Commitments and contingencies -- --
Mandatory redeemable preferred stock:
Class of Series C Preferred Stock: 386,206 shares outstanding for
2003 and 2002 1,125 1,400
Class of Series D Preferred Stock: 16,071 shares outstanding for 2003 337 --
Stockholders' deficit:
Common stock, par value $.0001 per share; 40,000,000 shares authorized,
36,007,855 shares outstanding 3 3
Preferred stock, 5,000,000 shares authorized; Class of Series C convertible
preferred stock, par value $.001, 4,600,000 authorized, 3,982,193 issued and
outstanding for 2003 and 2002, 200,000 shares of undesignated preferred stock
authorized 5 5
Preferred stock, 200,000 shares authorized; Class of Series D convertible
preferred stock, par value $.001, 104,402 and 88,330 shares issued and
outstanding in 2003 and 2002, respectively -- --
Additional paid-in capital 11,873 10,184
Accumulated other comprehensive loss (106) (49)
Accumulated deficit (13,611) (10,832)
----------------------------------
Total stockholders' deficit (1,836) (689)
----------------------------------
$ 46,125 $ 45,923
==================================
The accompanying notes are an integral part of the condensed consolidated financial statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share and share data)
(unaudited)
Three Months Ended Nine Months Ended
-------------------------------------------------------------------------
July 31, 2003 July 31, 2002 July 31, 2003 July 31, 2002
-------------------------------------------------------------------------
Net sales $ 16,795 $ 15,239 $ 42,802 $ 42,302
Cost of sales 14,390 12,400 37,445 35,320
-------------------------------------------------------------------------
Gross profit 2,405 2,839 5,357 6,982
Selling, general and administrative expenses 1,976 1,855 6,229 6,118
Insurance recovery -- (325) -- (325)
-------------------------------------------------------------------------
Income (loss) from operations 429 1,309 (872) 1,189
Other income (expense):
Interest expense, net (889) (839) (2,577) (2,616)
Other income (expense) (59) 1 (52) (32)
-------------------------------------------------------------------------
Income (loss) before income taxes,
discontinued operations and cumulative
effect of change in accounting principle (519) 471 (3,501) (1,459)
Income tax benefit 212 -- 771 155
-------------------------------------------------------------------------
Income (loss) before discontinued
operations and cumulative effect of change
in accounting principle (307) 471 (2,730) (1,304)
Loss from discontinued operations, net of
tax -- (364) (49) (1,085)
-------------------------------------------------------------------------
Income (loss) before cumulative effect of
change in accounting principle (307) 107 (2,779) (2,389)
Cumulative effect of change in accounting
principle -- -- -- (2,015)
-------------------------------------------------------------------------
Net income (loss) $ (307) $ 107 $ (2,779) $ (4,404)
=========================================================================
The accompanying notes are an integral part of the condensed consolidated financial statements.
Three Months Ended Nine Months Ended
------------------------------------------------------------------------
July 31, 2003 July 31, 2002 July 31, 2003 July 31, 2002
------------------------------------------------------------------------
Basic and diluted income (loss) per share attributable to common shareholders:
From continuing operations:
Basic $ .00 $ .01 $ (.07) $ (.03)
========================================================================
Diluted $ .00 $ .00 $ (.07) $ (.03)
========================================================================
Discontinued operations, net of tax:
Basic $ .00 $ (.01) $ (.00) $ (.03)
========================================================================
Diluted $ .00 $ (.00) $ (.00) $ (.03)
========================================================================
Cumulative effect of change in accounting principle:
Basic $ .00 $ .00 $ .00 $ (.05)
========================================================================
Diluted $ .00 $ .00 $ .00 $ (.05)
========================================================================
Net income (loss):
Basic $ .00 $ .00 $ (.07) $ (.11)
========================================================================
Diluted $ .00 $ .00 $ (.07) $ (.11)
========================================================================
Weighted average common shares outstanding:
Basic 36,007,855 36,007,855 36,007,855 36,007,855
========================================================================
Diluted 149,915,726 128,701,226 36,007,855 36,007,855
========================================================================
The accompanying notes are an integral part of the condensed consolidated financial statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT AND COMPREHENSIVE LOSS
(dollars in thousands)
(unaudited)
Series C Series D Accumu-
Convertible Convertible lated
Preferred Preferred Addi- Other
Common Stock Stock Stock tional Compre- Accumu-
Comprehensive --------------------------------------------------- Paid-in hensive lated
Loss Shares Amount Shares Amount Shares Amount Capital Loss Deficit Total
-----------------------------------------------------------------------------------------------------
Balance at October 31, 2002 $ -- 36,007,855 $3 4,368,399 $ 5 88,330 $-- $10,184 $ (49) $(10,832) $ (689)
Contribution to capital from
sale of Champion to related
party -- -- -- -- -- -- -- 1,142 -- -- 1,142
Fair value adjustment on
redeemable preferred stock -- -- -- -- -- -- -- 275 -- -- 275
Tax effect of sale of coaches
to DC Investments Leasing, LLC -- -- -- -- -- -- -- (96) -- -- (96)
Extension of stock options -- -- -- -- -- -- -- 30 -- -- 30
Issuance of mandatory
redeemable preferred stock -- -- -- -- -- 32,143 -- -- -- -- --
Assignment of Mandatory
redeemable preferred stock -- -- -- -- -- -- 338 -- -- 338
Unrealized loss on
available-for-sale marketable
securities (57) -- -- -- -- -- -- -- (57) -- (57)
Net loss (2,779) -- -- -- -- -- -- -- -- (2,779) (2,779)
----------------------------------------------------------------------------------------------------
Total comprehensive loss $(2,836)
===========
Balance at July 31, 2003 36,007,855 $3 4,368,399 $ 5 120,473 $-- $11,873 $(106) $(13,611) $(1,836)
=======================================================================================
The accompanying notes are an integral part of the condensed consolidated financial statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
-------------------------------
July 31, 2003 July 31, 2002
-------------------------------
Cash flow from operating activities:
Loss from continuing operations $ (2,730) $ (3,319)
Adjustments to reconcile loss from continuing operations to net cash provided by
(used in) operating activities:
Depreciation and amortization 2,232 1,907
Goodwill impairment loss -- 2,015
Other (538) (349)
Changes in operating assets and liabilities:
Accounts receivable, net (1,289) (1,317)
Inventories, net (376) (498)
Other, net (252) 1,451
-------------------------------
Net cash used in operating activities (2,953) (110)
-------------------------------
Cash flows from investing activities:
Capital expenditures (560) (575)
Other 23 16
-------------------------------
Net cash used in investing activities (537) (559)
-------------------------------
Cash flows from financing activities:
Advances from (repayments to) related parties, net (1,414) 272
Net borrowings on lines of credit 1,907 1,143
Borrowings (repayments) on long-term debt, including related parties 2,447 (822)
-------------------------------
-------------------------------
Net cash provided by financing activities 2,940 593
Net cash provided by (used in) discontinued operations (41) 6
-------------------------------
-------------------------------
Decrease in cash and cash equivalents (591) (70)
Cash and cash equivalents, beginning of period 920 529
-------------------------------
Cash and cash equivalents, end of period $ 329 $ 459
===============================
Interest paid $ 2,577 $ 2,389
===============================
Taxes paid $ 63 $ --
===============================
The accompanying notes are an integral part of the condensed consolidated financial statements.
Nine Months Ended
-------------------------------
July 31, 2003 July 31, 2002
-------------------------------
Supplemental disclosure of noncash operating, investing and financing
activities:
Acquisition of coaches and equipment through issuance of debt $ 2,304 $ --
Contribution to capital from sale of Champion to related party $ 1,142 $ --
Issuance of mandatory redeemable preferred stock in conjunction with the sale
of Champion $ 338 $ --
Assignment and assumption of mandatory redeemable preferred stock to Fair
Holdings $ 675 $ --
Tax effect of sale of coaches to a related party $ 96 $ --
Fair value change on mandatory redeemable preferred stock $ 275 $ 341
Reclassification of debt due to assumption of credit agreement by Fair Holdings $ 1,488 $ --
Conversion of debt to preferred stock and additional paid-in capital $ -- $ 3,348
Conversion of accounts payable, related parties to debt $ -- $ 1,295
Purchase price adjustment and conversion of accounts payable to debt for United $ -- $ 294
The accompanying notes are an integral part of the condensed consolidated financial statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per-share data)
(unaudited)
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Description of Business:
Obsidian Enterprises, Inc. ("Obsidian Enterprises"), formerly Danzer
Corporation, was reorganized (the "Reorganization") 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 Acquisition and Plan of Reorganization of Obsidian
Enterprises with U.S. Rubber Companies was accounted for as a reverse
acquisition as the shareholders of the U.S. Rubber Companies owned a majority of
the outstanding stock of Obsidian Enterprises subsequent to the Acquisition and
Plan of Reorganization. For accounting purposes, U.S. Rubber Reclaiming, Inc. is
deemed to have acquired Obsidian Enterprises.
Pursuant to the Plan of Acquisition and Reorganization, United Expressline, Inc.
was acquired July 31, 2001.
The accompanying financial data as of July 31, 2003 and for the three and nine
months ended July 31, 2003 and 2002 has been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. The October 31,
2002 consolidated balance sheet was derived from audited financial statements,
but does not include all disclosures required by accounting principles generally
accepted in the United States of America. However, the Company believes that the
disclosures are adequate to make the information presented not misleading. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the period ended October 31, 2002. The
Company follows the same accounting policies in preparation of interim reports.
In the opinion of management, all adjustments (which include normal recurring
adjustments except as disclosed herein) necessary to present a fair statement of
financial position as of July 31, 2003, results of operations for the three and
nine months ended July 31, 2003 and cash flows and stockholders' deficit for the
nine months ended July 31, 2003 have been made. The results of operations for
the three and nine months ended July 31, 2003 are not necessarily indicative of
the operating results for the full fiscal year or any future periods.
The entities resulting from the merger described above, considered accounting
subsidiaries of U.S. Rubber Reclaiming, Inc. (the accounting acquirer) and legal
subsidiaries of Obsidian Enterprises, Inc. (formerly 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.
Obsidian Enterprises, Inc. (formerly Danzer, the legal acquirer), a holding
company.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per-share data)
(unaudited)
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
Danzer Industries, Inc. ("Danzer Industries"), which is principally engaged in
the design, manufacture and sale of truck bodies and cargo trailers.
