SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JANUARY 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 ___________________________
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 (I.R.S. Employer Identification No.)
incorporation or organization)
111 MONUMENT CIRCLE, SUITE 4800 46204
INDIANAPOLIS, INDIANA
---------------------------------------- ---------------------------------------
(Address of principal executive offices) (Zip code)
(317) 237-4122
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report) 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
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKTUPCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes ___ 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
APPLICABLE ONLY TO CORPORATE ISSUERS:
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 March 17, 2003
36,007,855 shares
INTRODUCTORY NOTE
This Amendment No. 1 amends the Registrant's Quarterly Report on Form 10-Q for
the fiscal quarter ended January 31, 2003, to amend and restate Items 1 and 2 of
Part I to incorporate certain changes.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
(unaudited)
January 31, October 31,
2003 2002
----------------------------------
Assets
Current assets:
Cash and cash equivalents $ 433 $ 920
Marketable securities 137 137
Accounts receivable, net of allowance for doubtful accounts
of $495 for 2003 for 2002 2,891 3,307
Accounts receivable, related parties 221 206
Inventories, net 8,825 7,315
Prepaid expenses and other assets 676 1,049
----------------------------------
Total current assets 13,183 12,934
Property, plant and equipment, net 24,836 23,048
Other assets:
Goodwill, net 6,434 6,434
Other intangible assets, net of accumulated amortization of $588 for
2003 and $527 for 2002 1,752 1,853
Other 84 116
Assets of subsidiary held for sale -- 1,538
----------------------------------
$ 46,289 $ 45,923
==================================
The accompanying notes are an integral part of the
condensed consolidated financial statements.
January 31, October 31,
2003 2002
----------------------------------
Liabilities and Stockholders' Deficit
Current liabilities:
Current portion of long-term debt $ 4,672 $ 5,667
Current portion of long-term debt, related parties 82 --
Accounts payable, trade 2,923 3,450
Accounts payable, related parties 710 668
Accrued expenses and customer deposits 1,481 1,558
----------------------------------
Total current liabilities 9,868 11,343
Long-term debt, net of current portion 25,299 23,879
Long-term debt, related parties 8,969 5,518
Deferred income tax liabilities 1,257 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 1,503 1,400
Class of Series D Preferred Stock: 32,143 shares outstanding for 2003 675 --
Stockholders' equity (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, 88,330 shares issued and outstanding in
2003 and 2002 -- --
Additional paid-in capital 11,157 10,184
Accumulated other comprehensive loss (49) (49)
Accumulated deficit (12,398) (10,832)
----------------------------------
Total stockholders' deficit (1,282) (689)
----------------------------------
$ 46,289 $ 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
-------------------------------------
January 31, 2003 January 31, 2002
-------------------------------------
(as restated)
Net sales $ 10,899 $ 11,466
Cost of sales 9,739 9,948
-------------------------------------
GROSS PROFIT 1,160 1,518
Selling, general and administrative expenses 2,055 2,004
-------------------------------------
Loss from operations (895) (486)
Other income (expense):
Interest expense, net (784) (845)
Other income (expense) 4 (29)
-------------------------------------
Loss before income taxes and discontinued operations (1,675) (1,360)
Income tax benefit 158 155
-------------------------------------
Loss before discontinued operations (1,517) (1,205)
Loss from discontinued operations, net of tax (49) (326)
-------------------------------------
Net loss $ (1,566) $ (1,531)
=====================================
Basic and diluted loss per share attributable to common shareholders:
From continuing operations $ (.04) $ (.03)
Discontinued operations, net of tax .00 (.01)
-------------------------------------
Net loss per share $ (.04) $ (.04)
=====================================
Weighted average common and common equivalent shares outstanding, basic and
diluted: 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
(dollars in thousands)
(unaudited)
Series C Series D
Convertible Convertible Accumulated
Comprehensive Common Stock Preferred Stock Preferred Stock Additional Other
----------------------------------------------- Paid-in Comprehensive Accumulated
Loss Shares Amount Shares Amount Shares Amount Capital Loss Deficit Total
--------------------------------------------------------------------------------------------------------
Balance at
October 31, 2002 $ -- 36,007,855 $ 3 3,982,193 $ 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 -- -- -- -- -- -- -- (103) -- -- (103)
Tax effect of sale of
coaches to DC Investments -- -- -- -- -- -- -- (96) -- -- (96)
Leasing, LLC
Extension of stock options -- -- -- -- -- -- -- 30 -- -- 30
Net loss (1,566) -- -- -- -- -- -- -- -- (1,566) (1,566)
--------------------------------------------------------------------------------------------------------
Total comprehensive loss $ (1,566)
=========
Balance at January 31, 2003 36,007,855 $ 3 3,982,193 $ 5 88,330 $ -- $11,157 $ (49) $(12,398) $(1,282)
=================================================================================================
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)
Three Months Ended
-------------------------------
January 31, January 31,
2003 2002
-------------------------------
(as restated)
Cash flow from operating activities:
Net loss from continuing operations $ (1,517) $ (1,205)
Adjustments to reconcile net loss from continuing operations to net cash
provided by (used in) operating activities:
Depreciation and amortization 687 664
Other (93) (105)
Changes in operating assets and liabilities
Accounts receivable, net 417 (85)
Inventories, net (1,509) (434)
Other, net (534) 810
-------------------------------
Net cash used in operating activities (2,549) (355)
-------------------------------
Cash flows from investing activities:
Capital expenditures (96) (222)
Other -- 11
-------------------------------
Net cash used in investing activities (96) (211)
-------------------------------
Cash flows from financing activities:
Advances from (repayments to) related parties, net (652) 156
Net borrowings on lines of credit 1,574 1,002
Net borrowings (repayments) on long-term debt, including related parties 1,277 (727)
-------------------------------
Net cash provided by financing activities 2,199 439
Net cash provided by (used in) discontinued operations (41) 23
-------------------------------
Decrease in cash and cash equivalents (487) (112)
Cash and cash equivalents, beginning of period 920 529
-------------------------------
Cash and cash equivalents, end of period $ 433 $ 417
===============================
Interest paid $ 718 $ 915
===============================
Taxes paid $ 14 $ 15
===============================
The accompanying notes are an integral part of the
condensed consolidated financial statements.
