SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q/A
Amendment No. 1
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the three months ended July 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 ______
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 3680
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 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, 2002
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 July 31, 2002, 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)
(unaudited)
July 31, October 31,
2002 2001
----------------------------------
(as restated, see Note 11)
Assets
Current assets:
Cash and cash equivalents $ 456 $ 529
Marketable securities 143 223
Accounts receivable, net of allowance for doubtful accounts
of $66 for 2002 and $90 for 2001 4,954 3,744
Accounts receivable, related parties 24 217
Inventories, net 6,466 6,694
Prepaid expenses and other assets 814 1,275
----------------------------------
Total current assets 12,857 12,682
Property, plant and equipment, net 23,055 24,232
Other assets:
Goodwill, net 7,154 9,210
Other intangible assets, net of accumulated amortization of $555 for
2002 and $270 for 2001 1,863 2,147
Other 372 579
----------------------------------
$ 45,301 $ 48,850
==================================
The accompanying notes are an integral part of the
condensed consolidated financial statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
July 31, October 31,
2002 2001
----------------------------------
(as restated, see Note 11)
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 11,606 $ 9,233
Accounts payable, trade 3,337 3,620
Accounts payable, related parties 647 925
Accrued expenses and customer deposits 2,496 2,388
----------------------------------
Total current liabilities 18,086 16,166
Accounts payable, related parties 1,662 2,170
Long-term debt, related parties 3,940 -
Long-term debt, net of current portion 19,216 26,076
Deferred income tax liabilities 875 1,672
Commitments and contingencies - -
Mandatory redeemable preferred stock, Class of Series C Preferred Stock:
386,206 shares outstanding 1,094 1,435
Stockholders' equity:
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, 4,358,399 and
3,739,169 shares issued and outstanding for 2002 and 2001, respectively,
400,000 shares of undesignated preferred stock authorized 4 4
Additional paid-in capital 9,371 5,682
Accumulated other comprehensive income (loss) (43) 37
Accumulated deficit (8,907) (4,395)
----------------------------------
Total stockholders' equity 428 1,331
----------------------------------
$ 45,301 $ 48,850
==================================
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, 2002 July 31, 2001 July 31, 2002 July 31, 2001
--------------------------------------------------------------------------
(as restated, (as restated, see
see Note 11) Note 11)
Net sales $ 15,475 $ 6,040 $ 44,931 $ 15,043
Cost of sales 12,759 4,768 38,219 12,272
--------------------------------------------------------------------------
Gross profit 2,716 1,272 6,712 2,771
Selling, general and administrative
expenses 2,026 1,258 6,720 2,749
Insurance recovery (325) - (325) -
--------------------------------------------------------------------------
Income from operations 1,015 14 316 22
Other income (expense):
Interest expense, net (909) (690) (2,828) (1,578)
Other income (expense) 1 11 (32) (56)
--------------------------------------------------------------------------
Income (loss) before income taxes 107 (665) (2,544) (1,612)
Income tax benefit - 52 155 65
--------------------------------------------------------------------------
Income (loss) before cumulative effect of
change in accounting principle 107 (613) (2,389) (1,547)
Cumulative effect of change in accounting
principle - - (2,015) -
--------------------------------------------------------------------------
Net income (loss) $ 107 $ (613) $ (4,404) $ (1,547)
==========================================================================
Income (loss) per share before cumulative effect of change in accounting
principle:
Basic $ .00 $ (.02) $ (.06) $ (.08)
==========================================================================
Diluted $ .00 $ (.02) $ (.05) $ (.08)
==========================================================================
Cumulative effect of change in accounting principle:
Basic $ .00 $ .00 $ (.06) $ .00
==========================================================================
Diluted $ .00 $ .00 $ (.05) $ .00
==========================================================================
The accompanying notes are an integral part of the
condensed consolidated financial statements.
Net income (loss) per share:
Basic $ .00 $ (.02) $ (.11) $ (.01)
==========================================================================
Diluted $ .00 $ (.02) $ (.11) $ (.01)
==========================================================================
Weighted average common and common equivalent shares outstanding:
Basic 36,007,855 26,184,890 36,007,855 20,578,631
==========================================================================
Diluted 128,701,226 26,184,890 36,007,855 20,578,631
==========================================================================
The accompanying notes are an integral part of the
condensed consolidated financial statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(dollars in thousands)
(unaudited)
Addi- Accumulated
Common Stock Preferred Stock tional Other
Comprehensive ----------------------------------- Paid-in Comprehensive Accumulated
Loss Shares Amount Shares Amount Capital Income (Loss) Deficit Total
---------------------------------------------------------------------------------------------------------
(as restated, (as restated,
see Note 11) see Note 11)
Balance at October 31,
2001 $ - 36,007,855 $3 3,739,169 $4 $5,682 $ 37 $ (4,395) $ 1,331
Distributions to members
of DW Leasing, LLC - - - - - - (108) (108)
Unrealized loss on
available-for-sale
marketable securities (80) - - - - - (80) - (80)
Conversion of debt to
preferred stock and
additional paid-in capital - - - 619,230 - 3,348 - - 3,348
Fair value adjustment on
redeemable preferred
stock - - - - - 341 - - 341
Net loss (4,404) - - - - - - (4,404) (4,404)
---------------------------------------------------------------------------------------------------------
Total comprehensive loss $(4,484)
========
Balance at July 31, 2002 36,007,855 $3 4,358,399 $4 $ 9,371 $ (43) $ (8,907) $ 428
===============================================================================================
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, 2002 July 31, 2001
-------------------------------
(as restated,
see Note 11)
Cash flow from operating activities:
Net loss $ (4,404) $ (1,547)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization 2,018 1,469
Goodwill impairment loss 2,015 -
Other (351) 250
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable, net (1,209) 135
Inventories, net 227 1,001
Other, net 840 (902)
-------------------------------
Net cash provided by (used in) operating activities (864) 406
-------------------------------
Cash flows from investing activities:
Capital expenditures (577) (863)
Payments to acquire U.S. Rubber - (5,528)
Other 16 9
-------------------------------
Net cash used in investing activities (561) (6,382)
-------------------------------
Cash flows from financing activities:
Borrowings from and distributions to related parties, net $ 1,778 $ 1,044
Net borrowings on lines of credit 1,102 408
Borrowings (repayments) on long-term debt (1,528) 3,413
Debt issuance cost - (76)
Proceeds from issuance of U.S. Rubber common stock - 880
-------------------------------
Net cash provided by financing activities 1,352 5,669
-------------------------------
Decrease in cash and cash equivalents (73) (307)
Cash and cash equivalents, beginning of period 529 340
-------------------------------
Cash and cash equivalents, end of period $ 456 $ 33
===============================
Interest paid $ 2,389 $ 1,578
===============================
Taxes paid (refunded) $ - $ (163)
===============================
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, 2002 July 31, 2001
-------------------------------
(as restated,
see Note 11)
Supplemental disclosure of noncash operating, investing and financing
activities:
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 $ -
Advances to construct coaches and equipment acquired by issuance of debt $ - $ 292
Seller notes issued in acquisition of U.S. Rubber $ - $ 2,573
Fair value change on mandatory redeemable preferred stock $ 341 $ -
The accompanying notes are an integral part of the
condensed consolidated financial statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Description of Business:
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"). In addition, Danzer Corporation 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
Corporation 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 Danzer subsequent to the Acquisition and Plan of
Reorganization. For accounting purposes, U.S. Rubber Reclaiming, Inc. is deemed
to have acquired Danzer.
Pursuant to the Plan of Acquisition and Reorganization, United Expressline, Inc.
was acquired July 31, 2001.