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 coach leasing
segment also includes the assets, liabilities, equity and results of operations
of DW Leasing, LLC ("DW Leasing"), Obsidian Leasing Company, Inc. ("Obsidian
Leasing"), formed November 1, 2001 and DC Investments Leasing, LLC ("DC
Investments Leasing), formed December 13, 2002. DW Leasing and DC Investments
Leasing are controlled by individuals who are also controlling shareholders of
Obsidian Enterprises, Inc. and, accordingly, Pyramid. DW Leasing, Obsidian
Leasing and DC Investments Leasing also own the majority of the coaches operated
by Pyramid. All intercompany transactions are eliminated in consolidation.
United Expressline, Inc. ("United") manufactures and sells general use cargo
trailers and specialty trailers used in the racing industry and for other
special purposes.
Champion Trailer, Inc. ("Champion") manufactures and sells transport trailers to
be used primarily in the auto racing industry. During October 2002, the
Company's Board of Directors agreed to a plan to dispose of substantially all
assets and liabilities of Champion as further discussed in Note 3. The sale of
Champion was completed January 30, 2003. Accordingly, the operations of Champion
are classified as discontinued operations in the accompanying financial
statements.
Basis of Presentation:
Over the past year, the Company has undertaken various actions to improve its
operations and liquidity. Such actions include the sale of Champion described in
Note 3, as well as conversion of debt to equity and refinancing of certain of
its debt agreements as described in detail in the Company's 10-K for the year
ended October 31, 2002. Management believes that the Company has financing
agreements in place to provide adequate liquidity and working capital throughout
fiscal 2003. However, there can be no assurance that such working capital and
liquidity will in fact be adequate. Therefore, the Company may be required to
draw upon other liquidity sources. The Company has therefore secured an
increased financial commitment from Fair Holdings, Inc. ("Fair Holdings"), an
entity controlled by the Company's Chairman, to provide, as needed, additional
borrowings under a $8,000 line of credit agreement, which expires January 9,
2005. As of July 31, 2003, availability under the agreement is approximately
$2,480.
The Company incurred a net loss for the year ended October 31, 2002 of $6,330,
which included an asset impairment charge of $720, cumulative effect of change
in accounting principle of $2,015 and a loss from discontinued operations of
$1,040. In addition, the Company incurred a loss from continuing operations of
$307 and $2,730 for the three and nine months ended July 31, 2003, respectively.
Several of the Company's subsidiaries were acquired in highly leveraged
transactions and this factor combined with the loss has contributed to its
failure to meet certain financial covenants required by two of its lenders. As
of July 31, 2003, the lenders have waived all covenant violations.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per-share data)
(unaudited)
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
In view of these matters realization of assets and satisfaction of liabilities
in the ordinary course of business is dependent on the Company's ability to
generate sufficient cash flow to satisfy its obligations on a timely basis,
maintain compliance with its financing agreements and continue to receive
financing support from Fair Holdings to provide liquidity if needed.
Management, as a part of its plan towards resolving these issues and generating
positive cash flow and earnings, has taken the actions as described in the
Company's 10-K for the year ended October 31, 2002 as well as the actions
described below during the nine months ended July 31, 2003.
o During 2002, the Board of Directors authorized the Chairman of the
Board to explore various options regarding the operations at Champion.
Options included divestiture, restructuring of operations or closing
the facility. It was determined in the best interests of the Company
to sell Champion. On January 30, 2003, the Company completed the sale
of substantially all assets of Champion to an entity owned by Messrs.
Durham and Whitesell, Chairman and President of the Company,
respectively. The sale resulted in an increase in equity of $1,142 as
further described in Note 3.
o During December 2002, the Company sold certain coaches of Obsidian
Leasing to DC Investments Leasing for assumption of the existing debt.
DC Investments Leasing then refinanced this debt at terms more
favorable than the previous terms.
o On April 1, 2003, the Company obtained an increase in its available
line of credit with Fair Holdings to $8,000.
o On January 3, 2003, Obsidian Leasing refinanced debt due to former
shareholders in the amount of $928 with Fair Holdings at terms further
described in Note 4.
o During January 2003, United and U.S. Rubber obtained modifications to
provide less stringent requirements on certain financial covenants
with their respective lenders.
o On March 28, 2003, Fair Holdings acquired the line of credit and term
debt due to the senior lender of Danzer in the amount of $1,488 under
an assignment and assumption agreement. The maturity date of the line
of credit included in the assignment and assumption agreement was
extended to April 2006, and the debt covenants required by the senior
lender were waived through the end of the term. All other terms of the
assumed notes remain the same.
o During March 2003, United completed a compensation review and update
and provided a revised pay scale which realigns the Company with its
industry and reduces compensation costs. United also continues to
develop its new production facility to increase productivity and plant
efficiency.
o During 2003, U.S. Rubber has continued to consolidate its butyl
reclaiming operations from two plants to one to maximize production
and efficiently utilize equipment. The consolidation has caused some
pieces of equipment to be temporarily idle until the Company completes
its implementation of a new production process for "fine grind
rubber". Existing and new equipment will be required to complete the
"fine grind" production line. The new process will maximize the use of
the existing raw materials in the Company's existing butyl reclaim
production and also provide additional products of natural rubber.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per-share data)
(unaudited)
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
The above factors combined with additional actions by management at the
operating subsidiaries are expected to contribute to an increase in the
Company's working capital and liquidity.
Although management believes the actions described above will improve operations
and liquidity, there can be no assurance that such actions will sufficiently
improve operations or liquidity. In addition, management is continuing to
explore various opportunities to refinance the current outstanding debt.
Significant Accounting Policies:
Earnings Per Share:
Basic per-share amounts are computed, generally, by dividing net income or loss
attributable to common shareholders by the weighted-average number of common
shares outstanding. Diluted per-share amounts are computed similar to basic
per-share amounts except that the weighted-average shares outstanding are
increased to include additional shares for the assumed conversion of Company's
Series C and Series D Preferred Stock and assumed exercise of stock options and
warrants, if dilutive.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per-share data)
(unaudited)
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
Basic and diluted earnings (loss) per share have been computed as follows:
Three Months Ended Nine Months Ended
-------------------------------------- -------------------------------------
July 31, 2003 July 31, 2002 July 31, 2003 July 31, 2002
------------------ ------------------- ------------------ ------------------
Income (loss) before discontinued
operations and cumulative effect of
change in accounting principle $ (307) $ 471 $ (2,730) $ (1,304)
Change in fair value of mandatory
redeemable preferred stock 411 (82) 275 341
------------------ ------------------- ------------------ ------------------
Income (loss) attributable to common
shareholders before discontinued
operations and cumulative effect of
change in accounting principle 104 389 (2,455) (963)
Loss from discontinued operations, net
of tax -- (364) (49) (1,085)
Cumulative effect of change in
accounting principle -- -- -- (2,015)
------------------ ------------------- ------------------ ------------------
Net income (loss) attributable to
common shareholders $ 10-4 $ 25 $ (2,504) $ (4,063)
================== =================== ================== ==================
Weighted average common shares outstanding:
Basic 36,007,855 36,007,855 36,007,855 36,007,855
================== =================== ================== ==================
Diluted 149,915,726 128,701,226 36,007,855 36,007,855
================== =================== ================== ==================
Earnings (loss) per share attributable
to common shareholders:
From continuing operations:
Basic $ .00 $ .01 $ (.07) $ (.03)
Diluted .00 .01 (.07) (.03)
Discontinued operations, net of tax:
Basic .00 (.01) (.00) (.03)
Diluted .00 (.00) (.00) (.03)
------------------ ------------------- ------------------ ------------------
Cumulative effect of change in
accounting principle:
------------------ ------------------- ------------------ ------------------
Basic .00 .00 .00 (.05)
Diluted .00 .00 .00 (.05)
------------------ ------------------- ------------------ ------------------
Net income (loss):
Basic $ .00 $ .00 $ (.07) $ (0.11)
================== =================== ================== ==================
Diluted $ .00 $ .00 $ (.07) $ (0.11)
================== =================== ================== ==================
The Company's Series C Preferred Stock and Series D Preferred Stock, which have
all the rights and privileges of the Company's common stock, are convertible at
rates of 20 to 1 and 175 to 1, respectively. The inclusion of these potential
common shares in the calculation of loss per share would have an antidilutive
effect. However, pursuant to the Acquisition Agreement and Plan of
Reorganization entered into in connection with the Reorganization, these shares
will be converted to common stock immediately upon approval by the stockholders.
Accordingly, we are presenting the following pro forma information to indicate
the effect on earnings per share had such shares been converted to common shares
for the periods presented.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per-share data)
(unaudited)
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
Pro forma basic and diluted loss per share have been computed below as if the
Series C and Series D Preferred Stock were converted to common stock. For the
three and nine months ended July 31, 2003, the Series C Preferred Stock has been
reflected on a weighted average basis outstanding as common shares of
87,367,980. For the three and nine months ended July 31, 2002, the Series C
Preferred Stock has been reflected on a weighted average basis outstanding as
common shares of 87,167,980 and 79,111,259, respectively. The Series D Preferred
Stock has been reflected on a weighted average basis outstanding as common
shares of 21,082,775 and 19,283,594 for the three and nine months ended July 31,
2003, respectively. There were no Series D Preferred Stock shares issued or
outstanding during the three and nine months ended July 31, 2002.
Three Months Ended Nine Months Ended
--------------------------------------- --------------------------------------
July 31, 2003 July 31, 2002 July 31, 2003 July 31, 2002
------------------- ------------------- ------------------ -------------------
Pro forma weighted average common shares outstanding:
Basic 144,458,610 123,175,835 142,659,429 115,119,114
Diluted 149,915,726 128,701,226 142,659,429 115,119,114
Pro forma basic and diluted income (loss) per share, attributable to common
shareholders:
From continuing operations:
Basic $ .00 $ .00 $ (.02) $ (.01)
=================== =================== ================== ===================
Diluted $ .00 $ .00 $ (.02) $ (.01)
=================== =================== ================== ===================
Discontinued operations, net of tax:
Basic $ .00 $ (.00) $ (.00) $ (.01)
=================== =================== ================== ===================
Diluted $ .00 $ (.00) $ (.00) $ (.01)
=================== =================== ================== ===================
Cumulative effect of change in accounting principle:
Basic $ .00 $ .00 $ .00 $ (.02)
=================== =================== ================== ===================
Diluted $ .00 $ .00 $ .00 $ (.02)
=================== =================== ================== ===================
Net income (loss):
Basic $ .00 $ .00 $ (.02) $ (.04)
=================== =================== ================== ===================
Diluted $ .00 $ .00 $ (.02) $ (.04)
=================== =================== ================== ===================
The pro forma net income (loss) per share is presented for informational
purposes only and is not indicative of the weighted average common shares
outstanding or net income (loss) per share presented in accordance with
accounting principles generally accepted in the United States of America.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per-share data)
(unaudited)
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
The Company has a note payable agreement which is convertible by the holder to
common stock totaling 5,000,000 shares at a conversion rate of $0.10 per share.