Three Months Ended
-------------------------------
January 31, January 31,
2003 2002
-------------------------------
Supplemental disclosure of noncash operating, investing and financing
activities:
Acquisition of coaches and equipment through issuance of debt $ 2,278 $ --
Contribution to capital from sale of Champion to related party $ 1,142 $ --
Issuance of manadatory redeemable preferred stock in conjunction with the
sale of Champion $ 675 $ --
Tax effect of sale of coaches to a related party $ 96 $ --
Fair value change on mandatory redeemable preferred stock $ (103) $ 191
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 per share and 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, 2002.
The accompanying financial data as of January 31, 2003 and for the three months
ended January 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 January 31, 2003, results of operations for the three
months ended January 31, 2003 and cash flows and stockholders' deficit for the
three months ended January 31, 2003 have been made. The results of operations
for the three months ended January 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. 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 Corporation, the legal acquirer), a
holding company.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share and 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's financing
agreements will 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 $5,000 line of credit agreement, which expires January 9,
2005. As of January 31, 2003, availability under the agreement is approximately
$1,200.
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 net loss from continuing operations
of $1,517 for the three months ended January 31, 2003. 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 with two lenders as of January 31, 2003. Covenant violations with one
lender have not been waived and as a result, $833 of long-term debt has been
reclassified as a current liability as of January 31, 2003. On March 19, 2003,
the Company entered into an agreement in principle to refinance this debt with
Fair Holdings as further described in Note 10.
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
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share and share data)
(unaudited)
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
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 action
described below during the three months ended January 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 January 2, 2003, the Company obtained an increase in its available line
of credit with Fair Holdings to $5,000 from $3,000.
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 entered into amended agreements
with their respective lenders. Such agreements contain amended financial
covenants.
The above factors combined with additional actions by management at the
operating subsidiaries have contributed to an increase in the Company's working
capital from $1,561 at October 31, 2002 to $3,315 at January 31, 2003.
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 has continued to
explore various opportunities to refinance the current outstanding debt of
Danzer which, under a forebearance agreement with the lender, is payable March
31, 2003.On March 19, 2003, the Company entered into an agreement in principle
to refinance this debt with Fair Holdings as further described in Note 10.
SIGNIFICANT ACCOUNTING POLICIES:
Earnings Per Share, as restated:
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
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share and share data)
(unaudited)
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
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 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. However,
because the Company incurred a loss for the periods ended January 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.
Basic and diluted loss per share have been computed as follows:
Three Months Ended
-------------------------------------
January 31, 2003 January 31, 2002
------------------ ------------------
Loss before discontinued operations $ (1,517) $ (1,205)
Change in fair value of mandatory redeemable preferred stock (103) 191
------------------ ------------------
Loss attributable to common shareholders before discontinued operations (1,620) (1,014)
Loss from discontinued operations, net of tax (49) (326)
------------------ ------------------
Net loss attributable to common shareholders $ (1,669) $ (1,340)
================== ==================
Weighted average common and common equivalent shares outstanding, basic and
diluted 36,007,855 36,007,855
================== ==================
Loss per share, basic and diluted, attributable to common shareholders:
From continuing operations $ (.04) $ (.03)
Discontinued operations .00 (.01)
------------------ ------------------
Net loss per share $ (.04) $ (.04)
================== ==================
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 per share and 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 months ended January 31, 2003 and 2002, respectively, the Series C
Preferred Stock has been reflected on a weighted average basis outstanding as
common shares of 102,825,730 and 74,783,380, respectively. The Series D
Preferred Stock has been reflected on a weighted average basis outstanding as
common shares of 15,705,004 for the three months ended January 31, 2003. There
were no Series D Preferred Stock shares issued or outstanding during the three
months ended January 31, 2002.
