SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the three months ended July 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 0-17430
OBSIDIAN ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Delaware 35-2154335
(State of other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
111 Monument Circle, Suite 4800
Indianapolis, Indiana 46204
(Address of principal executive offices) (Zip Code)
(317) 237-4122
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------- ------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES NO X
------ --------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock Outstanding at
$.0001 par value July 31, 2003
36,007,855 shares
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION:
Item 1 - Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets - July 31, 2003 and October 31, 2002
Condensed Consolidated Statements of Operations
Three Months and Nine Months Ended July 31, 2003 and 2002
Condensed Consolidated Statement of Changes of Stockholders' Deficit
And Comprehensive Loss
Condensed Consolidated Statements of Cash Flows
Nine Months Ended July 31, 2003 and 2002
Notes to Condensed Consolidated Financial Statements
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
Item 4 - Controls and Procedures
PART II - OTHER INFORMATION:
Item 1 - Legal Proceedings
Item 2 - Changes in Securities and Use of Proceeds
Item 3 - Defaults Upon Senior Securities
Item 4 - Submission of Matters to a Vote of Security Holders
Item 5 - Other Information
Item 6 - Exhibits and Reports on Form 8-K
PART I--FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
July 31, October 31,
2003 2002
----------------------------------
Assets
Current assets:
Cash and cash equivalents $ 329 $ 920
Marketable securities 80 137
Accounts receivable, net of allowance for doubtful
accounts of $492 for 2003 and $495 for 2002 4,597 3,307
Accounts receivable, related parties 229 206
Inventories, net 7,692 7,315
Prepaid expenses and other assets 903 1,049
----------------------------------
Total current assets 13,830 12,934
Property, plant and equipment, net 24,271 23,048
Other assets:
Goodwill 6,434 6,434
Other intangible assets, net of accumulated amortization of $787 for 2003 and
$555 for 2002 1,562 1,853
Other 28 116
Assets of subsidiary held for sale -- 1,538
----------------------------------
$ 46,125 $ 45,923
==================================
The accompanying notes are an integral part of the condensed consolidated financial statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
July 31, October 31,
2003 2002
----------------------------------
Liabilities and Stockholders' Deficit
Current liabilities:
Current portion of long-term debt $ 6,889 $ 5,667
Current portion of long-term debt, related parties 73 --
Accounts payable, trade 2,398 3,450
Accounts payable, related parties 805 668
Accrued expenses and customer deposits 2,473 1,558
----------------------------------
Total current liabilities 12,638 11,343
Long-term debt, related parties 13,107 5,518
Long-term debt, net of current portion 20,155 23,879
Deferred income tax liabilities 599 1,624
Liabilities of subsidiary held for sale -- 2,848
Commitments and contingencies -- --
Mandatory redeemable preferred stock:
Class of Series C Preferred Stock: 386,206 shares outstanding for
2003 and 2002 1,125 1,400
Class of Series D Preferred Stock: 16,071 shares outstanding for 2003 337 --
Stockholders' deficit:
Common stock, par value $.0001 per share; 40,000,000 shares authorized,
36,007,855 shares outstanding 3 3
Preferred stock, 5,000,000 shares authorized; Class of Series C convertible
preferred stock, par value $.001, 4,600,000 authorized, 3,982,193 issued and
outstanding for 2003 and 2002, 200,000 shares of undesignated preferred stock
authorized 5 5
Preferred stock, 200,000 shares authorized; Class of Series D convertible
preferred stock, par value $.001, 104,402 and 88,330 shares issued and
outstanding in 2003 and 2002, respectively -- --
Additional paid-in capital 11,873 10,184
Accumulated other comprehensive loss (106) (49)
Accumulated deficit (13,611) (10,832)
----------------------------------
Total stockholders' deficit (1,836) (689)
----------------------------------
$ 46,125 $ 45,923
==================================
The accompanying notes are an integral part of the condensed consolidated financial statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share and share data)
(unaudited)
Three Months Ended Nine Months Ended
-------------------------------------------------------------------------
July 31, 2003 July 31, 2002 July 31, 2003 July 31, 2002
-------------------------------------------------------------------------
Net sales $ 16,795 $ 15,239 $ 42,802 $ 42,302
Cost of sales 14,390 12,400 37,445 35,320
-------------------------------------------------------------------------
Gross profit 2,405 2,839 5,357 6,982
Selling, general and administrative expenses 1,976 1,855 6,229 6,118
Insurance recovery -- (325) -- (325)
-------------------------------------------------------------------------
Income (loss) from operations 429 1,309 (872) 1,189
Other income (expense):
Interest expense, net (889) (839) (2,577) (2,616)
Other income (expense) (59) 1 (52) (32)
-------------------------------------------------------------------------
Income (loss) before income taxes,
discontinued operations and cumulative
effect of change in accounting principle (519) 471 (3,501) (1,459)
Income tax benefit 212 -- 771 155
-------------------------------------------------------------------------
Income (loss) before discontinued
operations and cumulative effect of change
in accounting principle (307) 471 (2,730) (1,304)
Loss from discontinued operations, net of
tax -- (364) (49) (1,085)
-------------------------------------------------------------------------
Income (loss) before cumulative effect of
change in accounting principle (307) 107 (2,779) (2,389)
Cumulative effect of change in accounting
principle -- -- -- (2,015)
-------------------------------------------------------------------------
Net income (loss) $ (307) $ 107 $ (2,779) $ (4,404)
=========================================================================
The accompanying notes are an integral part of the condensed consolidated financial statements.