In addition, the Company has options outstanding to purchase a total of 800,000
shares of common stock, at a weighted average exercise price of $.09. These
additional shares have been included in the calculation of weighted average
common shares outstanding on a diluted basis for the three-month periods ended
July 31, 2003 and 2002, respectively. However, because the Company incurred a
loss for the nine months ended July 31, 2003 and 2002, respectively, the
inclusion of those potential common shares in the calculation of diluted loss
per share would have an antidilutive effect.
Asset Impairment
The Company's truck body division at Danzer continues to negatively impact the
Company's cash flows. The trailer production line was put in place in the fourth
quarter of 2002 to support the production needs at United and also provide a new
product line to the existing customers of Danzer and open a potential new market
along the East coast of the U.S. Given the current state of the
telecommunications industry and economic conditions, management will continue to
evaluate the operations and progress with the implementation of the trailer
production. Management also expects to make a decision to continue or
discontinue operations by the end of fiscal 2003. In conjunction with the
analysis of the Danzer operations, we are also analyzing the potential for asset
impairment at the Danzer operation. Total assets of Danzer as of July 31, 2003
were $3,395, which consists of $1,396 of current assets and $1,999 of net
property and equipment, and represents approximately 7% of total consolidated
assets.
Recently Issued Pronouncements:
In January 2003, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 46 (FIN No. 46), Consolidation of Variable Interest Entities,
an interpretation of Accounting Research Bulletin No., 51. This Interpretation
addresses the application of Accounting Research Bulletin No. 51, Consolidated
Financial Statements, to certain entities in which equity investors do not have
the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. The Interpretation
applies immediately to variable interest entities created after January 31,
2003, and to variable interest entities in which an enterprise obtains an
interest after that date. It applies in the first interim period beginning after
June 15, 2003, to variable interest entities in which an entity holds a variable
interest that it acquired prior to February 1, 2003. DW Leasing and DCI Leasing,
which are included in the Company's consolidated financial statements, may be
subject to the provisions of FIN No. 46. However, management does not expect the
adoption of FIN No. 46 to have a material impact on the Company's financial
position, results of operations, cash flows, or its debt covenants as these
entities have generated negative operating results in the past and the current
operating model does not anticipate income in excess of losses previously
recognized in the consolidated financial statements. Should future operating
results exceed expectations, income generated by these entities in excess of
previously recognized losses would be charged to minority interest in the
consolidated statement of operations and recognized as minority interest on the
consolidated balance sheet.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure. SFAS 148 amends FASB Statement No. 123
(SFAS 123), Accounting for Stock-Based Compensation, to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS 148 amends
the disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The transition guidance and annual disclosure provisions of SFAS 148
are effective for fiscal years ending after December 15, 2002. The interim
disclosure provisions are effective for financial reports containing financial
statements for interim periods beginning after December 15, 2002. The Company
plans to continue accounting for stock options under Accounting Principles
Bulletin Opinion No. 25, Accounting for Stock Issued to Employees, (APB No. 25)
and has adopted the disclosure provisions of SFAS 148.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, which amends SFAS No. 133. This
statement amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under FASB Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities. This statement is effective
for contracts entered into or modified after June 30, 2003. We do not anticipate
that the adoption of this statement will have a significant impact on our
financial statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per-share data)
(unaudited)
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. The standard
further defines the accounting for certain financial instruments that, under
previous guidance, issuers could account for as equity or report between the
liability and equity section of the balance sheet. The standard requires that
those instruments be classified as liabilities in statements of financial
position. This standard is effective for interim periods beginning after June
15, 2003. We believe the adoption of this standard will result in mandatory
redeemable preferred stock currently reported on our balance sheet between
equity and liabilities being reclassified as a liability. We do not expect the
adoption of SFAS No. 150 to have a material impact on the Company's results of
operations, cash flows, or its debt covenants.
2. INVENTORIES
Inventories are stated at the lower-of-cost (first-in, first-out method) or
market and are comprised of the following components:
July 31, October 31,
2003 2002
------------------ -------------------
Raw materials $ 4,819 $ 3,655
Work-in-process 618 709
Finished goods 2,614 3,417
Valuation reserve (359) (466)
------------------ -------------------
Total $ 7,692 $ 7,315
================== ===================
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per-share data)
(unaudited)
3. DISCONTINUED OPERATIONS
On October 30, 2002, the Company's Board of Directors agreed to sell the assets
of Champion to an entity controlled by Messrs. Durham and Whitesell (Officers of
the Company) for the assumption of all liabilities of Champion excluding its
subordinated debt. The decision to divest Champion was based on the entity's
inability to achieve profitable operations in the foreseeable future without
substantial cash infusion. The Company also agreed in principal to settle the
outstanding subordinated debt due to Markpoint Equity Fund J.V. ("Markpoint")
from Champion in exchange for a cash payment of $675 and issuance to the debt
holder of 32,143 shares of the Company's Series D Preferred Stock. In addition,
the agreement provides Markpoint the option to require the Company to repurchase
these shares at a price of $21 per share. The sale of Champion was completed on
January 30, 2003. Champion is accounted for as a discontinued operation and
therefore the results of operations and cash flows have been removed from the
Company's continuing operations for all periods presented. In addition, assets
and liabilities of Champion included in the sale have been removed from the
consolidated balance sheet as of July 31, 2003 and are included in the
consolidated balance sheet as of October 31, 2002 as "Assets of subsidiary held
for sale" and "Liabilities of subsidiary held for sale," respectively.
The sale of Champion resulted in an increase in equity of the Company of $1,142,
net of tax of $97. No gain or loss was recognized on the sale because of the
involvement of related parties.
A summary of the Company's discontinued operations for the three and nine months
ended July 31, 2003 and 2002 are as follows:
Three Months Ended Nine Months Ended
-------------------------------------- -------------------------------------
July 31, 2003 July 31, 2002 July 31, 2003 July 31, 2002
------------------ ------------------- ------------------ ------------------
Net sales $ -- $ 236 $ 170 $ 2,629
Operating expenses -- (530) (286) (3,501)
Interest -- (70) (85) (213)
Other -- -- 127 --
Tax benefit -- -- 25 --
------------------ ------------------- ------------------ ------------------
Net loss $ -- $ (364) $ (49) $ (1,085)
================== =================== ================== ==================
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per-share data)
(unaudited)
3. DISCONTINUED OPERATIONS, CONTINUED
A summary of assets and liabilities of Champion held for sale at October 31,
2002 are as follows:
October 31, 2002
---------------------
Inventories $ 551
Other current assets 177
Property and equipment, net 715
Other 95
---------------------
$ 1,538
=====================
Accounts payable and accrued expenses $ 709
Customer deposits 313
Long-term debt, related parties 1,826
---------------------
$ 2,848
=====================
4. FINANCING ARRANGEMENTS
Obsidian Leasing:
On January 3, 2003, Obsidian Leasing refinanced debt in the amount of $928 to
former shareholders of Pyramid and related companies. Terms of the new note with
Fair Holdings include monthly interest payments of 13% of the outstanding
principal amount and a balloon principal payment in January 2006.
On December 17, 2002, Obsidian Leasing sold four coaches to DC Investments
Leasing in exchange for DC Investments Leasing's satisfaction of the debt
outstanding on such coaches. In addition, DC Investments Leasing also acquired
five additional coaches that were previously to be purchased by the Company
thereby eliminating the Company's existing purchase commitment for such coaches.
The Company refinanced the debt on the four coaches in addition to financing the
five additional coaches. DC Investments Leasing entered into an agreement with
First Indiana for $2,741 of the debt with interest payable at prime plus 1/2%
and a maturity of December 2007. DC Investments Leasing also incurred debt with
Fair Holdings for the remaining 20% of the net book value of the transferred and
new coaches. Terms of the debt with Fair Holdings include monthly interest
payments on the principal amount of $677 at 14% and a maturity of January 2008.
DC Investments Leasing also entered into a management agreement with Pyramid
under which all nine coaches described above will be leased by Pyramid.
United:
On December 26, 2002, United amended its credit agreement to provide additional
working capital during the winter months. The amendment included a "temporary
overline" line of credit with maximum borrowings not to exceed the lesser of
$650 or the remainder of the borrowing base less the outstanding principal
amount of the revolving line of credit. Interest is payable monthly at a rate of
prime plus 3/4%. The temporary overline line of credit matured on June 30, 2003.
The Company is currently in negotiations with its lender to convert the
temporary overline to additional availability under the current line of credit.
Should such an agreement not be reached, the line will be repaid from borrowings
under the Company's line of credit with Fair Holdings and from operating cash
flow.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per-share data)
(unaudited)
4. FINANCING ARRANGEMENTS, CONTINUED
United was in technical default of certain loan covenants with its subordinated
lender at July 31, 2003. United has obtained a waiver of the violations from the
lender.
Obsidian Enterprises:
On April 1, 2003, Obsidian Enterprises, Inc.'s line of credit with Fair Holdings
was amended. Maximum borrowings were increased from $5,000 to $8,000.
At October 31, 2002, the Company was in violation of negative covenants with
Renaissance US Growth & Income Trust PLC and FBSUS Special Opportunities Trust
PLC, the holders of debentures that completed the financing of United. During
January 2003, the Company received a waiver of the violations and obtained
modifications of terms with the debenture holders to provide for less stringent
covenants. In exchange for the waiver and modifications, the Company issued
warrants to the debenture holders to purchase up to 16,000 shares of the
Company's common stock at an exercise price of $.20 per share.
Danzer:
As of January 31, 2003, Danzer was in violation of certain covenants included in
its credit agreement and First Forbearance Agreement dated October 14, 2002 with
its senior lender. On February 28, 2003, the Company and the lender entered into
a Second Forbearance Agreement waiving these violations. On March 28, 2003, the
credit agreement was assumed by Fair Holdings under an assumption and
continuation agreement. An amendment was made as of the effective date of the
agreement to extend the maturity date of the line of credit agreement to April
1, 2006 and the debt covenants required by the senior lender were waived through
the end of the term. All other terms of the agreement will continue as stated in
the original agreement dated August 15, 2001.