Three Months Ended
--------------------------------------
January 31, 2003 January 31, 2002
------------------ -------------------
Pro forma weighted average common shares outstanding, basic and diluted 139,080,839 110,791,370
================== ===================
Pro forma net loss per share, basic and diluted, attributable to common
shareholders $ (.01 ) $ (.01)
================== ===================
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.
RECENTLY ISSUED PRONOUNCEMENTS:
In November 2002, the Financial Accounting Standards Board (FASB) issued FASB
interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others ("FIN 45").
FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a
liability for the fair value of an obligation assumed under a guarantee. FIN 45
also requires additional disclosures by a guarantor in its interim and annual
financial statements about the obligations associated with guarantees issued.
The recognition provisions of FIN 45 will be effective for any guarantees that
are issued or modified after December 31, 2002. Management does not expect the
adoption of FIN 45 to have a material impact on the Company's financial position
or results of operations.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share and share data)
(unaudited)
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
In January 2003, FASB issued FASB Interpretation 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. The Company is currently evaluating the impact that adopting FASB
Interpretation No. 46 may have on its consolidated financial statements
including the potential consolidation of DW Leasing and DC Investments Leasing
that are currently included in the Company's consolidated financial statements
on a combined basis. If it is determined that these entities should be
consolidated rather than combined, it may impact current balance sheet
classifications and a result in cumulative effect of change in accounting in the
consolidated statement of operations. Such impact, if any, has not yet been
determined.
2. INVENTORIES
Inventories are stated at the lower-of-cost (first-in, first-out method) or
market and are comprised of the following components (in thousands):
January 31, October 31, 2002
2003
------------------ -------------------
Raw materials $ 4,219 $ 3,655
Work-in-process 816 709
Finished goods 4,174 3,417
Valuation reserve (384) (466)
------------------ -------------------
Total $ 8,825 $ 7,315
================== ===================
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 January 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.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share and share data)
(unaudited)
3. DISCONTINUED OPERATIONS, CONTINUED
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 months ended
January 31, 2003 and 2002 are as follows:
Three Months Ended
-------------------------------------------------------
January 31, 2003 January 31, 2002
---------------------------- --------------------------
Net sales $ 170 $ 1,017
Operating expenses (286) (1,280)
Interest (85) (63)
Other 127 --
Tax benefit 25 --
---------------------------- --------------------------
Net loss $ (49) $ (326)
============================ ==========================
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.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share and share data)
(unaudited)
4. FINANCING ARRANGEMENTS, CONTINUED
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 entered into an amended 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. The "temporary overline" was used by the Company to increase
inventories during the quarter ended January 31, 2003. Inventories were
increased to improve the Company's ability to deliver orders during the second
and third quarters when sales have been historically higher than the first
quarter.
United was in technical default of certain loan covenants with its subordinated
lender at January 31, 2003. United has obtained a waiver of the violations from
the lender.
OBSIDIAN ENTERPRISES:
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.
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. The Company and the lender subsequently entered into a Second
Forbearance Agreement waiving these violations and reached an agreement in
principle to refinance this debt with Fair Holdings as further described in Note
10.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share and share data)
(unaudited)
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. The repurchase
options expire if not exercised during the specified periods. The Company's
repurchase obligation is guaranteed by Mr. Durham. Accordingly, the Company has
recorded mandatory redeemable preferred stock of $675 at January 31, 2003.
6. STOCKHOLDERS' DEFICIT
On December 13, 2003, the Company's Board of Directors approved the extension of
the expiration date of 200,000 fixed stock options, exercisable at $.05. The
original expiration date of December 31, 2002 was extended to December 31, 2003.
The Company recognized $30 of compensation expense related to the extension of
the options during the three months ended January 31, 2003.