Three Months Ended Nine Months Ended
------------------------------------------------------------------------
July 31, 2003 July 31, 2002 July 31, 2003 July 31, 2002
------------------------------------------------------------------------
Basic and diluted income (loss) per share attributable to common shareholders:
From continuing operations:
Basic $ .00 $ .01 $ (.07) $ (.03)
========================================================================
Diluted $ .00 $ .00 $ (.07) $ (.03)
========================================================================
Discontinued operations, net of tax:
Basic $ .00 $ (.01) $ (.00) $ (.03)
========================================================================
Diluted $ .00 $ (.00) $ (.00) $ (.03)
========================================================================
Cumulative effect of change in accounting principle:
Basic $ .00 $ .00 $ .00 $ (.05)
========================================================================
Diluted $ .00 $ .00 $ .00 $ (.05)
========================================================================
Net income (loss):
Basic $ .00 $ .00 $ (.07) $ (.11)
========================================================================
Diluted $ .00 $ .00 $ (.07) $ (.11)
========================================================================
Weighted average common shares outstanding:
Basic 36,007,855 36,007,855 36,007,855 36,007,855
========================================================================
Diluted 149,915,726 128,701,226 36,007,855 36,007,855
========================================================================
The accompanying notes are an integral part of the condensed consolidated financial statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT AND COMPREHENSIVE LOSS
(dollars in thousands)
(unaudited)
Series C Series D Accumu-
Convertible Convertible lated
Preferred Preferred Addi- Other
Common Stock Stock Stock tional Compre- Accumu-
Comprehensive --------------------------------------------------- Paid-in hensive lated
Loss Shares Amount Shares Amount Shares Amount Capital Loss Deficit Total
-----------------------------------------------------------------------------------------------------
Balance at October 31, 2002 $ -- 36,007,855 $3 4,368,399 $ 5 88,330 $-- $10,184 $ (49) $(10,832) $ (689)
Contribution to capital from
sale of Champion to related
party -- -- -- -- -- -- -- 1,142 -- -- 1,142
Fair value adjustment on
redeemable preferred stock -- -- -- -- -- -- -- 275 -- -- 275
Tax effect of sale of coaches
to DC Investments Leasing, LLC -- -- -- -- -- -- -- (96) -- -- (96)
Extension of stock options -- -- -- -- -- -- -- 30 -- -- 30
Issuance of mandatory
redeemable preferred stock -- -- -- -- -- 32,143 -- -- -- -- --
Assignment of Mandatory
redeemable preferred stock -- -- -- -- -- -- 338 -- -- 338
Unrealized loss on
available-for-sale marketable
securities (57) -- -- -- -- -- -- -- (57) -- (57)
Net loss (2,779) -- -- -- -- -- -- -- -- (2,779) (2,779)
----------------------------------------------------------------------------------------------------
Total comprehensive loss $(2,836)
===========
Balance at July 31, 2003 36,007,855 $3 4,368,399 $ 5 120,473 $-- $11,873 $(106) $(13,611) $(1,836)
=======================================================================================
The accompanying notes are an integral part of the condensed consolidated financial statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
-------------------------------
July 31, 2003 July 31, 2002
-------------------------------
Cash flow from operating activities:
Loss from continuing operations $ (2,730) $ (3,319)
Adjustments to reconcile loss from continuing operations to net cash provided by
(used in) operating activities:
Depreciation and amortization 2,232 1,907
Goodwill impairment loss -- 2,015
Other (538) (349)
Changes in operating assets and liabilities:
Accounts receivable, net (1,289) (1,317)
Inventories, net (376) (498)
Other, net (252) 1,451
-------------------------------
Net cash used in operating activities (2,953) (110)
-------------------------------
Cash flows from investing activities:
Capital expenditures (560) (575)
Other 23 16
-------------------------------
Net cash used in investing activities (537) (559)