5. MANDATORY REDEEMABLE PREFERRED STOCK
In conjunction with the sale of Champion discussed in Note 3, the Company agreed
to settle the outstanding subordinated debt due to Markpoint from Champion in
exchange for a cash payment of $675 and issuance to the debt holder of 32,143
shares of the Company's Series D Preferred Stock. The agreement provides
Markpoint the option to require the Company to repurchase these shares at a
price of $21 per share. The repurchase option is available to Markpoint as
follows: 16,072 shares during the period May 1, 2003 to June 1, 2003 and 16,071
shares during the period November 1, 2003 to December 1, 2003. On May 12, 2003,
under an Assignment Agreement, the Company transferred all rights, title and
interest in the Put Option to Fair Holdings. Markpoint exercised its option on
May 12, 2003 and was paid $338 by Fair Holdings. The exercise of the option
resulted in the reduction of the liability and an increase in additional paid in
capital of $338.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per-share data)
(unaudited)
6. STOCKHOLDERS' DEFICIT
Stock Options
The Company accounts for stock-based compensation under the provisions of APB
No. 25. The Company has adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. Accordingly, no compensation expense is
recognized if the exercise price of stock options equals the fair market value
of the underlying stock at the date of grant. Had compensation expense for the
Company's stock option plans been determined based on the fair value at the
grant date for awards consistent with the provisions of SFAS No. 123, the
Company's basic and diluted net income (loss) per share would have been as
follows:
Three Months Ended Nine Months Ended
-------------------------------------- -------------------------------------
July 31, 2003 July 31, 2002 July 31, 2003 July 31, 2002
------------------ ------------------- ------------------ ------------------
Net income (loss) as reported $ (307) $ 107 $ (2,779) $ (4,404)
Deduct total stock-based employee
compensation expense determined under
fair value methods -- -- -- --
------------------ ------------------- ------------------ ------------------
Pro forma net income (loss) (307) 107 (2,779) (4,404)
Income (loss) per share:
As reported:
Basic $ .00 $ .00 $ (.07) $ (.11)
Diluted $ .00 $ .00 $ (.07) $ (.11)
Pro forma:
Basic $ .00 $ .00 $ (.07) $ (.11)
Diluted $ .00 $ .00 $ (.07) $ (.11)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 2000 and 1999, respectively: risk-free interest
rates of 6.4 and 5.5 percent; dividend yield of 0 percent in both years;
expected lives of 5 years; and volatility of 978 and 170 percent. The estimated
weighted average fair value of options granted during 2000 and 1999 were $0.10
and $0.05 per share, respectively.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per-share data)
(unaudited)
7. BUSINESS SEGMENT DATA AND GEOGRAPHIC DATA
The Company operates in three industry segments comprised of trailer and related
transportation equipment manufacturing (trailer manufacturing); coach leasing;
and butyl rubber reclaiming. All sales are in North and South America primarily
in the United States, Canada and Brazil. Selected information by segment
follows:
Three Months Ended July 31, 2003
------------------------------------------------------------------------------
Trailer Manufacturing Coach Leasing Butyl Rubber Total
Reclaiming
------------------------------------------------------------------------------
Sales:
Domestic $ 10,402 $ 2,562 $ 2,338 $ 15,302
Foreign 1,132 -- 361 1,493
------------------------------------------------------------------------------
Total $ 11,534 $ 2,562 $ 2,699 $ 16,795
Cost of goods sold $ 10,378 $ 1,525 $ 2,487 $ 14,390
Income (loss) before taxes $ (427) $ 153 $ (141) $ (415)*
Identifiable assets $ 20,163 $ 14,167 $ 10,993 $ 45,323**
Depreciation and amortization expense $ 176 $ 281 $ 329 $ 786
Interest expense $ 357 $ 311 $ 117 $ 785***
*Identifiable income (loss) before taxes, as stated above $ (415)
Corporate-level loss before taxes, not identifiable with a specific segment (104)
--------------------
Total loss before taxes $ (519)
====================
**Identifiable assets, as stated above $ 45,323
Corporate-level intangibles 650
Other corporate-level assets 152
--------------------
Total assets $ 46,125
====================
***Identifiable interest expense, as stated above $ 785
Corporate-level interest expense, not identified with a specific segment 104
--------------------
Total interest expense $ 889
====================
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per-share data)
(unaudited)
7. BUSINESS SEGMENT DATA AND GEOGRAPHIC DATA, CONTINUED
Three Months Ended July 31, 2002
------------------------------------------------------------------------------
Trailer Coach Leasing Butyl Rubber Total
Manufacturing Reclaiming
------------------------------------------------------------------------------
Sales:
Domestic $ 10,475 $ 1,959 $ 2,672 $ 15,106
Foreign -- -- 133 133
------------------------------------------------------------------------------
Total $ 10,475 $ 1,959 $ 2,805 $ 15,239
Cost of goods sold $ 8,952 $ 997 $ 2,451 $ 12,400
Income before taxes $ 34 $ 163 $ 305 $ 502*
Identifiable assets $ 19,897 $ 12,670 $ 10,650 $ 43,217**
Depreciation and amortization expense $ 178 $ 169 $ 289 $ 636
Interest expense $ 321 $ 365 $ 122 $ 808***
*Identifiable income before taxes, as stated above $ 502
Corporate-level loss before taxes, not identifiable with a specific segment (31)
--------------------
Total income before taxes $ 471
====================
**Identifiable assets, as stated above $ 43,217
Corporate-level intangibles 650
--------------------
Total assets $ 43,867
***Identifiable interest expense, as stated above $ 808
Corporate-level interest expense, not identified with a specific segment 31
--------------------
Total interest expense $ 839
====================
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per-share data)
(unaudited)
7. BUSINESS SEGMENT DATA AND GEOGRAPHIC DATA, CONTINUED
Nine Months Ended July 31, 2003
------------------------------------------------------------------------------
Trailer Coach Leasing Butyl Rubber Total
Manufacturing Reclaiming
------------------------------------------------------------------------------
Sales:
Domestic $ 27,391 $ 5,082 $ 6,989 $ 39,462
Foreign 2,355 -- 985 3,340
------------------------------------------------------------------------------
Total $ 29,746 $ 5,082 $ 7,974 $ 42,802
Cost of goods sold $ 27,132 $ 2,879 $ 7,434 $ 37,445
Loss before taxes $ (2,317) $ (246) $ (669) $ (3,232)*
Identifiable assets $ 20,163 $ 14,167 $ 10,993 $ 45,323**
Depreciation and amortization expense $ 364 $ 704 $ 570 $ 1,638
Interest expense $ 1,038 $ 914 $ 356 $ 2,308***
*Identifiable loss before taxes, as stated above $ (3,232)
Corporate-level loss before taxes, not identifiable with a specific segment (269)
--------------------
Total loss before taxes $ (3,501)
====================
**Identifiable assets, as stated above $ 45,323
Corporate-level intangibles 650
Other corporate-level assets 152
--------------------
Total assets $ 46,125
====================
***Identifiable interest expense, as stated above $ 2,308
Corporate-level interest expense, not identified with a specific segment 269
--------------------
Total interest expense $ 2,577
====================
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per-share data)
(unaudited)
7. BUSINESS SEGMENT DATA AND GEOGRAPHIC DATA, CONTINUED
Nine Months Ended July 31, 2002
------------------------------------------------------------------------------
Trailer Coach Leasing Butyl Rubber Total
Manufacturing Reclaiming
------------------------------------------------------------------------------
Sales:
Domestic $ 30,210 $ 4,513 $ 7,134 $ 41,857
Foreign -- -- 445 445
------------------------------------------------------------------------------
Total $ 30,210 $ 4,513 $ 7,579 $ 42,302
Cost of goods sold $ 26,134 $ 2,336 $ 6,850 $ 35,320
Loss before taxes $ (772) $ (237) $ (297) $ (1,306)*
Identifiable assets $ 19,897 $ 12,670 $ 10,650 $ 43,217**
Depreciation and amortization expense $ 639 $ 579 $ 800 $ 2,018
Interest expense $ 936 $ 1,097 $ 430 $ 2,463***
*Identifiable income (loss) before taxes, as stated above $ (1,306)
Corporate-level loss before taxes, not identifiable with a specific segment (153)
--------------------
Total loss before taxes $ (1,459)
====================
**Identifiable assets, as stated above $ 43,217
Corporate-level intangibles 650
--------------------
Total assets $ 43,867
***Identifiable interest expense, as stated above $ 2,463
Corporate-level interest expense, not identified with a specific segment 153
--------------------
Total interest expense $ 2,616
====================
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per-share data)
(unaudited)
7. BUSINESS SEGMENT DATA AND GEOGRAPHIC DATA, CONTINUED
Obsidian Enterprises, Inc. (legal parent) allocates selling, general and
administrative expenses to the respective companies primarily based on a
percentage of sales. For the three months and nine months ended July 31, 2003
and 2002, allocated corporate expenses by segment were as follows:
Three Months Ended Nine Months Ended
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
July 31, 2003 July 31, 2002 July 31, 2003 July 31, 2002
-------------------------------------------------------------------------------
Trailer manufacturing $ 199 $ 146 $ 856 $ 828
Coach leasing 42 27 134 120
Butyl rubber reclaiming 45 38 234 185
-------------------------------------------------------------------------------
$ 286 $ 211 $ 1,224 $ 1,133
===============================================================================
8. RELATED PARTIES
The Company makes advances, receives loans and conducts other business
transactions with affiliates resulting in the following amounts for the periods
ended:
July 31, October 31,
2003 2002
------------------ ------------------
Balance sheet:
Current assets:
Accounts receivable, Obsidian Capital Partners $ 156 $ 181
Accounts receivable, Fair Holdings 12 --
Accounts receivable, Obsidian Capital Company 12 13
Accounts receivable, other affiliated entities 49 12
------------------ ------------------
Total assets $ 229 $ 206
================== ==================
Current liabilities:
Accounts payable, Obsidian Capital Company $ 274 $ 279
Accounts payable, stockholders 321 338
Accounts payable, DC Investments and Fair Holdings 197 42
Accounts payable, other affiliated entities 13 9
Notes payable, Fair Holdings 73 --
Long-term portion:
Notes payable, DC Investments 700 700
Notes payable, Fair Holdings 7,025 3,020
Line of credit, Fair Holdings 5,382 1,798
------------------ ------------------
Total liabilities $ 13,985 $ 6,186
================== ==================
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per-share data)
(unaudited)
8. RELATED PARTIES, CONTINUED
Three Months Ended Nine Months Ended
-------------------------------------- -------------------------------------
July 31, 2003 July 31, 2002 July 31, 2003 July 31, 2002
------------------- ------------------ ------------------ ------------------
Statement of operations:
Interest expense, DC Investments and
Fair Holdings $ 432 $ 58 $ 935 $ 140
Interest expense, Obsidian Capital
Partners $ -- $ -- $ -- $ 58
Rent expense, Obsidian Capital Company $ 15 $ 16 $ 30 $ 41
Rent expense, Fair Holdings $ 13 $ -- $ 31 $ --
Related-party amounts classified as current reflect those portions of the total
receivable or payable that were currently due in accordance with the terms, or
were collected or paid subsequent to July 31, 2003 or October 31, 2002,
respectively. Amounts classified as long term represent amounts not currently
due, amounts that are expected to be converted to equity subsequent to July 31,
2003 and October 31, 2002, respectively, or amounts converted to long-term debt
subsequent to July 31, 2003.