The accompanying financial data as of July 31, 2002 and for the three and nine
months ended July 31, 2002 and 2001 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,
2001 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, 2001. 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, 2002, results of operations for the three and
nine months ended July 31, 2002 and cash flows and stockholders' equity for the
nine months ended July 31, 2002 have been made. The results of operations for
the three and nine months ended July 31, 2002 are not necessarily indicative of
the operating results for the full fiscal year or any future periods.
The previously issued Form 10-Q for the period ended July 31, 2001 included the
financial results of U.S. Rubber Reclaiming, Inc. for the seven-month period
ended July 31, 2001. The financial results for the period ended July 31, 2001
included in this Form 10-Q include the operations of U.S. Rubber Reclaiming,
Inc. for the nine-month period ended July 31, 2001 for comparative purposes.
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. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
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.
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") and Obsidian Leasing Company, Inc. ("Obsidian
Leasing"), formed November 1, 2001. DW Leasing is controlled by individuals who
are also controlling shareholders of Obsidian Enterprises, Inc. and,
accordingly, Pyramid. DW Leasing and Obsidian Leasing also own the majority of
the coaches operated by Pyramid. All intercompany transactions are eliminated in
consolidation.
To complete the Plan of Reorganization, Pyramid and DW Leasing were required to
obtain lender approval of the transfer of assets subject to liabilities to
Obsidian Leasing, a wholly owned subsidiary of the Company. On November 1, 2001,
the Company completed the tax-free exchange contemplated by the Acquisition
Agreement of June 21, 2001, whereby all but seven coaches and the liabilities
thereon were transferred to Obsidian Leasing to operate this segment of business
previously under DW Leasing. However, as of July 31, 2002, the entities are
combined due to cross-guarantees associated with the debt on the seven coaches.
Champion Trailer, Inc. ("Champion") manufactures and sells transport trailers to
be used primarily in the auto racing industry.
United Expressline, Inc. ("United") manufactures and sells general use cargo
trailers and specialty trailers used in the racing industry and for other
special purposes.
Basis of Presentation:
The Company's July 31, 2002 consolidated financial statements have been
presented on the basis that it is a going concern which contemplates the
realization of assets and satisfaction of liabilities in the normal course of
business. The Company incurred a loss from operations for the ten months ended
October 31, 2001 of $2,149,000 and a net loss of $4,395,000, which included an
asset impairment charge of $2,305,000. In addition, the Company has incurred a
net loss of $4,404,000 for the nine months ended July 31, 2002. The losses have
weakened the Company's financial condition and contributed to its failure to
meet certain financial covenants required by the lenders. As a result of these
covenant violations which either were not waived, were waived only through
November 2002, or were subject to amendments to credit agreements, $3,953,000 of
long-term debt has been reclassified and included in the current debt caption of
current liabilities as of July 31, 2002. A significant portion of the Company's
assets is pledged as collateral on these loans and foreclosure by a bank would
seriously impair the Company's existence. In addition, these losses and the
reclassification of long-term debt have contributed to a total deficit in
working capital of $5,229,000 at July 31, 2002.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
In view of these matters, realization of the assets and satisfaction of the
liabilities in the ordinary course of business is dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely basis, comply
with the terms of its debt financing agreements, obtain refinancing of certain
obligations, and continue to receive capital contributions from its majority
stockholder.
Management, as a part of its plan towards resolving these issues and generating
revenue and cash flow, has taken the actions described below during and
subsequent to the nine months ended July 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, or occur on
terms acceptable to the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" elsewhere in this filing for
further discussions of the liquidity issues facing the Company and the risk
factors associated with these issues as well as management's plans for
addressing them.
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 $1,463,000. The subordinated lender received
30,000 shares of series C convertible 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 $602,000 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 $1,289,000 of debt and accrued
interest due to Obsidian Capital Partners, LP ("OCP"), majority owner of
the Company, to equity in exchange for 402,906 shares of Series C
convertible preferred stock.
o On April 30, 2002, the Company converted $596,000 of debt and accrued
interest due to Fair Holdings, Inc. ("Fair"), an entity controlled by the
Company's Chairman, to equity in exchange for 186,324 shares of Series C
convertible 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%. The line of credit facility and term loan have been
classified in accordance with these new terms at July 31, 2001.
The above transactions are estimated to reduce interest costs by approximately
$345,000 on an annual basis and defer approximately $437,000 of principal
repayments by twelve months.
o The Board of Directors has authorized the Chairman of the Board to explore
various options regarding the operations at Champion. Options include
divestiture, restructuring of operations or closing the facility. As these
options are considered, management has taken steps to further reduce
overhead through cost reductions and reduction in the space currently under
lease.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
o The Company is undertaking to refinance the coaches transferred from DW
Leasing to Obsidian Leasing with existing lenders and DC Investments.
Management anticipates that this will be concluded by the fourth fiscal
quarter of 2002.
o The Company is also pursuing refinancing of the outstanding bank debt at
U.S. Rubber that is due November 1, 2002. Management anticipates the
refinancing will be concluded during the fourth fiscal quarter of 2002.
The above factors combined with additional actions by management at the
operating subsidiaries and the positive impact of the seasonality in certain
segments resulted in the Company recording positive income from operations and
net income in the quarter ended July 31, 2002. In addition, these factors have
also contributed to a reduction in the Company's working capital deficit from
$9,567,000 at April 30, 2002 to $5,229,000 at July 31, 2002.
OCP has entered into agreements related to the debt of U.S. Rubber and United.
Specifically, in the event of a default and in accordance with the default
provisions, Obsidian is obligated to make capital contributions to these
subsidiaries of $1,620,000 and $1,000,000, respectively. In addition, OCP has
committed to fund through the purchase of additional preferred stock the costs
of legal, accounting and related costs to complete the Plan of Reorganization
and the costs to meet regulatory requirements to allow continued trading of
Company stock by shareholders. Funding through July 31, 2002 was $860,000 from
OCP and OCP has agreed to fund an additional $415,000 through the end of fiscal
2002. In addition, Fair has advanced approximately $270,000 to fund additional
costs related to the Plan of Reorganization and related regulatory requirements
above the commitment of OCP. OCP and Fair have agreed to convert these advances
of approximately $1,275,000 to equity in exchange for convertible preferred
stock. Such conversion is anticipated to occur in the next fiscal year.
Significant Accounting Policies:
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is calculated
using the straight-line method over the estimated useful lives of the assets.
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 for the second and third fiscal
quarters totaling approximately $142,000.
Earnings Per Share, as restated, see Note 11:
Earnings per basic share is computed based on the weighted average number of
outstanding common shares. Earnings per diluted share includes the weighted
average effect of dilutive options, warrants, and convertible debt on the
weighted average shares outstanding. Diluted net income includes the effect of
interest expense on the dilutive convertible debt of $10,000. Basic and diluted
weighted average common shares outstanding for all periods presented with losses
are the same, as the inclusion of options, warrants and other common stock
equivalents in the calculation of diluted loss per share would have an
antidilutive effect.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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, 2002 July 31, 2001 July 31, 2002 July 31, 2001
------------------ ------------------- ------------------ ------------------
Income (loss) before cumulative effect
of accounting change $ 107 $ (613) $ (2,389) $ (1,547)
Change in fair value of mandatory
redeemable preferred stock (82) - 341 -
------------------ ------------------- ------------------ ------------------
Income (loss) attributable to common
shareholders before cumulative effect
of accounting change 25 (613) (2,048) (1,547)
Cumulative effect of change in
accounting principle - - (2,015) -
------------------ ------------------- ------------------ ------------------
Net income (loss) attributable to
common shareholders $ 25 $ (613) $ (4,063) $ (1,547)
================== =================== ================== ==================
Weighted average common and common equivalent shares outstanding:
Basic 36,007,855 26,184,890 36,007,855 20,578,631
================== =================== ================== ==================
Diluted 128,701,226 26,184,890 36,007,855 20,578,631
================== =================== ================== ==================
Earnings (loss) per share, basic:
From continuing operations $ (0.02) $ (0.02) $ (0.06) $ (0.08)
Cumulative effect of accounting
change 0.00 0.00 (0.05) 0.00
------------------ ------------------- ------------------ ------------------
Net income (loss) per share, basic $ (0.02) $ (0.02) $ (0.11) $ (0.08)
================== =================== ================== ==================
Earnings (loss) per share, diluted:
From continuing operations $ 0.00 $ (0.02) $ (0.06) $ (0.08)
Cumulative effect of accounting
change 0.00 0.00 (0.05) 0.00
------------------ ------------------- ------------------ ------------------
Net income (loss) per share, diluted $ 0.00 $ (0.02) $ (0.11) $ (0.08)
================== =================== ================== ==================
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
The Company's Series C Preferred Stock Preferred Stock, which has all the rights
and privileges of the Company's common stock, is convertible at a rate of 20 to
1. 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.