-------------------------------
Cash flows from financing activities:
Advances from (repayments to) related parties, net (1,414) 272
Net borrowings on lines of credit 1,907 1,143
Borrowings (repayments) on long-term debt, including related parties 2,447 (822)
-------------------------------
-------------------------------
Net cash provided by financing activities 2,940 593
Net cash provided by (used in) discontinued operations (41) 6
-------------------------------
-------------------------------
Decrease in cash and cash equivalents (591) (70)
Cash and cash equivalents, beginning of period 920 529
-------------------------------
Cash and cash equivalents, end of period $ 329 $ 459
===============================
Interest paid $ 2,577 $ 2,389
===============================
Taxes paid $ 63 $ --
===============================
The accompanying notes are an integral part of the condensed consolidated financial statements.
Nine Months Ended
-------------------------------
July 31, 2003 July 31, 2002
-------------------------------
Supplemental disclosure of noncash operating, investing and financing
activities:
Acquisition of coaches and equipment through issuance of debt $ 2,304 $ --
Contribution to capital from sale of Champion to related party $ 1,142 $ --
Issuance of mandatory redeemable preferred stock in conjunction with the sale
of Champion $ 338 $ --
Assignment and assumption of mandatory redeemable preferred stock to Fair
Holdings $ 675 $ --
Tax effect of sale of coaches to a related party $ 96 $ --
Fair value change on mandatory redeemable preferred stock $ 275 $ 341
Reclassification of debt due to assumption of credit agreement by Fair Holdings $ 1,488 $ --
Conversion of debt to preferred stock and additional paid-in capital $ -- $ 3,348
Conversion of accounts payable, related parties to debt $ -- $ 1,295
Purchase price adjustment and conversion of accounts payable to debt for United $ -- $ 294
The accompanying notes are an integral part of the condensed consolidated financial statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per-share data)
(unaudited)
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Description of Business:
Obsidian Enterprises, Inc. ("Obsidian Enterprises"), formerly Danzer
Corporation, was reorganized (the "Reorganization") through an Acquisition and
Plan of Reorganization with U.S. Rubber Reclaiming, Inc. and Related Entities
("U.S. Rubber Companies"), which was consummated on June 21, 2001 (the
"Effective Date"). The Acquisition and Plan of Reorganization of Obsidian
Enterprises with U.S. Rubber Companies was accounted for as a reverse
acquisition as the shareholders of the U.S. Rubber Companies owned a majority of
the outstanding stock of Obsidian Enterprises subsequent to the Acquisition and
Plan of Reorganization. For accounting purposes, U.S. Rubber Reclaiming, Inc. is
deemed to have acquired Obsidian Enterprises.
Pursuant to the Plan of Acquisition and Reorganization, United Expressline, Inc.
was acquired July 31, 2001.
The accompanying financial data as of July 31, 2003 and for the three and nine
months ended July 31, 2003 and 2002 has been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. The October 31,
2002 consolidated balance sheet was derived from audited financial statements,
but does not include all disclosures required by accounting principles generally
accepted in the United States of America. However, the Company believes that the
disclosures are adequate to make the information presented not misleading. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the period ended October 31, 2002. The
Company follows the same accounting policies in preparation of interim reports.
In the opinion of management, all adjustments (which include normal recurring
adjustments except as disclosed herein) necessary to present a fair statement of
financial position as of July 31, 2003, results of operations for the three and
nine months ended July 31, 2003 and cash flows and stockholders' deficit for the
nine months ended July 31, 2003 have been made. The results of operations for
the three and nine months ended July 31, 2003 are not necessarily indicative of
the operating results for the full fiscal year or any future periods.