In addition to the transactions described above, Fair Holdings acquired from the
Company all rights and interest in a Put Option for Series D Preferred Stock
held by Markpoint as discussed in Note 5. Fair Holdings has also agreed to
purchase shares subject to the second put option held by Markpoint which may be
exercised in November 2003.
9. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company is liable for contract completion
and product performance. In the opinion of management, such obligations will not
significantly affect the Company's financial position or results of operations.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
IMPORTANT NOTE ABOUT FORWARD-LOOKING STATEMENTS.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. The Company and its representatives may from time to
time make written or oral forward-looking statements, including statements
included in or incorporated by reference into this Quarterly Report on Form 10-Q
and the Company's other filings made with the Securities and Exchange
Commission. These forward-looking statements are based on management's views and
assumptions and involve risks, uncertainties and other important factors, some
of which may be beyond the control of the Company, that could cause actual
results to differ materially from those expressed or implied in the
forward-looking statements. Factors that might cause or contribute to such
differences include, but are not limited to, those discussed in this Item 2.,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, in this Form 10-Q. Readers should carefully review the risks
described in this and other documents that the Company files from time to time
with the Securities and Exchange Commission. The forward-looking statements
speak only as of the date that they are made and the Company undertakes no
obligation to update or revise any of the forward-looking statements.
OVERVIEW
The Company operates in three industry segments, comprised of trailer and
related transportation equipment manufacturing, butyl rubber reclaiming, and
coach leasing. Trailer and related transportation equipment manufacturing
includes the operations of United and Danzer Industries. Butyl rubber reclaiming
includes the operations of U.S. Rubber and coach leasing includes the operations
of Pyramid, DW Leasing, Obsidian Leasing and DC Investments Leasing.
Champion is accounted for as a discontinued operation, therefore, its results of
operations and cash flow have been removed from the Company's continuing
operations for all periods presented.
RESULTS OF OPERATIONS
The Company's overall operating results and financial condition during the three
and nine months ended July 31, 2003 compared to the three and nine months ended
July 31, 2002 continue to be adversely affected by the overall economic
situation in the United States through lower than anticipated product demand in
the trailer and related transportation equipment manufacturing segment and by
the limited availability of raw materials in the butyl reclaiming segment.
The following table shows net sales by product segment:
Three Months Ended Nine Months Ended
------------------------------------------ -------------------------------------------
July 31, 2003 July 31, 2002 July 31, 2003 July 31, 2002
--------------------- -------------------- --------------------- ---------------------
Trailer manufacturing $ 11,534 $ 10,475 $ 29,746 $ 30,210
Butyl rubber reclaiming 2,699 2,805 7,974 7,579
Coach leasing 2,562 1,959 5,082 4,513
--------------------- -------------------- --------------------- ---------------------
Net Sales $ 16,795 $ 15,239 $ 42,802 $ 42,302
===================== ==================== ===================== =====================
The following is a discussion of the major elements impacting the Company's
operating results by segment for the three-month and nine-month periods ended
July 31, 2003 compared to the three-month and nine-month periods ended July 31,
2002. The comments that follow should be read in conjunction with the Company's
condensed consolidated financial statements and related notes contained in this
Form 10-Q.
TRAILER AND RELATED TRANSPORTATION EQUIPMENT MANUFACTURING
The following table shows sales, cost of sales and gross profit for this segment
for the periods indicated:
Three Months Ended Nine Months Ended
------------------------------------------ -------------------------------------------
July 31, 2003 July 31, 2002 July 31, 2003 July 31, 2002
--------------------- -------------------- --------------------- ---------------------
Net Sales $ 11,534 $ 10,475 $ 29,746 $ 30,210
Cost of Sales 10,378 8,952 27,132 26,134
--------------------- -------------------- --------------------- ---------------------
Gross Profit $ 1,156 $ 1,523 $ 2,614 $ 4,076
===================== ==================== ===================== =====================
Gross Profit % 10.0% 14.5% 8.8% 13.5%
===================== ==================== ===================== =====================
Three Months Ended July 31, 2003 Compared to The Three Months Ended July 31,
2002
Net sales in this segment for the three months ended July 31, 2003 as compared
to the comparable three month period ended July 31, 2002 increased 10.1% in the
amount of $1,059. Sales in this segment were higher than the prior year due
primarily to the sales of cargo trailers. Production and sales of the cargo
trailers increased due to the additional cargo manufacturing facility and the
implementation of a discount/rebate program that was implemented in February
2003 for the cargo trailers to stimulate sales. Additional sales of cargo
trailers were also made to existing customers that historically purchased truck
bodies. The trailer market remains very price competitive and all major
competitors are offering similar discount programs. The sales of truck bodies
for the three months ended July 31, 2003 decreased $36 compared to July 31,
2002. The decrease in sales was due primarily to the loss of this segment's
primary truck body customer due to the customer's bankruptcy. We believe sales
of truck bodies will continue at a level below 2002 as the Company does not
anticipate any orders from this segment's primary truck body customer in the
future.
o The gross profit percentage decreased 4.5% for the three months ended
July 31, 2003. The reduction in gross profit is attributable to three
primary factors. First, the sales discount/rebate program discussed
above has reduced gross profit by approximately 3.3%. Second, during
the fourth quarter of 2002, the Company opened an additional cargo
trailer manufacturing facility. This facility did not obtain a level
of efficiency of existing facilities until the end of the third
quarter. Efficiency improved during the third quarter and is expected
to be in line with existing facilities through the end of fiscal 2003.
Lastly, gross profit has been negatively impacted by a reduction in
sales of truck bodies, which has reduced the ability to absorb
overhead at the truck body manufacturing facility. During late 2002,
the Company began manufacturing cargo trailers in this facility to
provide additional capacity and serve new markets. Production levels
are increasing but have not yet reached a level of efficiency of
existing cargo trailer facilities. Management is currently analyzing
the use of the truck body facility and considering options of
continuing production of truck bodies and cargo trailers,
discontinuing one of these lines at this facility or closing the
facility. A decision is expected prior to October 31, 2003. In
conjunction with the analysis of operations at the truck body
manufacturing facility, management is also analyzing any potential
asset impairment at this facility. Total assets of Danzer at July 31,
2003 were $3,395, which consists of $1,396 of current assets and
$1,999 of net property and equipment, and represents approximately 7%
of consolidated total assets.
Nine Months Ended July 31, 2003 Compared to The Nine Months Ended July 31, 2002
Sales in this segment decreased $464 or 1.5% over the comparable period of 2002.
The decrease was primarily related to the following factors. First the sales of
cargo trailers have increased approximately $900 over the nine months ended July
31, 2002 as a result of additional production facilities and sales to existing
customers in new markets. The Company also began a sales discount/rebate program
to stimulate sales. While this program did increase the units sold, it resulted
in a lower average price per unit. This increase was offset by the decrease in
sales of truck bodies by approximately $1,400 over the nine months ended July
31, 2003. This reduction was related to the continued depressed condition of the
telecommunications industry which has historically been a significant consumer
of truck bodies, as well as the bankruptcy filing of a significant truck body
customer in late 2002. We believe sales of truck bodies will continue at a level
below 2002, as we do not anticipate any orders from this segment's primary truck
body customer in the future, and a replacement market has not yet been
developed.
The gross profit decreased 4.7% primarily as a result of decreased volume at the
Company's truck body plant which resulted in an inability to absorb fixed
overhead costs. To offset these costs, management began production of cargo
trailers in this facility during late 2002. Inefficiencies in the start up of
this operation and additional production facilities have also had a negative
impact in gross profit margins as compared to the nine months ended July 31,
2002. Management believes gross profits will continue to be adversely impacted
by the lack of sales volume in truck bodies. The sales discounts/rebates offered
during 2003 have ended as of July 31, 2003 with the introduction of new product
lines to compete in the market at higher gross margins than the discounted cargo
trailers.
BUTYL RUBBER RECLAIMING
The following table shows sales, cost of sales and gross profit for this segment
for the periods indicated:
Three Months Ended Nine Months Ended
------------------------------------------ -------------------------------------------
July 31, 2003 July 31, 2002 July 31, 2003 July 31, 2002
--------------------- -------------------- --------------------- ---------------------
Net Sales $ 2,699 $ 2,805 $ 7,974 $ 7,579
Cost of Sales 2,487 2,451 7,434 6,850
--------------------- -------------------- --------------------- ---------------------
Gross Profit $ 212 $ 354 $ 540 $ 729
===================== ==================== ===================== =====================
Gross Profit % 7.9% 12.6% 6.8% 9.6%
===================== ==================== ===================== =====================
Three Months Ended July 31, 2003 Compared to The Three Months Ended July 31,
2002
Net sales for the three months ended July 31, 2003 compared to same period for
2002 decreased $106 or 3.7%. The decrease relates to the demand from the
Company's tire manufacturing customers for the three months ended July 31, 2003.
The decreased demand was partially offset by a price increase of 2.2% over the
comparable period for 2002. While sales have been steady with the additional
price increase, management does not anticipate the return to historical levels
due to the availability of raw materials discussed below.
The gross profit percentage decreased 4.7% for the three months ended July 31,
2003. This decrease was due to the decrease in volume, increase in the cost to
obtain raw material and ongoing equipment maintenance. The Company has
consolidated part of its equipment from two plants into one to maximize the
production facilities. A portion of the equipment not consolidated with a
carrying value of approximately $650 is used at various times for additional
capacity and toll grinding but at times may be temporarily idle. The equipment
is being evaluated on an ongoing basis for its use in a production process for
"fine ground" rubber. Existing and new equipment will be required to complete
the "fine grind" production line. If it is determined the idle equipment does
not have any foreseeable use, the equipment will be reclassified as idle
equipment on the balance sheet, not depreciated and tested for impairment.