Pro forma basic and diluted loss per share have been computed below as if the
Series C Preferred Stock was converted to common stock. For the three months
ended July 31, 2002 and 2001, respectively, the Series C Preferred Stock has
been reflected on a weighted average basis outstanding as common shares of
87,262,511 and 32,167,442 respectively. For the nine months ended July 31, 2002
and 2001, respectively, the Series C Preferred Stock has been reflected on a
weighted average basis outstanding as common shares of 79,205,791 and
36,291,687, respectively.
Three Months Ended Six Months Ended
--------------------------------------- --------------------------------------
July 31, 2002 July 31, 2001 July 31, 2002 July 31, 2001
------------------- ------------------- ------------------ -------------------
Pro forma weighted average common shares outstanding:
Basic 123,175,835 58,352,332 115,119,114 57,685,179
Diluted 128,701,226 58,352,332 115,119,114 57,685,179
Pro forma net loss per share attributable to common shareholders:
Basic $ (.00) $ (.01) $ (.04) $ (.03)
Diluted $ (.00) $ (.01) $ (.04) $ (.03)
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.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
2. PRO FORMA INFORMATION, as restated
The unaudited condensed consolidated results of operations shown below are
presented on a pro forma basis and represent the results of Obsidian
Enterprises, Inc. (formerly Danzer), Danzer Industries, U.S. Rubber, United,
Champion, Pyramid, Obsidian Leasing and DW Leasing on a combined basis. The
schedule below includes all necessary pro forma adjustments for all entities for
the periods shown.
Three Months Ended Nine Months Ended
July 31, July 31,
2001 2001
----------------------------------------
Net sales $ 16,047 $ 47,624
Net loss $ (344) $ (1,637)
Net loss per share - basic $ (.01) $ (.08)
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 is it necessarily
indicative of future operating results.
3. 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):
July 31,
2002 October 31, 2001
------------------ -------------------
Raw materials $ 3,614 $ 3,734
Work-in-process 783 1,471
Finished goods 2,479 2,322
Valuation reserve (410) (833)
------------------ -------------------
Total $ 6,466 $ 6,694
================== ===================
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
4. GOODWILL AND INTANGIBLE ASSETS
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 Financial Accounting Standard
(FAS) 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 FAS 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, $2,015,000 has been
recorded as a cumulative effect of change in accounting principle. This charge
has been reflected in the first quarter pursuant to the implementation
guidelines. Accordingly, results for the three months ended January 31, 2002 and
the six months ended April 30, 2002 have been restated to reflect this change as
follows (in thousands except for share data):
Quarter Ended Six Months Ended
January 31, 2002 April 30, 2002
------------------ -------------------
Net loss as previously reported $ (1,531) $ (2,496)
Less cumulative effect of change in accounting principle (2,015) (2,015)
------------------ -------------------
Net loss as restated $ (3,456) $ (4,511)
================== ===================
Weighted average common and common equivalent shares
outstanding basic and diluted 36,007,855 36,007,855
Basic and diluted loss per share, as previously reported $ (0.04) $ (0.07)
Add cumulative effect of change in accounting principle (0.06) (0.06)
------------------ -------------------
Basic and diluted loss per share as restated $ (0.10) $ (0. 13)
================== ===================
The changes in the carrying amount of goodwill are as follows (in thousands):
Trailer Holding Total
Manufacturing Company
------------------ ------------------ ------------------
Balance as of November 1, 2001 $ 8,560 $ 650 $ 9,210
Purchase price adjustment (41) - (41)
Cumulative effect of change in
accounting principle (2,015) - (2,015)
------------------ ------------------ ------------------
Balance as of July 31, 2002 $ 6,504 $ 650 $ 7,154
================== ================== ==================
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
4. GOODWILL AND INTANGIBLE ASSETS, CONTINUED
Had FAS No. 142 been effective at the beginning of 2001, the nonamortization
provisions would have reduced the net loss for the three months ended July 31,
2001 of $613,000 by $77,000, resulting in an adjusted net loss of $536,000 and
the net loss for the nine months ended July 31, 2001 of $1,547,000 by $77,000,
resulting in an adjusted net loss of $1,470,000.
5. FINANCING ARRANGEMENTS AND STOCKHOLDERS' EQUITY
U.S. Rubber
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, 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 $730,000,
plus accrued interest of $123,000, for $700,000. U.S. Rubber then acquired this
agreement in exchange for a new note payable to DC Investments with a face
amount of $700,000. 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 $1,750,000
subordinated note payable, plus accrued interest of $255,000, in exchange for
$700,000 and 30,000 shares of Series C convertible preferred stock. The cash
portion of the transaction was from the proceeds of a note payable in the amount
of $700,000 issued to DC Investments. The note requires monthly interest
payments at 15% per annum with the principal payable March 2007.
No gain or loss was recognized in the transactions because of the involvement of
related parties. The transaction resulted in an increase in equity of the
Company of $1,463,000 and an annual interest savings of approximately $145,000.
During February 2002, U.S. Rubber entered into a "Second Amendment to Credit
Agreement" with its primary lender. The terms of the amendment require scheduled
debt service payments under substantially the same terms through November 1,
2002 when all debt outstanding with the primary lender will become due. The
agreement also modifies the terms of an operating lease with the lender
requiring payment in full of the remaining lease obligation as of November 1,
2002 of approximately $738,000. U.S. Rubber is currently in negotiations with a
new prospective lender to refinance this debt, as further discussed in Note 10.
Obsidian Enterprises
On April 30, 2002, the Company converted $1,289,000 of debt and accrued interest
owed to OCP and $596,000 of debt and accrued interest owed to Fair Holdings,
Inc. ("Fair"), an entity controlled by the Company's Chairman, to equity through
the issuance to OCP and Fair of a total of 589,230 shares of Series C
Convertible Preferred Stock which are convertible into an aggregate of
11,784,600 shares of common stock of the Company. The transaction resulted in an
increase in equity of the Company of $1,885,000 and an annual interest savings
of approximately $200,000.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
5. FINANCING ARRANGEMENTS AND STOCKHOLDERS' EQUITY, CONTINUED
The Company and DW Leasing converted amounts owed to DC Investments to notes
payable. The notes bear interest at 10% payable quarterly, with principal due in
one installment in March 2005. The total advances converted to notes payable to
DC Investments were $1,085,000 and $210,000 for Obsidian Enterprises and DW
Leasing, respectively.
The Company was in violation of three 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. The Company has received a
waiver of these violations through November 1, 2002.