In January 2003, the Company and certain lenders entered into amended debt
agreements containing less stringent covenants. In exchange for this amendment,
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.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share and 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 January 31, 2003
------------------------------------------------------------------------------
Trailer Butyl Rubber
Manufacturing Coach Leasing Reclaiming Total
------------------------------------------------------------------------------
Sales:
Domestic $ 7,012 $ 1,107 $ 2,212 $ 10,331
Foreign 347 -- 221 568
------------------------------------------------------------------------------
Total $ 7,359 $ 1,107 $ 2,433 $ 10,899
Cost of goods sold $ 6,720 $ 622 $ 2,397 $ 9,739
Loss before taxes $ (1,066) $ (248) $ (361) $ (1,675)
Identifiable assets $ 20,466 $ 14,043 $ 10,977 $ 45,486*
Depreciation and amortization expense $ 189 $ 190 $ 308 $ 687
*Identifiable assets, as stated above $ 45,486
Corporate-level goodwill 650
Other corporate-level assets 153
--------------------
Total assets $ 46,289
====================
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share and share data)
(unaudited)
7. BUSINESS SEGMENT DATA AND GEOGRAPHIC DATA, CONTINUED
Three Months Ended January 31, 2002
------------------------------------------------------------------------------
Trailer Butyl Rubber
Manufacturing Coach Leasing Reclaiming Total
------------------------------------------------------------------------------
Sales:
Domestic $ 8,233 $ 1,043 $ 2,079 $ 11,355
Foreign -- -- 111 111
------------------------------------------------------------------------------
Total $ 8,233 $ 1,043 $ 2,190 $ 11,466
Cost of goods sold $ 7,329 $ 573 $ 2,046 $ 9,948
Loss before taxes $ (641) $ (367) $ (352) $ (1,360)
Identifiable assets $ 22,102 $ 12,444 $ 10,253 $ 44,799*
Depreciation and amortization expense $ 160 $ 245 $ 259 $ 664
*Identifiable assets, as stated above $ 44,799
Corporate-level goodwill 650
Other corporate-level assets 130
--------------------
Total assets $ 45,579
====================
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 ended January 31, 2003 and 2002,
allocated corporate expenses by segment were as follows:
Three Months Ended
----------------------------------------
January 31, January 31,
2003 2002
----------------------------------------
Trailer manufacturing $ 318 $ 218
Coach leasing 48 37
Butyl rubber reclaiming 99 52
----------------------------------------
$ 465 $ 307
========================================
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share and share data)
(unaudited)
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:
January 31, October 31,
2003 2002
------------------ ------------------
Balance sheet:
Current assets:
Accounts receivable, Obsidian Capital Partners $ 156 $ 181
Accounts receivable, Fair Holdings 21 --
Accounts receivable, Obsidian Capital Company 13 13
Accounts receivable, other affiliated entities 31 12
------------------ ------------------
Total assets $ 221 $ 206
================== ==================
Current liabilities:
Accounts payable, Obsidian Capital Company $ 274 $ 279
Accounts payable, other affiliated entities 29 9
Accounts payable, stockholders 280 338
Accounts payable, DC Investments and Fair Holdings 127 42
Notes payable, Fair Holdings 82 --
Long-term portion:
Notes payable, DC Investments 700 700
Notes payable, Fair Holdings 4,500 3,020
Line of credit, Fair Holdings 3,769 1,798
------------------ ------------------
Total liabilities $ 9,761 $ 6,186
================== ==================
Three Months Ended
-------------------------------------
January 31, 2003 January 31, 2002
------------------ ------------------
Income statement:
Interest expense, DC Investments and Fair Holdings $ 179 $ --
Rent expense, Obsidian Capital Company $ 21 $ 15
Rent expense, Fair Holdings $ 4 $ --
Related-party amounts classified as current reflect those portions of the total
receivable or payable that were currently due in accordance with the terms.
Amounts classified as long term represent amounts not currently due, amounts
that are expected to be converted to equity subsequent to January 31, 2003 and
October 31, 2002, respectively, or amounts converted to long-term debt
subsequent to January 31, 2003.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share and share data)
(unaudited)
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.
10. SUBSEQUENT EVENTS
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. The Company and the Lender entered into a Second Forbearance
Agreement dated February 28, 2003. Terms of this agreement include a waiver of
the Company's violations of the above covenants. The maturity date of the debt
with the senior lender remains March 31, 2003.
On March 19, 2003, the Company entered into an agreement in principle with the
senior lender of Danzer and Fair Holdings to refinance the current senior debt
of Danzer. Under the proposed terms of this refinancing, Fair Holding will
acquire the senior lender's interest in the Danzer debt based on the current
amount outstanding of approximately $1,429. The proposed terms also include an
amendment to the debt agreement to provide less stringent financial covenants.
11. 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, 2001. 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 three months ended January 31, 2002 for the error related to
redeemable preferred stock. We are also restating the previously issued
financial statements for the periods ended January 31, 2003 and 2002 for the
change in weighted average shares outstanding.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share and share data)
(unaudited)
11. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS, CONTINUED
Below is a comparison of previously reported and restated balances included in
the Condensed Consolidated Balance Sheet and Statement of Operations as of and
for the three months ended January 31, 2003 and 2002, respectively.