Reserves have been established primarily for inventory not usable without
additional processing costs and currently usable only when mixed in the
production process at a low rate with quality raw material. Reserves are
reversed when such inventory is used in production. For the three months ended
July 31, 2003, the Company utilized $19 of its reserve.
Nine Months Ended July 31, 2003 Compared to The Nine Months Ended July 31, 2002
Net sales in this segment for the nine months ended July 31, 2003 as compared to
the nine-month period ended July 31, 2002 increased 5.2% in the amount of $395.
Sales in this segment were higher than the nine months ended July 31, 2002
because of increased demand from Company's tire manufacturing customers and an
increase in pricing. While the Company experienced an increase in sales
throughout calendar year 2002, management does not anticipate a return to
historic levels of sales of reclaimed butyl rubber to tire manufacturers during
fiscal 2003, in part due to the lack of consistent sources of raw materials. Net
sales also increased over the third quarter of 2002 due to increased demand for
pipeline mastic wraps produced with reclaimed butyl rubber. Demand for this
product fell dramatically beginning in October 2001 as a result of a decline in
the price of crude oil in late 2001, which caused a decline in new oil
exploration. As the price of crude oil increased, the demand for those uses has
also increased. Although this demand has increased from its lows at the end of
fiscal 2001 and beginning of fiscal 2002, demand has not returned to historical
levels.
Gross profit percentage decreased 2.8% for the nine months ended July 31, 2003
compared to the nine months ended July 31, 2002. The primary reason for this
decrease is a lack of a consistent supply of raw materials and increasing energy
costs. The Company's reclaim process is most efficient when raw material
consists of primarily road worn inner tubes with a mix of other butyl rubber.
Since the introduction of the tubeless tire for automobiles in the 1970s,
sources of material have declined substantially and the cost of available raw
materials has increased. As a result of having to use less than optimum raw
material mix in the reclaiming process, additional processing time is incurred
to ensure delivery of quality product. Management has been testing other
materials including butyl pad scrap as a replacement material for the past
several years with some success. In addition, alternative sources of material,
including overseas sources, are being pursued to provide a consistent supply of
material in the future. Until such time that consistent sources of raw materials
are available, sales growth and gross profit in this segment will be limited.
COACH LEASING
The following table shows sales, cost of sales and gross profit for this segment
for the periods indicated:
Three Months Ended Nine Months Ended
------------------------------------------ -------------------------------------------
July 31, 2003 July 31, 2002 July 31, 2003 July 31, 2002
--------------------- -------------------- --------------------- ---------------------
Net Sales $ 2,562 $ 1,959 $ 5,082 $ 4,513
Cost of Sales 1,525 997 2,879 2,336
--------------------- -------------------- --------------------- ---------------------
Gross Profit $ 1,037 $ 962 $ 2,203 $ 2,177
===================== ==================== ===================== =====================
Gross Profit % 40.5% 49.1% 43.3% 48.2%
===================== ==================== ===================== =====================
Three Months Ended July 31, 2003 Compared To The Three Months Ended July 31,
2002
Sales for the three months ended July 31, 2003 increased $603 or 30.7% from the
period July 31. 2002. The increase in sales relates to a higher utilization of
the fleet for three months ended July 31, 2003 compared to the same period for
2002. The Company has increased its fleet size by adding four new buses during
the current fiscal year to a total of 37 coaches as of July 31, 2003 compared to
30 coaches for the same period for 2002. The increase in number of coaches to
the fleet is expected to increase revenues during the remainder of 2003.
Gross profit percentage decreased 8.6% for the three months ended July 31, 2003
compared to the period July 31, 2002. The reduction is attributable primarily to
the cost of maintaining a larger fleet and the need to sublease additional buses
from third parties for the three months ended July 31, 2003 to meet current
demand. The Company has also had increased operating costs for insurance.
Nine Months Ended July 31, 2003 Compared To The Nine Months Ended July 31, 2002
Sales for the nine months ended July 31, 2003 increased 12.6% in the amount of
$569 over the comparable nine-month period ended July 31, 2002. The increase in
sales is attributable to increased utilization of the coach fleet. Management
believes the increased utilization resulted from its marketing efforts and
specialized tour groups (i.e. golf course trips) and corporate customers. These
customers are in addition to the traditional country and western performers who
have traditionally been this segment's primary customer base.
Gross profit percentage for this segment was 43.3% for the nine months ended
July 31, 2003 compared to 48.2% for the comparable nine-month period ended July
31, 2002. As noted above the reduction is attributable primarily to the need to
sublease additional buses from third parties to meet current demand and
increased operating costs for insurance.
Selling, General And Administrative (SG&A) Expenses
The Company's selling, general and administrative expenses increased $121 or
6.5% for the three months ended July 31, 2003 compared to the three-month period
ended July 31, 2002 and $111 or 1.8% for the nine months ended July 31, 2003
compared to the nine-month period ended July 31, 2002. The increases are related
primarily to the overall increase in the use of outside professionals for
services in assisting with amended filings for restatements.
Interest Expense
Interest expense as a percentage of average borrowings is as follows:
Three Months Ended Nine Months Ended
------------------------------------------ -------------------------------------------
July 31, 2003 July 31, 2002 July 31, 2003 July 31, 2002
--------------------- -------------------- --------------------- ---------------------
Average debt borrowings $ 40,101 $ 35,893 $ 37,844 $ 36,448
Interest expense as a
percentage of average debt
borrowings 2.2% 2.4 % 6.8% 7.8%
Interest expense as a
percentage of average debt
borrowings, annualized 8.8% 9.6% 9.5% 10.8%
===================== ==================== ===================== =====================
The decrease is primarily due to the reduction of the prime rate and refinancing
of a significant portion of the coach debt at lower rates during the fourth
quarter of fiscal 2002.
Income Tax Provision
The income tax benefit for the three-month period ended July 31, 2003 increased
by $212 compared to the three-month period ended July 31, 2002 and increased
$616 for the nine-month period ended July 31, 2003 as compared to the nine-month
period ended July 31, 2002. The income tax benefit is created primarily through
net operating loss carryforwards recognized to the extent they are available to
offset the Company's net deferred tax liability. Any quarterly tax benefits are
based on the estimated effective tax rate for the full year.
Discontinued Operations
On October 30, 2002, the Company's Board of Directors agreed to sell
substantially all assets of Champion to an entity controlled by Messrs. Durham
and Whitesell in exchange for assumption of all liabilities of Champion, other
than its subordinated debt. In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 144, Accounting for Impairment of Long-Lived Assets, the
operating results of Champion have been classified as discontinued operations.
The losses from discontinued operations for the nine months ended July 31, 2003
and 2002 represent the losses of Champion during these periods, net of tax
benefit of $25 and $0, respectively. The loss from discontinued operations for
the three and nine months ended July 31, 2003 and were $0 and $49, respectively,
as compared to the three and nine months ended July 31, 2002 and totaled $364
and $1,085, respectively.
Substantially all assets of Champion subject to its liabilities were sold on
January 30, 2003. No gain or loss was recognized in the consolidated statement
of operations due to the involvement of related parties. This transaction
resulted in an increase in equity of $1,142.
Liquidity And Capital Resources
Each of the subsidiaries of the Company have separate revolving credit
agreements and term loan borrowings through which the subsidiary finances its
operations together with cash generated from operations. The principal balances
of some of these loans reflect the fact that Obsidian Capital Partners
("Partners"), from whom three of the four subsidiaries were purchased, entered
into highly leveraged acquisitions of U.S. Rubber, Pyramid, and United.
This high level of debt has created liquidity issues for the Company and the
stringent financial covenants that are common for this type of debt increase the
probability that the Company's subsidiaries may from time to time be in
technical violation of their credit agreements. These risks are mitigated, in
part, for the Company's United and U.S. Rubber subsidiaries by the right
described below under "Guarantees of Partners." Liquidity and capital resources
have also been negatively impacted by consolidated losses.
The high level of debt also subjects the Company to additional liquidity risk
should interest rates increase by a material amount. Approximately 46% of the
Company's outstanding debt is variable and based on market factors such as the
prime rate or LIBOR rates. A significant increase in these market indexes could
have a material adverse affect on the Company's liquidity.
The Company's working capital position (current assets over current liabilities)
was positive at July 31, 2003 by $1,192. The working capital position was $1,591
at October 31, 2002. This decrease is attributable to the lack of positive
results primarily from the Trailer manufacturing segment and certain line of
credit renewal dates which resulted in reclassification of $4,288 to current
liability as of July 31, 2003. This is partially offset by the assumption of
Danzer Industries bank debt by Fair Holdings and the extension of the term
resulting in a reclassification of $1,488 of debt from current to long term.
The Company continues to address liquidity and working capital issues.
Management believes that the steps started in 2002 and currently underway will
continue to improve the Company's working capital, strengthen its equity and
place the Company in a position to successfully enhance its liquidity. These
steps include:
o During 2002, the Board of Directors authorized the Chairman of the
Board to explore various options regarding the operations at Champion.
Options included divestiture, restructuring of operations or closing
the facility. It was determined in the best interests of the Company
to sell Champion. On January 30, 2003, the Company completed the sale
of substantially all assets of Champion to an entity owned by Messrs.
Durham and Whitesell, Chairman and President of the Company,
respectively. The sale resulted in an increase in equity of $1,142 as
further described in Note 3.
o During December 2002, the Company sold certain coaches of Obsidian
Leasing to DC Investments Leasing for assumption of the existing debt.
DC Investments Leasing then refinanced this debt at terms more
favorable than the previous terms.
o On April 1, 2003, the Company obtained an increase in its available
line of credit with Fair Holdings to $8,000.
o On January 3, 2003, Obsidian Leasing refinanced debt due to former
shareholders in the amount of $928 with Fair Holdings at terms further
described in Note 4.
o During January 2003, United and U.S. Rubber obtained modifications to
provide less stringent requirements on certain financial covenants
with their respective lenders.
o On March 28, 2003, Fair Holdings acquired the line of credit and term
debt due to the senior lender of Danzer in the amount of $1,488 under
an assignment and assumption agreement. The maturity date of the line
of credit included in the assignment and assumption agreement was
extended to April 2006, and the debt covenants required by the senior
lender were waived through the end of the term. All other terms of the
assumed notes remain the same.
o During March 2003, United completed a compensation review and update
and provided a revised pay scale which realigns the Company with its
industry and reduces compensation costs. United also continues to
develop its new production facility to increase productivity and plant
efficiency.
o During 2003, U.S. Rubber has continued to consolidate its butyl
reclaiming operations from two plants to one to maximize production
and efficiently utilize equipment. The consolidation has provided some
pieces of equipment to be at times temporarily idle until the Company
completes its implementation of a new production process for "fine
ground rubber". Existing and new equipment will be required to
complete the "fine grind" production line. The new process will
maximize the use of the existing raw materials in the Company's
existing Butyl reclaim production and also provide additional products
of natural rubber.
o The Company's truck body division at Danzer continues to negatively
impact the Company's cash flows. The trailer production line was put
in place in the fourth quarter of 2002 to support the production needs
at United and also provide a new product line to the existing
customers of Danzer and open a potential new market along the East
coast of the U.S. Given the current state of the Telecommunications
industry and economic conditions management will continue to evaluate
the operations and progress with the implementation of the trailer
production. Management also expects to make a decision to continue or
discontinue operations by the end of fiscal 2003.
o As a result of the actions described above, management believes that
the Company has financing agreements in place to provide adequate
liquidity and working capital for the remainder of fiscal 2003.