The Company has an agreement with OCP that gives it the right to mandate a
capital contribution from OCP if the lenders to U.S. Rubber and United were to
declare a default. In that event, the Company has the right to enforce a capital
contribution agreement with OCP up to $1,620,000 on U.S. Rubber and $1,000,000
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.
Champion
Champion was in default of its debt due its subordinated lender as of July 31,
2002 and in default of debt due its senior and subordinated lender at October
31, 2001. The Company has not been able to obtain a waiver from the subordinated
lender, and the subordinated lender has filed a lawsuit to collect the debt from
Champion or the Company under a guarantee agreement. Accordingly, debt in the
amount of $1,250,000 has been classified as current as of July 31, 2002. At
October 31, 2001, $2,612,000 of debt was classified as current. On March 20,
2002, DC Investments acquired the senior lender's loan to Champion in the amount
of $602,000 in a nonrecourse assignment of the debt.
DW Leasing
DW Leasing was in technical default of certain loan covenants with two of its
primary lenders. The Company has obtained bank waivers from one of these lenders
through November 2002 for a portion of this amount. Amounts classified as
current as of October 31, 2001 due to the technical default that has not been
waived was $639,000. DW Leasing was in technical default of certain loan
covenants at July 31, 2002. The maturity date of the loan is June 2003, and the
balance of the loan outstanding at July 31, 2002 has been classified as current.
Danzer Industries
Danzer Industries was in technical default of certain loan covenants in its
credit agreement. As a result of these violations, long-term debt in the amount
of $867,000 is classified as current as of July 31, 2002.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
6. 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
(in thousands), as restated (see Note 11):
Three Months Ended July 31, 2002
------------------------------------------------------------------------------
Trailer Butyl Rubber
Manufacturing Coach Leasing Reclaiming Total
------------------------------------------------------------------------------
Sales:
Domestic $ 10,711 $ 1,959 $ 2,672 $ 15,342
Foreign - - 133 133
------------------------------------------------------------------------------
Total $ 10,711 $ 1,959 $ 2,805 $ 15,475
Cost of goods sold $ 9,311 $ 997 $ 2,451 $ 12,759
Income (loss) before taxes $ (374) $ 163 $ 318 $ 107
Identifiable assets $ 21,331 $ 12,670 $ 10,650 $ 44,651*
Depreciation and amortization expense $ 215 $ 169 $ 289 $ 673
*Identifiable assets, as stated above $ 44,651
Corporate-level goodwill 650
--------------------
Total assets $ 45,301
====================
Three Months Ended July 31, 2001
------------------------------------------------------------------------------
Trailer Butyl Rubber
Manufacturing Coach Leasing Reclaiming Total
------------------------------------------------------------------------------
Sales:
Domestic $ 1,759 $ 1,467 $ 2,680 $ 5,906
Foreign - - 134 134
------------------------------------------------------------------------------
Total $ 1,759 $ 1,467 $ 2,814 $ 6,040
Cost of goods sold $ 1,634 $ 518 $ 2,616 $ 4,768
Loss before taxes $ (437) $ 29 $ (257) $ (665)
Identifiable assets $ 11,756 $ 12,704 $ 11,198 $ 35,658
Depreciation and amortization expense $ 101 $ 242 $ 267 $ 610
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
6. BUSINESS SEGMENT DATA AND GEOGRAPHIC DATA, CONTINUED
Nine Months Ended July 31, 2002
------------------------------------------------------------------------------
Trailer Butyl Rubber
Manufacturing Coach Leasing Reclaiming Total
------------------------------------------------------------------------------
Sales:
Domestic $ 32,839 $ 4,513 $ 7,134 $ 44,486
Foreign - - 445 445
------------------------------------------------------------------------------
Total $ 32,839 $ 4,513 $ 7,579 $ 44,931
Cost of goods sold $ 29,033 $ 2,336 $ 6,850 $ 38,219
Loss before taxes $ (2,031) $ (224) $ (289) $ (2,544)
Identifiable assets $ 21,331 $ 12,670 $ 10,650 $ 44,651*
Depreciation and amortization expense $ 639 $ 579 $ 800 $ 2,018
*Identifiable assets, as stated above $ 44,651
Corporate-level goodwill 650
--------------------
Total assets $ 45,301
====================
Nine Months Ended July 31, 2001
------------------------------------------------------------------------------
Trailer Butyl Rubber
Manufacturing Coach Leasing Reclaiming Total
------------------------------------------------------------------------------
Sales:
Domestic $ 3,123 $ 2,645 $ 8,876 $ 14,644
Foreign - - 399 399
------------------------------------------------------------------------------
Total $ 3,123 $ 2,645 $ 9,275 $ 15,043
Cost of goods sold $ 2,817 $ 964 $ 8,491 $ 12,272
Loss before taxes $ (746) $ (502) $ (364) $ (1,612)
Identifiable assets $ 11,756 $ 12,704 $ 11,198 $ 35,658
Depreciation and amortization expense $ 209 $ 544 $ 716 $ 1,469
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
6. 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, 2002,
allocated corporate expenses by segment were as follows:
Three Months Ended Nine Months Ended
July 31, July 31,
2002 2002
----------------------------------------
Trailer manufacturing $ 146 $ 828
Coach leasing 27 120
Butyl rubber reclaiming 38 185
----------------------------------------
$ 211 $ 1,133
========================================
Included in the above expenses are professional fees related to regulatory
filings and historical audits and other related expenses which will be
nonrecurring costs and have been funded by OCP. Pursuant to the agreement with
OCP, such advances will be converted to equity in Fiscal 2003. Total
nonrecurring costs for the three months and nine months ended July 31, 2002 were
approximately $0 and $600,000 respectively.
7. RELATED PARTIES
The Company makes advances, receives loans and conducts other business
transactions with affiliates resulting in the following amounts for the periods
ended (in thousands):
July 31, October 31,
2002 2001
------------------ ------------------
Balance sheet:
Current assets:
Accounts receivable, Obsidian Capital Company (OCC) $ 13 $ 217
Accounts receivable, Obsidian Capital Partners (OCP) 2 -
Accounts receivable, stockholders 9 -
Long-term portion:
Investment banking fees, purchase accounting - 1,960
------------------ ------------------
Total assets $ 24 $ 2,177
================== ==================
Current liabilities:
Accounts payable, DC Investments $ 27 $ -
Accounts payable, Fair Holdings 13 -
Accounts payable, Obsidian Capital Company 270 625
Accounts payable, Obsidian Capital Partners 5 -
Accounts payable, stockholders 332 300
Long-term portion:
Accounts payable, DC Investments 802 -
Accounts payable, Obsidian Capital Partners 860 2,170
------------------ ------------------
Total liabilities $ 2,309 $ 3,095
================== ==================
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
7. RELATED PARTIES, CONTINUED
Three Months Ended Nine Months Ended
-------------------------------------- -------------------------------------
July 31, 2002 July 31, 2001 July 31, 2002 July 31, 2001
------------------- ------------------ ------------------ ------------------
Income statement:
Interest expense, DC Investments $ 58 $ - $ 140 $ -
=================== ================== ================== ==================
Interest expense, Obsidian Capital $ - $ - $ 58 $ -
Partners
=================== ================== ================== ==================
Rent expense, Obsidian Capital Company $ 16 $ - $ 41 $ -
=================== ================== ================== ==================
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, 2002 or October 31, 2001,
respectively. Amounts classified as long term represent amounts not currently
due, amounts that are expected to be converted to equity subsequent to July 31,
2002 and October 31, 2001, respectively, or amounts converted to long-term debt
subsequent to July 31, 2002.
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. Also see Note 5 for details regarding
related-party transactions converting debt to equity.