Previously
January 31, 2002 Reported Change As Restated
----------------
------------------ ------------------- ------------------
Statement of Operations:*
Interest expense $ 811 $ 34 $ 845
Loss before income taxes (1,326) (34) (1,360)
Net loss (1,497) (36) (1,531)
Weighted average common and common equivalent shares
outstanding basic and diluted 110,791,370 (74,783,515) 36,007,855
Net loss per share (.01) (.03) (.04)
Balance Sheet:
Long-term debt, net of current 22,228 (1,436) 20,792
Mandatory redeemable preferred stock -- 1,244 1,244
Additional paid-in capital 5,612 261 5,873
Accumulated deficit (5,950) (69) (6,019)
January 31, 2003
Weighted average common and common equivalent shares
outstanding basic and diluted 139,080,839 (103,072,984) 36,007,855
Net loss per share:
From continuing operations (.01) (.03) (.04)
From discontinued operations, net of tax .00 .00 .00
------------------ ------------------- ------------------
------------------ ------------------- ------------------
Net loss per share (.01) (.03) (.04)
================== =================== ==================
================== =================== ==================
*Amounts do not include the operations of Champion which have been reclassified
as discontinued operations.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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.
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.
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, 2001. 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 three months ended January 31, 2002 for the error in
accounting for redeemable preferred stock and restating its previously issued
financial statements for all periods presented for the change in weighted
average shares outstanding.
RESULTS OF OPERATIONS
The Company's overall operating results and financial condition during the three
months ended January 31, 2003 compared to the three months ended January 31,
2002 were adversely affected by the overall economic situation in the United
States, the limited availability of raw materials in the butyl reclaiming
segment and adverse weather conditions in the Midwest that affected the
Company's ability to deliver orders in the trailer and related transportation
equipment manufacturing segment.
The following table shows net sales by product segment:
Three Months Ended
------------------------------------------
January 31, 2003 January 31, 2002
--------------------- --------------------
Trailer manufacturing $ 7,359 $ 8,233
Butyl rubber reclaiming 2,433 2,190
Coach leasing 1,107 1,043
--------------------- --------------------
Net Sales $ 10,899 $ 11,466
===================== ====================
The following is a discussion of the major elements impacting the Company's
operating results by segment for the three months ended January 31, 2003
compared to the three months ended January 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
-------------------------------------------
January 31, 2003 January 31, 2002
--------------------- ---------------------
Net Sales $ 7,359 $ 8,233
Cost of Sales 6,720 7,329
--------------------- ---------------------
Gross Profit $ 639 $ 904
===================== =====================
Gross Profit % 8.7% 11.0%
===================== =====================
Three Months Ended January 31, 2003 Compared to The Three Months Ended January
31, 2002
Sales in this segment decreased $874 or 10.6% over the comparable period of
2002. The decrease was primarily related to two factors.
First, sales of truck bodies decreased by $354 over the quarter ended January
31, 2002. 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. Sales to this customer in the first quarter did not
decline significantly from 2002, but the Company anticipates little to no future
sales from this customer after January 31, 2003.
Second, the sale of cargo trailers decreased by $520 as a result of the general
state of the U.S. economy and harsher weather during the winter of 2003.
The gross profit decrease was primarily 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 have also had a negative impact in gross profit margins as
compared to the three months ended January 31, 2002. Management believes gross
profits will continue to be adversely impacted by the lack of sales volume in
truck bodies during 2003.
BUTYL RUBBER RECLAIMING
The following table shows sales, cost of sales and gross profit for this segment
for the periods indicated:
Three Months Ended
------------------------------------------
January 31, 2003 January 31, 2002
--------------------- --------------------
Net Sales $ 2,433 $ 2,190
Cost of Sales 2,397 2,046
--------------------- --------------------
Gross Profit $ 36 $ 144
===================== ====================
Gross Profit % 1.5% 6.6%
===================== ====================
Three Months Ended January 31, 2003 Compared To The Three Months Ended January
31, 2002
Net sales in this segment for the three months ended January 31, 2003 as
compared to the three-month period ended January 31, 2002 increased 11.1% in the
amount of $243.
Sales in this segment were higher than the three months ended January 31, 2002
because of increased demand from Company's tire manufacturing customers. 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 first quarter of 2002 due to the demand for
pipeline mastic wraps produced with reclaimed butyl rubber. Demand for this
product fell dramatically beginning in October 2001 as a result of the 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 2002, demand has not returned to historical levels.
Gross profit percentage decreased 5.1% for the three months ended January 31,
2003 when compared to the three months ended January 31, 2002. The primary
reasons 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
------------------------------------------
January 31, 2003 January 31, 2002
--------------------- --------------------
Net Sales $ 1,107 $ 1,043
Cost of Sales 622 573
--------------------- --------------------
Gross Profit $ 485 $ 470
===================== ====================
Gross Profit % 43.8% 45.1%
===================== ====================
Three Months Ended January 31, 2003 Compared To The Three Months Ended January
31, 2002
Sales for the three months ended January 31, 2003 increased 6.1% in the amount
of $64 over the comparable three-month period ended January 31, 2002. The
increase in sales is attributable to increased utilization of the coach fleet as
well as the use of "all inclusive" lease arrangements. Under these lease
arrangements, the customer pays one price for all costs including drivers and
fuel as opposed to paying these items separately and leasing only the coach.