However, there can be no assurance that refinancing will be obtained
or that such working capital and liquidity will, in fact, be adequate.
Future liquidity is also dependent upon the ability of the company to
generate profitable operations and positive cash flow from its
operating entities and maintain compliance with its credit agreements.
Financial Covenant Waivers
At July 31, 2003, United Expresslines and US Rubber were in violation of certain
financial covenants with Huntington Capital Investment Company and PNC Bank,
respectively. United and US Rubber have received waivers of these violations.
Funds Availability
On a consolidated basis, as of July 31, 2003, the Company had approximately $329
of cash and cash equivalents. Danzer Industries, U.S. Rubber, United and
Obsidian Enterprises each have revolving credit lines available for working
capital at each individual entity. Borrowings under the credit facilities are
available to the lesser of the maximum amount or the borrowing base as defined
in the credit agreement. At July 31, 2003, additional current availability under
these credit lines and maximum additional availability if supported by their
individual borrowing base are:
Company Current Availability Maximum Availability
------------------------ --------------------------- --------------------------
Danzer Industries $ 0 $ 0
U.S. Rubber 62 2,240
United 0 0
Obsidian Enterprises 2,480 2,480
The Company generated negative net cash flow of $2,953 from operations during
the nine months ended July 31, 2003. Cash used in operations during this period
is primarily due to increases in inventories and accounts receivable and
decreases in accounts payable. The Company increased inventories during the
first and second quarters primarily in the Trailer Manufacturing segment to
improve the Company's ability to deliver orders during the balance of the year
when demand was expected to increase. Inventory has continued to be above
historic levels primarily due to lower than expected demand of Cargo Trailers.
Accounts receivable increased in both the Trailer Manufacturing and Coach
Leasing segments primarily due to increasing sales in the summer months in both
segments. Funding during this period was provided through borrowings on lines of
credit and from related parties.
Refinancing Activities
Refinancing activity during the nine months ended July 31, 2003 included the
following:
o On December 17, 2002, Obsidian Leasing sold four coaches to DC
Investments Leasing in exchange for DC Investments Leasing's
satisfaction of the debt outstanding on such coaches. DC Investments
Leasing paid this debt through a refinancing at terms that included a
reduction in interest rates. In addition, DC Investments Leasing also
acquired five additional coaches that were previously to be purchased
by the Company thereby eliminating the Company's existing purchase
commitment for such coaches. DC Investments Leasing also entered into
a management agreement with Pyramid under which all nine coaches
described above will be leased by Pyramid.
o On January 5, 2003, Obsidian Leasing refinanced debt in the amount of
$928 to former shareholders of Pyramid and related companies. Terms of
the new note with Fair Holdings include monthly interest payments of
13% of the outstanding principal amount and a balloon principal
payment in January 2006.
o On March 28, 2003, Danzer's line of credit and term loan were assumed
by Fair Holdings. The maturity date on the line of credit was extended
to April 1, 2006 and all covenants were waived.
Guarantees Of Partners
The Company has an agreement with Partners that gives it the right to mandate a
capital contribution from Partners if the lenders to U.S. Rubber or United were
to declare a default. In either of those events, the Company has the right to
enforce a capital contribution agreement with Partners up to $1,620,000 on U.S.
Rubber and $1,000,000 on United to fund the respective subsidiary's shortfall.
These payments, if any, would be applied directly to reduce the respective
subsidiary's debt obligations to the lender.
Cash Flows
A summary of our contractual cash obligations for the fiscal years ending 2003
through 2006 and 2007 and thereafter at July 31, 2003 is as follows:
2007 and
Contractual Obligations Total 2003 2004 2005 2006 Thereafter
------------ ------------- ------------ ------------ ------------ ------------
Long-term debt, and all debt service
interest payments $ 54,931 $ 4,284 $ 8,931 $ 20,640 $ 10,239 $ 10,837
Operating leases 1,397 450 353 274 189 131
Mandatory redeemable preferred stock 1,462 -- 337 -- 1,125 --
------------ ------------- ------------ ------------ ------------ ------------
Total contractual cash obligations $ 57,790 $ 4,734 $ 9,621 $ 20,914 $ 11,553 $ 10,968
============ ============= ============ ============ ============ ============
Cash flow and liquidity are discussed further below, and the footnotes to our
financial statements discuss cash flow, liquidity and the current classification
of debt.
We also have a commercial commitment as described below:
Other Commercial Commitment Total Amount Committed Outstanding at July 31, Date of Expiration
2003
----------------------------------- -------------------------- --------------------------- ---------------------------
Line of credit, related party $ 1,000 $ 1,000 April 1, 2006
Line of credit 3,750 3,750 February 1, 2004
Line of credit 4,000 2,068 October 1, 2005
Line of credit 650 650 June 30, 2003*
Line of credit, related party 8,000 5,519 January 9, 2005
*Currently in negotiations with lender.
The Company's net cash used in operations for the nine months ended July 31,
2003 was $2,953. This is comprised of a loss from continuing operations of
$2,730, offset by noncash changes as follows: depreciation and amortization of
$2,232, deferred tax benefit of $820, accretion of interest expense of $286, and
the extension of stock options of $30. In addition, the Company had increases in
accounts receivable of $1,289, inventories of $376, accrued expenses and
customer deposits of $915, and other assets of $146 and a decrease in accounts
payable of $1,055.
Net cash flow provided from financing activities for the nine months ended July
31, 2003 was $2,940. This is comprised of borrowings of long-term debt and net
borrowings of short-term debt of $1,984 and borrowings from related parties of
$4,982, offset by principal repayments of long-term debt of $2,612. In addition,
the Company repaid $1,414 of related-party payables.
Cash flow used in investing activities for the nine months ended July 31, 2003
was $537 This is comprised of purchases of equipment of $560 and other of $23.
The total decrease in cash is summarized as follows:
Nine Months Ended
--------------------------------------
July 31, July 31,
2003 2002
------------------- ------------------
Net cash used in operations $ (2,953) $ (110)
Net cash used in investing activities (537) (559)
Net cash provided by financing activities 2,940 593
Net cash provided by (used in) discontinued operations (41) 6
------------------- ------------------
Decrease in cash and cash equivalents $ (591) $ (70)
=================== ==================
Critical Accounting Policies
Our significant accounting policies are summarized in Note 2 to the consolidated
financial statements in the Annual Report on Form 10-K for the fiscal year ended
October 31, 2002 and describe the significant accounting policies and methods
used in the preparation of the consolidated financial statements. Some of the
most critical policies are also discussed below.
As a matter of policy, we review our major assets for impairment. Our major
operating assets are accounts receivable, inventory, intangible assets and
property and equipment. We have not historically experienced significant bad
debts expense, although the filing of Chapter 11 bankruptcy during 2002 of a
customer resulted in a bad debt charge of $379. However, we believe our reserve
for doubtful accounts of $492 should be adequate for any exposure to loss in our
July 31, 2003 accounts receivable. We have also established reserves for
slow-moving and obsolete inventories and believe the reserve of $359 is
adequate. We depreciate our property and equipment and amortize intangible
assets (except for goodwill) over their estimated useful lives. Property and
equipment are reviewed for impairment when events and circumstances indicate
impairment factors may be present. Currently, operating results at our truck
body manufacturing facility, including the bankruptcy of a significant truck
body customer, indicate the assets of this facility may be subject to
impairment. Accordingly, we are analyzing these assets for impairment in
conjunction with our analysis of the continuing operations of this facility. In
addition, consolidation of facilities at our butyl rubber reclaiming operation
has resulted in some equipment at that facility being temporarily idle as we
implement a new production line for "fine grind" rubber. Should this new process
not utilize all of the idle equipment, we will analyze such equipment for
impairment.
Goodwill and intangibles are reviewed annually for impairment or more frequently
when events and circumstances indicate potential impairment factors are present.
The Company has established the first day of the fourth quarter as the date for
its annual goodwill impairment test. In assessing the recoverability of the
Company's goodwill, the Company must make various assumptions regarding
estimated future cash flows and other factors in determining the fair values of
the respective assets. If these estimates or their related assumptions change in
the future, the Company may be required to record impairment charges for these
assets in future periods. Any such resulting impairment charges could be
material to the Company's results of operations.
The initial cost of coaches acquired is depreciated over a straight-line basis
to a salvage value of 38% of original cost. Subsequent enhancements and
refurbishments of coaches are depreciated over five years using the
straight-line method. The age of coaches in our fleet range from less than one
year to nine years, with an average age of approximately four years. Actual
value of coaches after 15 years is dependent on several factors including the
level of maintenance and the market conditions at the time of disposal. We have
not disposed of a material number of coaches, and our estimate of depreciation
is based on information other than actual disposal experience. Accordingly, we
continue to evaluate our estimates with respect to the actual depreciation of
such vehicles based on market conditions and our experience in disposals when
they occur. Should future factors indicate the current depreciation policy is
not adequate, we will adjust the depreciation rates, and such adjustments may
have an adverse impact on our results of operations.
In conjunction with financing of the acquisition of United, the Company issued
386,206 shares of Series C preferred stock to Huntington Capital Investment
Corporation ("Huntington"). The note purchase agreement includes a provision
that gives Huntington the option to require the Company to repurchase these
shares at 90% of market value upon the earlier of: a) fifth anniversary of
issuance of such shares, b) default under the subordinated debt agreement, c)
other factors related to a sale of substantially all assets of the Company as
defined in the agreement. Increases in the value of the Company's stock will
result in a corresponding increase to this repurchase requirement. Accordingly,
a substantial increase in stock price at the repurchase date may have an adverse
impact on the Company's liquidity. At July 31, 2003, the Company had violated
certain financial covenants defined in the subordinated debt agreement with
Huntington. The Company received a waiver of these violations as of July 31,
2003.