8. COMMITMENTS AND CONTINGENCIES
The Company has a purchase commitment to purchase or lease five (5) coaches
within 60 days of completion. The cost of these coaches will approximate $2.34
million. This transaction was initially expected to close in the second quarter
of calendar 2002 and has been extended until financing for these coaches has
been obtained.
On April 29, 2002, the Company received notice of a lawsuit filed by the
subordinated lender of Champion seeking payment of a $1,250,000 note payable
plus accrued interest from Champion or Obsidian Enterprises under a guarantee
agreement. An answer of general denial on behalf of Champion has been filed with
the court. In addition, a special appearance with respect to jurisdiction has
been filed with the court on behalf of Obsidian Enterprises. This matter is
currently scheduled for a nonbinding arbitration hearing in September 2002.
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.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
9. INSURANCE RECOVERY
On May 16, 2002, one of the production facilities of U.S. Rubber was damaged by
a fire at an adjacent property. The primary production facility was not damaged,
and the Company is able to produce and ship product although at a reduced rate.
The Company completed processing its claims with its insurance carrier for
damaged equipment and facilities and business interruption losses. On August 16,
2002 the Company accepted settlement for the business interruption claim for
$376,000 and has received $250,000 as a prepayment against an initial property
damage claim of $289,000. An additional property damage claim is expected to be
submitted in mid September 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 $325,000 has been recognized in the quarter ended July 31, 2002. The
production facility damaged in the fire resumed operations on July 8, 2002.
10. SUBSEQUENT EVENTS
On August 28, 2002, the Company completed a restructuring of its current debt
with the senior lender of United. The terms of this amended credit agreement
extended the maturity date of the revolving line of credit to February 2004. In
addition, the maturity date of one of United's term notes was extended twelve
months to July 2004. As a result, required monthly principal payments on this
term note were reduced by approximately 50%.
The Company is currently negotiating terms with a new prospective senior lender
for U.S. Rubber. Appraisals and a financial due diligence by this new senior
lender have been completed, and closing on the new loan is expected to be
completed during September 2002.
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 preferred stock as it
has not yet been converted to common shares and thus is antidilutive. The
Company is restating its previously issued financial statements for the three
months and nine months ended July 31, 2002 for this error. The Company has also
restated the consolidated balance sheet and statement of operations for the year
ended October 31, 2001 for the redeemable preferred stock and the weighted
average common and common equivalent shares as further discussed in Form 10-K/A
for the year ended October 31, 2001.
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 and nine months ended July 31, 2002.
Previously Change As Restated
Reported
------------------- ------------------ ------------------
Statement of Operations:
Three Months Ended July 31, 2002
Interest expense $ 867 $ 42 $ 909
Income before income taxes 149 (42) 107
Net income 149 (42) 107
Weighted average common and common equivalent shares outstanding:
Basic 123,175,835 (87,167,980) 36,007,855
Diluted 129,251,572 (550,346) 128,701,226
Net income per share basic .00 -- .00
Net income per share diluted .00 -- .00
Nine Months Ended July 31, 2002
Interest expense $ 2,713 $ 115 $ 2,828
Loss before income taxes and cumulative
effect of change in accounting principle (2,429) (115) (2,544)
Net loss (4,289) (115) (4,404)
Weighted average common and common equivalent shares
outstanding basic and diluted 115,119,114 (79,111,259) 36,007,855
Net loss per share before cumulative effect of
change in accounting principle (.02) (.04) (.06)
Net loss per share (.04) (.08) (.12)
Balance Sheet:
Long-term debt, net of current 20,571 (1,355) 19,216
Mandatory redeemable preferred stock -- 1,094 1,094
Additional paid-in capital 8,960 411 9,371
Accumulated deficit (8,757) (150) (8,907)
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
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.,
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 reverse merger transactions, completed in June and July 2001, have been
treated for accounting purposes as an acquisition by U.S. Rubber. For this
reason, the results for the nine-month period July 31, 2001 represent only the
financial results of U.S. Rubber for nine months, Champion Trailer for seven
months, and the Pyramid Group for seven months based on the January 1, 2001
acquisition date. Danzer Corporation and its wholly owned subsidiary, Danzer
Industries, and United Expressline were acquired June 21, 2001 and July 31,
2001, respectively, and, accordingly, are not included in the results of
operations for the three and nine months ended July 31, 2001. Since the Company
acquired a substantial portion of its operations on or after January 1, 2001 and
was not previously a registrant, management's discussion and analysis does not
include a detailed comparison of 2001 operating results with the three-month and
nine-month periods ended July 31, 2000.
The Company initially reported its financial position and results of operations
as of and for the three months and nine months ended July 31, 2001 in September
2001 as part of its filing under Form 10-Q. That filing included accounting for
the reverse merger transactions on a preliminary basis. Subsequently and in
conjunction with the Company's annual report filed on Form 10-K in February
2002, certain preliminary accounting and reporting decisions were revised and
finalized. As a result, the Company will amend its filing under Form 10-Q for
the quarter ended July 31, 2001. The Company anticipates filing the amendment
during the fiscal fourth quarter.
The financial condition at July 31, 2002 and the results of operations for the
three and nine months ended July 31, 2002, include the operations of Obsidian
Enterprises, U.S. Rubber, Champion Trailer, Pyramid Coach, Obsidian Leasing, DW
Leasing, United Expressline, and Danzer Industries.
RESULTS OF OPERATIONS
The Company's overall operating results and financial condition continued to
improve during the third quarter of 2002 compared to the first and second
quarters of 2002 and can be characterized by the shift to positive EBITDA and
operating income. These results are indicative of business seasonality in the
trailer and related transportation equipment manufacturing and coach leasing
segments, and increasing demand in the butyl rubber segment, as well as
management's efforts to concentrate on generating revenue and earnings, managing
cash, and steadily addressing the debt/equity structure while completing the
integration of acquired subsidiaries (mostly privately held entities) into an
operating company with consistent reporting systems. Management has no prior
history in effecting such an integration of subsidiaries under a holding
company, and its ability to successfully accomplish this task will have a
substantial impact on long-term Company revenues and profits.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
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, Danzer Industries, and Champion. Butyl rubber
reclaiming includes the operations of U.S. Rubber and coach leasing includes the
operations of Pyramid, DW Leasing, and Obsidian Leasing.
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, 2002 compared to the three-month and nine-month periods ended July 31,
2001. 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 (in thousands):
Three Months Ended Nine Months Ended
------------------------------------------ ------------------------------------------
July 31, 2002 July 31, 2001 July 31, 2002 July 31, 2001
--------------------- -------------------- --------------------- --------------------
Net Sales $ 10,711 $ 1,759 $ 32,839 $ 3,123
Cost of Sales 9,311 1,634 29,033 2,817
--------------------- -------------------- --------------------- --------------------
Gross Profit $ 1,400 $ 125 $ 3,806 $ 306
===================== ==================== ===================== ====================
Gross Profit % 13.1% 7.1% 11.6% 9.8%
===================== ==================== ===================== ====================
Three Months Ended July 31, 2002 Compared to The Three Months Ended July 31,
2001 And Nine Months Ended July 31, 2002 Compared to The Nine Months Ended July
31, 2001
Operating results between these periods are not comparable due to the
acquisition of Danzer and United in June and July of 2001, respectively, and the
acquisition of Champion in January 2001. During the three months and nine months
ended July 31, 2002, this segment has seen increasing sales in cargo trailers,
primarily in the three months ended July 31, 2002, due to additional demand
driven by marketing efforts, as well as the seasonal nature of the product.
These increases have been partially offset by a continued reduction in the
demand for truck bodies and slow sales volume in the transport specialty trailer
product line.