Management believes the increased utilization is a result of its marketing
efforts to 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.
The first quarter is typically the segment's lowest sales period due to
seasonality. Business is historically stronger in the spring, summer and fall.
Gross profit for this segment was 43.8% for the three months ended January 31,
2003 compared to 45.1% for the comparable three-month period ended January 31,
2002. The reduction is attributable primarily to an increase in "all inclusive"
lease arrangements described above which result in higher costs of sales and
also to additional costs of maintaining a larger fleet during the lower
utilization period of the year.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES
The Company's selling, general and administrative expenses for the three months
ended January 31, 2003 increased $51 or 2.5% over the three-month period ended
January 31, 2002. $30 of this increase is related to the extension of stock
options for certain employees in December 2002.
INTEREST EXPENSE, AS RESTATED
Interest expense for the three months ended January 31, 2003 as a percentage of
average debt borrowings of $37,318 was 2.1% (8.4% on an annual basis). Interest
expense for the three months ended January 31, 2002 as a percentage of average
debt borrowings of $32,975 was 2.6% (10.4% on an annual basis). 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 2002.
INCOME TAX PROVISION
The income tax benefit for the three-month period ended January 31, 2003
increased by $3 as compared to the three-month period ended January 31, 2002.
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. 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 the criteria provided for in
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 three months ended January 31, 2003 and 2002 represent the losses of
Champion during these periods, net of tax benefit of $97 and $0, respectively.
The loss from discontinued operations for the three months ended January 31,
2003 decreased by $277 as compared to the three months ended January 31, 2002.
The reduced loss was a result of a gain of $127 on the settlement of
subordinated debt and a reduction in overhead costs of the operations at
Champion.
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. The benefit of
liabilities assumed by the purchaser in excess of assets sold in the amount of
$1,142 was recorded as additional paid in capital.
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 four of the five 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 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." 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 57% of the
Company's outstanding debt is variable and based on market factors such as the
prime rate of LIBOR rates. A significant increase in these market indexes could
have a material adverse affect on the Company's liquidity.
In addition, the lack of positive results at Danzer has resulted in violations
of certain requirements of its loan agreement with its senior lender as further
described below under "Financial Covenant Waivers". As a result, all debt due
the senior lender ($1,741 as of January 31, 2003) matures on March 31, 2003.
Obsidian Enterprises also is a guarantor under this debt agreement. The company
is currently exploring alternatives to refinance this debt or extend the terms
with the current lender although no agreements have been reached as of yet.
Should refinancing or an extension of the current agreement not be obtained, the
Company's liquidity and resources could be reduced materially should it need to
repay this loan.
The Company's working capital position (current assets over current liabilities)
was positive at January 31, 2003 by $3,315. The working capital position was
$1,561 at October 31, 2002. This increase is attributable to the items discussed
below.
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 as indicated above, strengthen
its equity and place the Company in a position to successfully enhance its
liquidity. These steps include:
o The agreement to refinance debt of Danzer with Fair Holdings as further
described under "Refinancing Activities;" o The actions taken with respect
to Champion described under "Discontinued Operations" which improved the
Company's overall equity and working capital position;
o The refinancing of additional coaches in the coach leasing group;
o The increased line availability through Fair Holdings;
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 should a viable option be obtained for
the Danzer financing. However, there can be no assurance that adequate Danzer
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.
FINANCIAL COVENANT WAIVERS
The Company has reached agreements with certain of its lenders to waive
financial covenant defaults under the following loans:
o 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. The Company and the Lender entered
into a Second Forbearance Agreement dated February 28, 2003. Terms of this
agreement include a waiver of the Company's violations of the above
covenants. The maturity date of the debt with the senior lender remains
March 31, 2003.
o At January 31, 2003, United was in violation of certain financial covenants
with Huntington Capital Investment Company. United has received a waiver of
these violations.
FUNDS AVAILABILITY
On a consolidated basis, as of January 31, 2003, the Company had approximately
$433 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 January 31, 2003, 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 274 2,154
United 112 112
Obsidian Enterprises 1,231 1,231
(1) Additional borrowings only at the bank's discretion under the forbearance
agreement
The Company generated negative net cash flow of $2,549 from operations during
the three months ended January 31, 2003. Cash used in operations during the
quarter is primarily due to increases in inventories and decreases in accounts
payable. The Company has increased inventories during the first quarter
primarily in the trailer and related transportation equipment manufacturing
segment. The first quarter is historically the lowest volume quarter due to
seasonality of this business. Inventories were increased during this quarter to
provide an increase in the Company's ability to deliver orders during the second
and third quarters when sales have historically been higher than in the first
quarter. Funding during the quarter was provided through borrowings on lines of
credit and from related parties.