Item 3 Quantitative And Qualitative Disclosures About Market Risk
The Company is exposed to market risk related to interest rate changes. See the
discussion of market risk in Management's Discussion and Analysis of Financial
Condition and Results of Operations in Item 2, which discussion is incorporated
by reference herein.
Item 4 Controls And Procedures
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the reports we file pursuant
to the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms. Such
information is accumulated and communicated to the Company's management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. The
Company's management recognizes that, because the design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events and also is subject to other inherent limitations, any controls
and procedures, no matter how well designed and operated, can provide only
reasonable, and not absolute, assurance of achieving the desired objectives. The
Company's management believes, however, that the Company's disclosure controls
and procedures provide reasonable assurance that the disclosure controls and
procedures are effective.
The Company has carried out as of July 31, 2003, an evaluation, under the
supervision and with the participation of the Company's management, including
the Company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on this evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures were effective. There have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
internal controls subsequent to the July 31, 2003 evaluation.
Part II--Other Information
Item 1. Legal Proceedings
The Company is party to ordinary litigation incidental to its business. No
current pending litigation is expected to have a material adverse effect on
results of operations, financial condition or cash flows.
Item 2. Changes In Securities And Use Of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission Of Matters To A Vote Of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits And Reports On Form 8-K
Exhibits
The exhibits filed as part of this Form 10-Q are listed in the Exhibit Index,
which is incorporated herein by reference.
Reports on Form 8-K
None.
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.
OBSIDIAN ENTERPRISES, INC.
September 15, 2003 By: /s/ Timothy S. Durham
-------------------- -----------------------------------------------------
Date Timothy S. Durham, Chairman and Chief
Executive Officer
September 15, 2003 By: /s/ Rick D. Snow
-------------------- -----------------------------------------------------
Date Rick D. Snow, Executive Vice President/
Chief Financial Officer
Exhibit Index
Exhibit No. Description
------------------ --------------------------------------------------------------- ------------------
10.1 Employment Agreement, dated April 30, 2003, between Obsidian Attached
Enterprises, Inc. and Rick D. Snow.*
31.1 Certification of Timothy S. Durham. Attached
31.2 Certification of Rick D. Snow. Attached
32.1 Statement Regarding Certification Pursuant to 18 U.S.C.ss. Attached
1350 by Timothy S. Durham, Chief Executive Officer.
32.2 Statement Regarding Certification Pursuant to 18 U.S.C.ss. Attached
1350 by Rick D. Snow, Chief Financial Officer.
* Indicates exhibits that describe or evidence management contracts or
compensatory plans or arrangements required to be filed as exhibits.
OBSIDIAN ENTERPRISES, INC.
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS
November 19, 2003
THIS PROXY IS SOLICITED
ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Terry G. Whitesell and Jeffrey W. Osler, and
each of them, with full power of substitution, as proxies to represent the
undersigned and to vote all of the shares of Common Stock the undersigned is
entitled to vote at the 2003 Annual Meeting of Stockholders of Obsidian
Enterprises, Inc. (the "Company"), to be held at the Company's offices, 111
Monument Circle, Suite 4800, Indianapolis, Indiana 46204, on Wednesday, November
19, 2003 at 10:00 A.M. (local time), and at any adjournment, postponement or
continuation thereof, as follows:
1. Election of Seven (7) Directors.
[ ] FOR all nominees listed below (EXCEPT as marked to the contrary below)
INSTRUCTIONS: To withhold authority to vote for any individual
nominee, strike a line through such nominee's name
in the following list:
Timothy S. Durham Daniel S. Laikin D. Scott McKain
Jeffrey W. Osler John A. Schmit Goodhue W. Smith, III
Terry G. Whitesell
[ ] WITHHOLD AUTHORITY to vote for ALL nominees listed above.
2. Amendment of Certificate of Designation for Series C Preferred Stock
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. Amendment of Certificate of Designation for Series D Preferred Stock
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. Amendment of Certificate of Incorporation to effect a 50-to-1 reverse
stock split
[ ] FOR [ ] AGAINST [ ] ABSTAIN
5. Amendment of Certificate of Incorporation to decrease number of shares
of authorized capital stock from 45,000,000 to 15, 000,000 shares
[ ] FOR [ ] AGAINST [ ] ABSTAIN
6. Ratification of McGladrey & Pullen, LLP as the Company's independent
auditors for the fiscal year ending October 31, 2003
[ ] FOR [ ] AGAINST [ ] ABSTAIN
7. In their discretion, on any other matters properly coming before the
meeting and any adjournment, postponement or continuation thereof.
This proxy will be voted as directed. If this proxy card is properly signed and
returned but no directions are specified, this proxy will be voted FOR the
election of the nominees for director listed above and FOR Proposals 2, 3, 4, 5
and 6. This proxy card, if properly executed and delivered in a timely manner,
will revoke all prior proxies.
Dated____________________________, 2003
---------------------------------
Signature
---------------------------------
Signature
Please sign EXACTLY as name or names appear
hereon. When signing as attorney, executor,
trustee, administrator or guardian, please give
your full title. If a corporation, please sign in
full corporate name by president or other
authorized officer. If a partnership, please sign
in partnership name by authorized person.
Please complete, date, sign and mail promptly in the enclosed envelope which
requires no postage.
PROXY CARD FOR
SERIES C PREFERRED
STOCKHOLDERS
OBSIDIAN ENTERPRISES, INC.
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS
November 19, 2003
THIS PROXY IS SOLICITED
ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Terry G. Whitesell and Jeffrey W. Osler, and
each of them, with full power of substitution, as proxies to represent the
undersigned and to vote all of the shares of Series C Preferred Stock the
undersigned is entitled to vote at the 2003 Annual Meeting of Stockholders of
Obsidian Enterprises, Inc. (the "Company"), to be held at the Company's offices,
111 Monument Circle, Suite 4800, Indianapolis, Indiana 46204, on Wednesday,
November 19, 2003 at 10:00 A.M. (local time), and at any adjournment,
postponement or continuation thereof, as follows:
1. Election of Seven (7) Directors.
[ ] FOR all nominees listed below(EXCEPT as marked to the contrary below)
INSTRUCTIONS: To withhold authority to vote for any individual
nominee, strike a line through such nominee's name
in the following list:
Timothy S. Durham Daniel S. Laikin D. Scott McKain
Jeffrey W. Osler John A. Schmit Goodhue W. Smith, III
Terry G. Whitesell
[ ] WITHHOLD AUTHORITY to vote for ALL nominees listed above.
2. Amendment of Certificate of Designation for Series C Preferred Stock
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. Amendment of Certificate of Designation for Series D Preferred Stock
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. Amendment of Certificate of Incorporation to effect a 50-to-1
reverse stock split
[ ] FOR [ ] AGAINST [ ] ABSTAIN
5. Amendment of Certificate of Incorporation to decrease number of shares
of authorized capital stock from 45,000,000 to 15, 000,000 shares
[ ] FOR [ ] AGAINST [ ] ABSTAIN
6. Ratification of McGladrey & Pullen, LLP as the Company's independent
auditors for the fiscal year ending October 31, 2003.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
7. In their discretion, on any other matters properly coming before the
meeting and any adjournment, postponement or continuation thereof.
This proxy will be voted as directed. If this proxy card is properly signed and
returned but no directions are specified, this proxy will be voted FOR the
election of the nominees for director listed above and FOR Proposals 2, 3, 4, 5
and 6. This proxy card, if properly executed and delivered in a timely manner,
will revoke all prior proxies.
Dated____________________________, 2003
---------------------------------
Signature
---------------------------------
Signature
Please sign EXACTLY as name or names appear
hereon. When signing as attorney, executor,
trustee, administrator or guardian, please give
your full title. If a corporation, please sign in
full corporate name by president or other
authorized officer. If a partnership, please sign
in partnership name by authorized person.
Please complete, date, sign and mail promptly in the enclosed envelope which
requires no postage.
PROXY CARD FOR
SERIES D PREFERRED
STOCKHOLDERS
OBSIDIAN ENTERPRISES, INC.
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS
November 19, 2003
THIS PROXY IS SOLICITED
ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Terry G. Whitesell and Jeffrey W. Osler, and
each of them, with full power of substitution, as proxies to represent the
undersigned and to vote all of the shares of Series d Preferred Stock the
undersigned is entitled to vote at the 2003 Annual Meeting of Stockholders of
Obsidian Enterprises, Inc. (the "Company"), to be held at the Company's offices,
111 Monument Circle, Suite 4800, Indianapolis, Indiana 46204, on Wednesday,
November 19, 2003 at 10:00 A.M. (local time), and at any adjournment,
postponement or continuation thereof, as follows:
1. Election of Seven (7) Directors.
[ ] FOR all nominees listed below (EXCEPT as marked to the contrary below)
INSTRUCTIONS: To withhold authority to vote for any individual
nominee, strike a line through such nominee's name
in the following list:
Timothy S. Durham Daniel S. Laikin D. Scott McKain
Jeffrey W. Osler John A. Schmit Goodhue W. Smith, III
Terry G. Whitesell
[ ] WITHHOLD AUTHORITY to vote for ALL nominees listed above.
2. Amendment of Certificate of Designation for Series C Preferred Stock
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. Amendment of Certificate of Designation for Series D Preferred Stock
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. Amendment of Certificate of Incorporation to effect a 50-to-1
reverse stock split
[ ] FOR [ ] AGAINST [ ] ABSTAIN
5. Amendment of Certificate of Incorporation to decrease number of shares
of authorized capital stock from 45,000,000 to 15, 000,000 shares
[ ] FOR [ ] AGAINST [ ] ABSTAIN
6. Ratification of McGladrey & Pullen, LLP as the Company's independent
auditors for the fiscal year ending October 31, 2003.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
7. In their discretion, on any other matters properly coming before the
meeting and any adjournment, postponement or continuation thereof.
This proxy will be voted as directed. If this proxy card is properly signed and
returned but no directions are specified, this proxy will be voted FOR the
election of the nominees for director listed above and FOR Proposals 2, 3, 4, 5
and 6. This proxy card, if properly executed and delivered in a timely manner,
will revoke all prior proxies.
Dated____________________________, 2003
---------------------------------
Signature
---------------------------------
Signature
Please sign EXACTLY as name or names appear
hereon. When signing as attorney, executor,
trustee, administrator or guardian, please give
your full title. If a corporation, please sign in
full corporate name by president or other
authorized officer. If a partnership, please sign
in partnership name by authorized person.
Please complete, date, sign and mail promptly in the enclosed envelope which
requires no postage.