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 during the remainder of calendar 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 this facility.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
Gross profit for the three months and nine months ended July 31, 2002 was
impacted by a traditional seasonal week long holiday shut down at United as well
as the reduced volume in the truck body and specialty transport trailer lines
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):
Three Months Ended Nine Months Ended
------------------------------------------ ------------------------------------------
July 31, 2002 July 31, 2001 July 31, 2002 July 31, 2001
--------------------- -------------------- --------------------- --------------------
Net Sales $ 2,805 $ 2,814 $ 7,579 $ 9,275
Cost of Sales 2,451 2,616 6,850 8,491
--------------------- -------------------- --------------------- --------------------
Gross Profit $ 354 $ 198 $ 729 $ 784
===================== ==================== ===================== ====================
Gross Profit % 12.6% 7.0% 9.6% 8.5%
===================== ==================== ===================== ====================
Three Months Ended July 31, 2002 Compared to The Three Months Ended July 31,
2001
Net sales in this segment for the three months ended July 31, 2002 as compared
to the comparable three-month period ended July 31, 2001 decreased .3% in the
amount of $9. Sales in this segment were lower than anticipated for the three
months ended July 31, 2002 due to damage at a production facility in May 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. Note 9 of the Notes to Condensed Consolidated Financial Statements
provides additional information regarding the insurance recovery from the fire.
Sales for the quarter are still below historical levels primarily due to the
factors enumerated below.
The Company's tire manufacturing customers built up large inventories during the
widespread tire recalls in 2001 in anticipation of huge demand under such
recalls. The number of tire orders submitted by consumers to be replaced was
substantially lower than anticipated, and as a result, tire manufacturer orders
were lower than the previous year, producing a substantial decrease in reclaimed
butyl demand. The Company is continuing to see an increase in sales throughout
calendar year 2002 which may indicate a return to historic inventory levels at
its tire manufacturer customers, but management does not anticipate a return to
historic levels of demand for reclaimed butyl rubber by tire manufacturers prior
to fiscal 2003.
The demand for pipeline mastic wraps produced with reclaimed butyl rubber
supplied by the Company also 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 has begun to climb
again, the demand for those uses is also returning to historic levels. 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 improved from 7.0% for the three months ended July 31,
2001 to 12.6% for the three months ended July 31, 2002 as a result of operating
efficiency. The improvement was partially due to the refurbishment of the 12"
extruder, a primary piece of operating equipment, and the use of butyl rubber
pad scrap in the production process that have reduced operating costs. This
piece of equipment was not used in the production process during much of the
comparable period of 2001, which negatively impacted that period's gross profit.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
Nine Months Ended July 31, 2002 Compared to The Nine Months Ended July 31, 2001
Net sales in this segment for the nine months ended July 31, 2002 as compared to
the comparable nine-month period ended July 31, 2001 decreased 18.3% in the
amount of $1,696. The reduction in sales is due primarily to reduced sales to
tire manufacturers and pipeline mastic manufacturers as described above.
Gross profit percentage for the nine months ended July 31, 2002 was 9.6%
compared to 8.5% for the nine months ended July 31, 2001 as a result of the
improved operating efficiency. Gross profit for the nine months ended July 31,
2001 was also below historical levels as the result of an inventory obsolescence
charge recorded in December 2000. The increase in gross profit for 2002 is due
primarily to the refurbishment of the 12" extruder, a primary piece of operating
equipment, and the use of butyl rubber pad scrap in the production process that
have reduced operating costs.
Management believes that the use of butyl rubber pad scrap will help control the
cost of raw materials during the remainder of 2002 and the Company is also
exploring the ability to raise prices in late 2002 and 2003.
On March 7, 2002, the Company completed a series of transactions with U.S.
Rubber, SerVaas, the former owner of U.S. Rubber, and DC Investments 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
$730,000, plus accrued interest of $123,000, for $700,000. U.S. Rubber then
acquired the debt agreement from DC Investments in exchange for a new $700,000
note payable to DC Investments. 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 $1,750,000
subordinated note payable, plus accrued interest of $255,000, in exchange for
$700,000 and 30,000 shares of Series C convertible preferred stock. The cash
portion of the transaction was from the proceeds of a $700,000 loan to the
Company by DC Investments. The loan requires monthly interest payments at 15%
with the principal payable March 2007.
No gain or loss was recognized in the transactions due to involvement of related
parties. The transaction resulted in an increase in equity of the Company of
$1,463,548 and a net annual interest savings of approximately $145,000.
COACH LEASING
The following table shows sales, cost of sales and gross profit for this segment
for the periods indicated (in thousands):
Three Months Ended Nine Months Ended
------------------------------------------ ------------------------------------------
July 31, 2002 July 31, 2001 July 31, 2002 July 31, 2001
--------------------- -------------------- --------------------- --------------------
Net Sales $ 1,959 $ 1,467 $ 4,513 $ 2,645
Cost of Sales 997 518 2,336 964
--------------------- -------------------- --------------------- --------------------
Gross Profit $ 962 $ 949 $ 2,177 $ 1,681
===================== ==================== ===================== ====================
Gross Profit % 49.1% 64.7% 48.2% 63.6%
===================== ==================== ===================== ====================
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
Three Months Ended July 31, 2002 Compared to The Three Months Ended July 31,
2001
Sales for the three months ended July 31, 2002 increased 33.5% in the amount of
$492 over the comparable three-month period ended July 31, 2001. The increase in
sales is attributable to 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. In addition, this business is seasonal in nature and historically
is stronger in the spring, summer and fall months.
Gross profit for this segment was 49.1% for the three months ended July 31, 2002
compared to 64.7% for the comparable three-month period ended July 31, 2001. The
reduction is attributable to several factors. During the three-month period
ended July 31, 2002, additional coaches have been 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. In addition, 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 three month period
ended July 31, 2001, a larger percentage of coach drivers were independent
contractors paid directly by the customer.
Nine Months Ended July 31, 2002 Compared to The Nine Months Ended July 31, 2001
Results for the nine months ended July 31, 2002 are not comparable to the
nine-month period ended July 31, 2001, as this segment was acquired as of
January 1, 2001 and, therefore, includes only seven months of operations for the
period ended July 31, 2001. Gross profit percentage is also not comparable for
the reasons stated above and also 2001 does not include the months of November
and December that are historically a slow period for this segment.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES
The Company's selling, general and administrative expenses are higher for the
three months ended July 31, 2002 versus the three-month period ended July 31,
2001 due to the operations added in 2002, as previously discussed.
In addition, selling, general and administrative expenses are higher for the
nine month period ended July 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. As a part of the postacquisition process, OCP has agreed to
provide capital to fund certain of the administrative expenses and convert the
amount to equity prior to the end of this fiscal year. As of July 31, 2002, OCP
has provided funding of approximately $860,000 of such expenses. Management
anticipates this amount will be converted to equity during fiscal 2003 in
exchange for issuance of convertible preferred stock. In addition, under the
terms of the agreement with OCP, the Company anticipates receiving an additional
amount of approximately $415,000 during the fourth fiscal quarter of 2002. The
Company has also received approximately $270,000 in advances from Fair to cover
additional costs above amounts agreed to by OCP. The additional advances from
OCP and Fair will also be converted to equity in exchange for convertible
preferred stock.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
INTEREST EXPENSE
Interest expense for the three months ended July 31, 2002 as a percentage of
average debt borrowings of $35,893 was 2.5% (10%, as restated, on an annual
basis). Interest expense for the three months ended July 31, 2001 as a
percentage of average debt borrowings of $24,964 was 2.8% (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."