REFINANCING ACTIVITIES
Refinancing activity during the quarter ended January 31, 2003 included the
following:
o On December 17, 2002, Obsidian Leasing sold four coaches to DC Investments
Leasing, LLC ("DC Investments Leasing"), a newly created entity owned by DC
Investments, LLC (an 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.
o Danzer is currently operating under a forbearance agreement with its senior
lender that includes a maturity date of the debt with this lender of March
31, 2003. On March 19, 2003, the Company entered into an agreement in
principle with the senior lender of Danzer and Fair Holdings to refinance
the current senior debt of Danzer. Under the proposed terms of this
refinancing, Fair Holding will acquire the senior lender's interest in the
Danzer debt based on the current amount outstanding of approximately
$1,429. The proposed terms also include an amendment to the debt agreement
to provide less stringent financial covenants.
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 (EBITDA)
A summary of our contractual cash obligations for the fiscal years ending 2003
through 2006 and 2007 and thereafter at January 31, 2003 is as follows:
2007 and
Contractual Obligations Total 2003 2004 2005 2006 Thereafter
------------ ------------- ------------ ------------ ------------ ------------
Long-term debt, with covenant
violations and classified as current $ 833 $ 833 $ -- $ -- $ -- $ --
Long-term debt, and all debt service
interest payments 49,767 5,143 8,408 18,017 7,992 10,207
Operating leases 1,397 450 353 274 189 131
Mandatory redeemable preferred stock 2,178 337 338 - 1,503 -
------------ ------------- ------------ ------------ ------------ ------------
Total contractual cash obligations $ 54,175 $ 6,763 $ 9,099 $ 18,291 $ 9,684 $ 10,338
============ ============= ============ ============ ============ ============
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 January Date of Expiration
31, 2003
----------------------------------- -------------------------- --------------------------- ---------------------------
Line of credit $ 1,000 $ 840 March 31, 2003
Line of credit 3,750 3,750 February 1, 2004
Line of credit 4,000 1,846 October 1, 2005
Line of credit 650 538 March 31, 2003
Line of credit, related party 5,000 3,769 January 1, 2005
The Company's net cash used in operations for the three months ended January 31,
2003 was $2,549. This is comprised of a net loss from continuing operations of
$1,517, offset by noncash changes as follows: depreciation and amortization of
$687, deferred tax benefit of $174, accretion of interest of $81 and the
extension of stock options of $30. In addition, the Company had decreases in
accounts receivable of $417, other assets of $44, accounts payable of $530, and
accrued expenses and customer deposits of $78 and increases in inventories of
$1,509.
Net cash flow provided from financing activities for the three months ended
January 31, 2003 was $2,199. This is comprised of borrowings of long-term debt
and net borrowings of short-term debt of $1,651 and borrowings from related
parties of $2,033, offset by principal repayments of long-term debt of $833. In
addition, the Company repaid $652 of related party payables.
Cash flow used in investing activities for the three months ended January 31,
2003 was $96. This is comprised of purchases of equipment.
The total decrease in cash is summarized as follows:
Three Months Ended
--------------------------------------
January 31, January 31,
2003 2002
------------------- ------------------
Net cash used in operations $ (2,549) $ (355)
Net cash used in investing activities (96) (211)
Net cash provided by financing activities 2,199 431
Net cash provided by (used in) discontinued operations (41) 23
------------------- ------------------
Decrease in cash and cash equivalents $ (487) $ (112)
=================== ==================
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 loss from continuing
operations under accounting principles generally accepted in the United States
of America by segment for the applicable periods is as follows:
Three Months Ended January 31, 2003
-------------------------------------------------------------------------
Net Loss
From
Interest Income Depreciation Continuing
EBITDA Expense Taxes & Amortization Operations
------------ ------------ ----------- -------------------- --------------
Trailer and related transportation
equipment manufacturing $ (495) $ 318 $ (99) $ 189 $ (903)
Coach leasing 233 270 -- 190 (227)
Butyl rubber reclaiming 58 97 (103) 308 (244)
Corporate -- 99 44 -- (143)
------------ ------------ ----------- -------------------- --------------
Total Company $ (204) $ 784 $ (158) $ 687 $ (1,517)
============ ============ =========== ==================== ==============
Three Months Ended January 31, 2002
-------------------------------------------------------------------------
Net Loss
From
Interest Income Depreciation Continuing
EBITDA Expense Taxes & Amortization Operations
------------ ------------ ----------- -------------------- --------------
Trailer and related transportation
equipment manufacturing $ (148) $ 333 $ (46) $ 160 $ (595)
Coach leasing 235 357 -- 245 (367)
Butyl rubber reclaiming 83 176 (109) 259 (243)
------------ ------------ ----------- -------------------- --------------
Total Company $ 170 $ 866 $ (155) $ 664 $ (1,205)
============ ============ =========== ==================== ==============
Obsidian Enterprises, Inc. (legal parent) allocates selling, general and
administrative expenses to the respective companies primarily based on a
percentage of sales. Amounts allocated by segment are as follows:
Three Months Ended
----------------------------------------
January 31, January 31,
2003 2002
----------------------------------------
Trailer manufacturing $ 318 $ 218
Coach leasing 48 37
Butyl rubber reclaiming 99 52
----------------------------------------
Total $ 465 $ 307
========================================
EBITDA by segment, exclusive of the allocation of the above selling, general and
administrative expenses, is as follows:
Three Months Ended
----------------------------------------
January 31, January 31,
2003 2002
----------------------------------------
Trailer manufacturing $ (177) $ 70
Coach leasing 281 272
Butyl rubber reclaiming 157 135
----------------------------------------
Total $ 261 $ 477
========================================
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 $495 should be adequate for any exposure to loss in our
January 31, 2003 accounts receivable. We have also established reserves for
slow-moving and obsolete inventories and believe the reserve of $384 is
adequate. We depreciate our property and equipment and amortize intangible
assets (except for goodwill) over their estimated useful lives. Property and
equipment is reviewed for impairment when events and circumstances indicate
potential impairment factors are present. In assessing the recoverability of the
Company's property and equipment, 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.