Interest expense for the nine months ended July 31, 2002 as a percentage of
average debt borrowings of $36,448 was 7.8% (10.4% on an annual basis). Interest
expense for the nine months ended July 31, 2001 as a percentage of average debt
borrowings of $24,601 was 6.4% (8.6% on an annual basis). The increase for 2002
is due to additional debt of the entities that were not part of the consolidated
group during the nine months ended July 31, 2001. Portions of this debt carries
higher interest rates than rates charged on debt outstanding in the prior year.
This increase is net of the factors described above.
INCOME TAX PROVISION
There was no income tax expense for the three months ended July 31, 2002 due to
the utilization of fully reserved net operating loss (NOL) carryforwards. The
income tax benefit for the nine-month period ended July 31, 2002 increased by
$90 as compared to the nine-month period ended July 31, 2001. 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.
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 OCP, from whom four of the five
subsidiaries were purchased, entered into highly leveraged acquisitions of
Champion, 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 OCP." They are also mitigated by the actions taken with Champion,
U.S. Rubber, United and the refinancing efforts underway with U.S. Rubber and
Pyramid.
The Company and certain of its subsidiaries have violated certain requirements
and covenants in their debt agreements relating to maintenance of certain
minimum ratios and levels of earnings to funded debt and fixed charge coverage
rate. Management has brought these violations to the attention of its lenders
and, except for the Champion subordinated debt, Danzer Line of Credit and Term
Note and one DW Leasing note agreement, the lenders have waived these violations
as described below under "Financial Covenant Waivers."
The Company's working capital position (current assets over current liabilities)
was negative at July 31, 2002 by $5,229,000 in part because approximately 32% of
the Company's debt is classified as a current liability. By the end of the third
quarter 2002, the working capital position had improved by $4,338,000, a
reduction of negative working capital of approximately 45%.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
The Company has been addressing these liquidity and working capital issues in a
number of ways. Management anticipates that the following steps started in early
2002 and currently in process will improve the Company's working capital,
strengthen its equity and place the Company in a position to successfully
address its liquidity issues. These steps include:
o The transactions described below under "Partners Equity Transactions" which
converts approximately $2,689,000 of long-term liabilities to equity. Of
this amount, $1,289,000 was converted to Series C convertible preferred
stock during the second fiscal quarter of 2002.
o The actions taken with respect to 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
management anticipates will reduce the Company's interest costs and
decrease the proportion of debt which has been reclassified as a current
liability. The Company completed the refinancing of the United Line of
Credit and a term note which significantly contributed to reducing the
negative working capital.
While there can be no assurance that these transactions will occur as projected,
the transactions that have taken place are consistent with the plans delineated
in previously issued reports. It should be noted that even if these transactions
do occur, there can be no assurance that they will sufficiently address the
Company's liquidity issues. Management will continue to address the liquidity
concerns as well as consider any additional actions if the contemplated
transactions either do not occur or are insufficient.
FINANCIAL COVENANT WAIVERS
The Company has reached agreements with certain of its lenders to waive
financial covenant defaults under the following loans:
o Management completed discussions with Bank One in respect of the violations
by U.S. Rubber of the negative covenants of (i) fixed charge coverage ratio
and (ii) funded debt to EBITDA ratio. Management has received a waiver of
these violations and an amendment of the Credit Agreement which extends it
through November 1, 2002 when the entire debt is due. The Company
anticipates closing on a new credit facility for US Rubber in September
2002.
o Pyramid is a guarantor of DW Leasing's debt to Regions Bank, Nashville,
Tennessee. DW Leasing and Pyramid have been in violation of the Funded Debt
to EBITDA ratio in the Regions Bank Credit Facility since the inception of
the loan. This is due to the fact that DW Leasing acquired eight additional
new luxury coaches, in highly leveraged transactions. At the time of the
Acquisition, Regions Bank granted a waiver of this violation. To date, the
covenant has not been rewritten. Regions Bank has waived the violation as
of October 31, 2001. The Company continues to be in technical violation of
this covenant; therefore, the balance of the long-term debt due Regions
Bank at July 31, 2002 has been classified as a current liability as it is
due June 2003.
o At October 31, 2001, the Company was in violation of three 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. These covenants are to be analyzed annually. The
Company has received a waiver of these violations through November 1, 2002
and is in discussions with Renaissance Capital to restructure the covenants
on a go forward basis.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
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. The
Company is endeavoring to provide the appropriate documentation and resolve
the compliance requirement. In addition, the Company's line of credit with
an outstanding balance of $825,000 expired March 31, 2002. The line of
credit has been extended based on a verbal agreement with the bank while
the covenant violations are addressed. As of July 31, 2002, $867,000 of
long-term debt related to these obligations has been reclassified as a
current liability due to these violations.
o Champion remains in default of its subordinated debt agreement in the
amount of $1,250,000, which has been classified as a current liability due
to the default. On April 29, 2002, the Company received notice of a lawsuit
filed by the subordinated lender seeking payment of the $1,250,000 note
payable plus accrued interest from Champion or Obsidian Enterprises under a
guarantee agreement. An answer of general denial on behalf of Champion has
been filed with the court. In addition, a special appearance with respect
to jurisdiction has been filed with the court on behalf of Obsidian
Enterprises. DC Investments, in a nonrecourse assignment, has purchased the
outstanding senior debt from Bank One on March 20, 2002. (See Champion
Transactions below.)
FUNDS AVAILABILITY
On a consolidated basis, as of July 31, 2002, the Company had approximately
$456,000 of cash and cash equivalents. Danzer Industries, U.S. Rubber and United
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, 2002, Danzer Industries, U.S. Rubber, and United had
additional current availability of $0, $692,000, and $401,000, respectively.
Maximum additional amounts available under these credit lines if supported by
their individual borrowing base are approximately $0, $140,000, and $261,000 for
Danzer Industries, U.S. Rubber, and United, respectively.
The Company generated negative net cash flow of $542 from operations during the
quarter ended July 31, 2002. Cash used in operations during the quarter is
primarily due to increases in accounts receivable as a result of increasing
revenues and reductions in accounts payable. Funding during the quarter was
provided through borrowings on lines of credit and from related parties.
REFINANCING ACTIVITIES
Management is in the process of refinancing certain of the currently outstanding
debt:
o Negotiations have been ongoing with a new lender to refinance the primary
lender of U.S. Rubber at more favorable terms than the current terms.
Management anticipates the refinancing will be concluded during September
2002.
o The Company has 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 is undertaking to refinance the coaches transferred from DW
Leasing to Obsidian Leasing with DC Investments and its various existing
lenders. Two senior lenders representing approximately 80% of Obsidian
Leasing Company's debt have provided letters of intent to refinance their
respective loans which will include a substantial reduction in the interest
rates and a longer amortization of the debt. Management anticipates that
this refinancing will be concluded during the fourth fiscal quarter of
2002.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
PARTNERS EQUITY TRANSACTIONS
OCP, the major shareholder of the Company, is 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 OCP.
Such amounts expended through July 31, 2002 approximated $1,275,000. As of July
31, 2002, OCP has advanced approximately $860,000 to the Company for these
expenses. In addition, the Company expects to receive an additional $415,000
during fourth fiscal quarter 2002. Pursuant to the agreement with OCP, the
Company plans to convert these amounts to equity in exchange for issuance to OCP
of convertible preferred stock. This conversion to convertible preferred stock
is dependent upon the authorization of additional shares of convertible
preferred stock by the Company's shareholders, which is planned to occur in
calendar 2003.
Previously OCP converted $1,289,000 of notes payable and accrued interest from
OCP to the Company to 402,906 shares of Series C convertible preferred stock of
the Company.
GUARANTEES OF OCP
The Company has an agreement with OCP that gives it the right to mandate a
capital contribution from OCP 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 OCP 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.