Goodwill and intangibles are reviewed annually for impairment as of the first
day of the fourth quarter or more frequently when events and circumstances
indicate potential impairment factors are present. The realization of the
goodwill of $6,434 is primarily dependent on the future operations of the
operating entity whether 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 and accordingly result in
impairment charges which could be material to the Company's operating results.
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 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 January 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 January 31,
2003.
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.
August 25, 2003 By: /s/ Timothy S. Durham
Date --------------------------------
Timothy S. Durham, Chairman
and Chief Executive Officer
EXHIBIT INDEX
------------------ --------------------------------------------------------------- --------------------------------
Exhibit No. Description
------------------ --------------------------------------------------------------- --------------------------------
2.1 Memorandum of Agreement, dated October 30, 2002, between Incorporated by reference to
Champion Trailer, Inc., on the one hand, and Timothy S. Exhibit 2.1 to the Current
Durham and Terry G. Whitesell, on the other hand. Report on Form 8-K filed by
the Registrant on November 6,
2002.
------------------ --------------------------------------------------------------- --------------------------------
2.2 Agreement for the Purchase and Sale of Business Assets of Incorporated by reference to
Champion Trailer, Inc., dated January 31, 2003, among Exhibit 2.2 to the Current
Obsidian Enterprises, Inc., Champion Trailer, Inc. and Report on Form 8-K filed by
Champion Trailer Acquisition Company, LLC, and related the Registrant on February 11,
Assumption Agreement. 2003.
------------------ --------------------------------------------------------------- --------------------------------
10.1 Promissory Term Note, dated November 18, 2002, from Obsidian Attached+
Leasing Company, Inc. to Fair Holdings, Inc.
------------------ --------------------------------------------------------------- --------------------------------
10.2 Third Amendment to Credit Agreement, dated December 26, 2002, Attached+
between United Expressline, Inc. and First Indiana Bank, N.A.
------------------ --------------------------------------------------------------- --------------------------------
10.3 Credit Agreement, dated December 18, 2002, between DC Attached+
Investments Leasing, LLC and First Indiana Bank, N.A. and
Related Documents.
------------------ --------------------------------------------------------------- --------------------------------
10.4 Term Promissory Note, dated January 3, 2003, from Obsidian Attached+
------------------ --------------------------------------------------------------- --------------------------------
10.5 Stock Purchase Warrant, dated January 24, 2003, issued by Attached+
Obsidian Enterprises, Inc. to Frost National Bank, Custodian,
FBO Renaissance US Growth Investment Trust PLC Trust No.
WOO740100.
------------------ --------------------------------------------------------------- --------------------------------
10.6 Stock Purchase Warrant, dated January 24, 2003, issued by Attached+
Obsidian Enterprises, Inc., to HSBC Global Custody Nominee
(UK) Limited, FBO BFS US Special Opportunities Trust PLC.
------------------ --------------------------------------------------------------- --------------------------------
10.7 Second Limited Forbearance Agreement, dated February 28, Attached+
2003, between Danzer Industries, Inc. and Obsidian
Enterprises, Inc.
------------------ --------------------------------------------------------------- --------------------------------
10.8* Form of Letter Amending Stock Options and Schedule Attached+
Identifying Material Details
------------------ --------------------------------------------------------------- --------------------------------
10.9 First Amendment to Promissory Note, dated January 9, 2003. Attached+
------------------ --------------------------------------------------------------- --------------------------------
10.10 Sublease, effective as of January 1, 2003, between Fair Attached+
Holdings, Inc. and Obsidian Enterprises, Inc.
------------------ --------------------------------------------------------------- --------------------------------
10.11 Commercial Equipment Lease Agreement, commencing November 20, Attached+
2002, between Fair Holdings, Inc. and United Expressline,
Inc.
------------------ --------------------------------------------------------------- --------------------------------
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.
+ Previously filed.