CHAMPION TRANSACTIONS
The Board of Directors has authorized the Chairman of the Board of the Company
to explore various options to divest Champion Trailer or, at a minimum,
restructure this component of the business. As a result, DC Investments
negotiated the purchase of the loans of Bank One to Champion.
Champion is also indebted to Markpoint Equity Fund IV under a subordinated
credit facility in the amount of $1,250,000. Champion has been in violation of
the funded debt to EBITDA negative covenant of the Markpoint Credit Agreement
since the inception of the loan. Management brought this violation to
Markpoint's attention prior to the close of the Acquisition and has obtained a
waiver of the violation each quarter through January 31, 2002. Markpoint has
informed Champion that it would not grant waiver of this violation in the
future. The Markpoint debt has been classified as a current liability due to
this violation. 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 Obsidian
Enterprises under a guarantee agreement.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CASH FLOWS (EBITDA), as restated
A summary of our contractual cash obligations for the fiscal years ending 2002
through 2005 and 2006 and thereafter at July 31, 2002 is as follows:
Contractual Obligations Total 2002 2003 2004 2005 2006 and
Thereafter
------------ ------------- ------------ ------------ ------------ ------------
Long-term debt, with covenant
violations and classified as current $3,953,000 $3,953,000 $ - $ - $ - $ -
Long-term debt, and all debt service
interest payments 39,682,000 2,068,000 7,734,000 7,291,000 9,025,000 13,564,000
Operating leases 1,854,000 727,000 980,000 67,000 32,000 48,000
Purchase agreement for equipment 2,343,000 2,343,000
Mandatory redeemable preferred stock 1,094,000 - - - - 1,094,000
------------ ------------- ------------ ------------ ------------ ------------
Total contractual cash obligations $48,926,000 $9,091,000 $8,714,000 $7,358,000 $9,057,000 $14,706,000
============ ============= ============ ============ ============ ============
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 July 31, Date of Expiration
2002
------------------------------- ---------------------------- ---------------------------- ----------------------------
Line of credit $ 1,000,000 $ 825,000 March 31, 2002*
Line of credit 3,750,000 3,088,000 February 1, 2004
Line of credit 3,000,000 2,168,000 November 1, 2002
*currently in negotiations with a new lender
The Company's net cash used in operations for the nine months ended July 31,
2002 was $864. This is comprised of a net loss of $4,404, decreases in other
liabilities of $351 and increases in accounts receivable of $1,209, offset by
noncash depreciation and amortization of $2,018 and goodwill impairment loss of
$2,015, decreases in inventories of $227, prepaid expenses and other assets of
$333, increases in accrued expenses and customer deposits of $495, and accounts
payable of $12.
Net cash flow provided from financing activities for the nine months ended July
31, 2002 was $1,352. This is comprised of borrowings of long-term debt and net
borrowings of short-term debt of $3,002 and borrowings from related parties of
$1,778, offset by principal repayments of long-term debt of $3,428.
Cash flow was used in investing activities for the nine months ended July 31,
2002 of $561. This is comprised primarily of purchases of property and
equipment.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
The total decrease in cash is summarized as follows:
Nine Months Ended
--------------------------------------
July 31, July 31,
2002 2001
------------------ -------------------
Net cash used in operations $ (864) $ 406
Net cash used in investing activities (561) (6,382)
Net cash provided by financing
activities 1,352 5,669
------------------ -------------------
Decrease in cash and cash equivalents $ (73) $ (307)
================== ===================
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:
Three Months Ended July 31, 2002
(in thousands)
------------------------------------------------------------------------
Net
Interest Income Depreciation Income
EBITDA Expense Taxes & Amortization (Loss)
------------ ------------ ----------- -------------------- -------------
Trailer and related transportation
equipment manufacturing $ 276 $ 435 $ - $ 215 $ (374)
Coach leasing 697 365 - 169 163
Butyl rubber reclaiming 716 109 - 289 318
------------ ------------ ----------- -------------------- -------------
Total Company $ 1,689 $ 909 $ - $ 673 $ 107
============ ============ =========== ==================== =============
Three Months Ended July 31, 2001
(in thousands)
------------------------------------------------------------------------
Net
Interest Income Depreciation Income
EBITDA Expense Taxes & Amortization (Loss)
------------ ------------ ----------- -------------------- -------------
Trailer and related transportation
equipment manufacturing $ (215) $ 121 $ - $ 101 $ (437)
Coach leasing 648 377 - 242 29
Butyl rubber reclaiming 202 192 (52) 267 (205)
------------ ------------ ----------- -------------------- -------------
Total Company $ 635 $ 690 $ (52) $ 610 $ (613)
============ ============ =========== ==================== =============
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
Nine Months Ended July 31, 2002
(in thousands)
------------------------------------------------------------------------
Net
Interest Income Depreciation Income
EBITDA Expense Taxes & Amortization (Loss)
------------ ------------ ----------- -------------------- -------------
Trailer and related transportation
equipment manufacturing $ (91) $ 1,301 $ (46) $ 2,654* $ (4,000)
Coach leasing 1,454 1,099 - 579 (224)
Butyl rubber reclaiming 948 437 (109) 800 (180)
------------ ------------ ----------- -------------------- -------------
Total Company $ 2,311 $ 2,837 $ (155) $ 4,033 $ (4,404)
============ ============ =========== ==================== =============
*Includes impairment charge of $2,015.
Nine Months Ended July 31, 2001
(in thousands)
------------------------------------------------------------------------
Net
Interest Income Depreciation Income
EBITDA Expense Taxes & Amortization (Loss)
------------ ------------ ----------- -------------------- -------------
Trailer and related transportation
equipment manufacturing $ (287) $ 250 $ - $ 209 $ (746)
Coach leasing 901 859 - 544 (502)
Butyl rubber reclaiming 821 469 (65) 716 (299)
------------ ------------ ----------- -------------------- -------------
Total Company $ 1,435 $ 1,578 $ (65) $ 1,469 $ (1,547)
============ ============ =========== ==================== =============
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 Nine Months Ended
July 31, July 31,
2002 2002
----------------------------------------
Trailer manufacturing $ 146 $ 828
Coach leasing 27 120
Butyl rubber reclaiming 38 185
----------------------------------------
Total $ 211 $ 1,133
========================================
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
EBITDA by segment, exclusive of the allocation of the above selling, general and
administrative expenses, is as follows:
Three Months Ended Nine Months Ended
July 31, July 31,
2002 2002
----------------------------------------
Trailer manufacturing $ 422 $ 737
Coach leasing 724 1,574
Butyl rubber reclaiming 754 1,133
----------------------------------------
Total $ 1,900 $ 3,444
========================================
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 experienced significant bad debts expense
and our reserve for doubtful accounts of $66 should be adequate for any exposure
to loss in our July 31, 2002 accounts receivable. We have also established
reserves for slow-moving and obsolete inventories and believe the reserve of
$410 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 the operating results for the
ten-month period ended October 31, 2001 included a goodwill impairment charge of
$2,305,000. During the quarter ended July 31, 2002, the Company completed its
transitional impairment test in conjunction with the adoption of FAS 142. The
impairment test indicated that certain goodwill related to the trailer
manufacturing segment was impaired. Accordingly $2,015,000 has been recorded as
a cumulative effect of change in accounting principle.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits.
The exhibits listed in the Exhibit Index are 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.
August 25, 2003 By:/s/ Timothy S. Durham
------------------------------------------
Timothy S. Durham, Chief Executive Officer
EXHIBIT INDEX
Exhibit No. Description Location
31.1 Sarbanes-Oxley Act Section 302 Attached
Certification
31.2 Sarbanes-Oxley Act Section 302 Attached
Certification
32.1 Sarbanes-Oxley Act Section 906 Attached
Certification
32.2 Sarbanes-Oxley Act Section 906 Attached
Certification