The entities resulting from the merger described above, considered accounting
subsidiaries of U.S. Rubber Reclaiming, Inc. (the accounting acquirer) and legal
subsidiaries of Obsidian Enterprises, Inc. (formerly Danzer) after the
Acquisition and Plan of Reorganization, are as follows:
U.S. Rubber Reclaiming, Inc. ("U.S. Rubber", the accounting acquirer), which is
engaged in reclaiming scrap butyl rubber into butyl reclaim for resale to
manufacturers of rubber products.
Obsidian Enterprises, Inc. (formerly Danzer, the legal acquirer), a holding
company.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per-share data)
(unaudited)
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
Danzer Industries, Inc. ("Danzer Industries"), which is principally engaged in
the design, manufacture and sale of truck bodies and cargo trailers.
Pyramid Coach, Inc. ("Pyramid"), which is engaged in the leasing of coaches,
designed and fitted out for use for travel by country, rock bands and other
business enterprises, primarily on weekly to monthly leases. The coach leasing
segment also includes the assets, liabilities, equity and results of operations
of DW Leasing, LLC ("DW Leasing"), Obsidian Leasing Company, Inc. ("Obsidian
Leasing"), formed November 1, 2001 and DC Investments Leasing, LLC ("DC
Investments Leasing), formed December 13, 2002. DW Leasing and DC Investments
Leasing are controlled by individuals who are also controlling shareholders of
Obsidian Enterprises, Inc. and, accordingly, Pyramid. DW Leasing, Obsidian
Leasing and DC Investments Leasing also own the majority of the coaches operated
by Pyramid. All intercompany transactions are eliminated in consolidation.
United Expressline, Inc. ("United") manufactures and sells general use cargo
trailers and specialty trailers used in the racing industry and for other
special purposes.
Champion Trailer, Inc. ("Champion") manufactures and sells transport trailers to
be used primarily in the auto racing industry. During October 2002, the
Company's Board of Directors agreed to a plan to dispose of substantially all
assets and liabilities of Champion as further discussed in Note 3. The sale of
Champion was completed January 30, 2003. Accordingly, the operations of Champion
are classified as discontinued operations in the accompanying financial
statements.
Basis of Presentation:
Over the past year, the Company has undertaken various actions to improve its
operations and liquidity. Such actions include the sale of Champion described in
Note 3, as well as conversion of debt to equity and refinancing of certain of
its debt agreements as described in detail in the Company's 10-K for the year
ended October 31, 2002. Management believes that the Company has financing
agreements in place to provide adequate liquidity and working capital throughout
fiscal 2003. However, there can be no assurance that such working capital and
liquidity will in fact be adequate. Therefore, the Company may be required to
draw upon other liquidity sources. The Company has therefore secured an
increased financial commitment from Fair Holdings, Inc. ("Fair Holdings"), an
entity controlled by the Company's Chairman, to provide, as needed, additional
borrowings under a $8,000 line of credit agreement, which expires January 9,
2005. As of July 31, 2003, availability under the agreement is approximately
$2,480.
The Company incurred a net loss for the year ended October 31, 2002 of $6,330,
which included an asset impairment charge of $720, cumulative effect of change
in accounting principle of $2,015 and a loss from discontinued operations of
$1,040. In addition, the Company incurred a loss from continuing operations of
$307 and $2,730 for the three and nine months ended July 31, 2003, respectively.
Several of the Company's subsidiaries were acquired in highly leveraged
transactions and this factor combined with the loss has contributed to its
failure to meet certain financial covenants required by two of its lenders. As
of July 31, 2003, the lenders have waived all covenant violations.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per-share data)
(unaudited)
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
In view of these matters realization of assets and satisfaction of liabilities
in the ordinary course of business is dependent on the Company's ability to
generate sufficient cash flow to satisfy its obligations on a timely basis,
maintain compliance with its financing agreements and continue to receive
financing support from Fair Holdings to provide liquidity if needed.
Management, as a part of its plan towards resolving these issues and generating
positive cash flow and earnings, has taken the actions as described in the
Company's 10-K for the year ended October 31, 2002 as well as the actions
described below during the nine months ended July 31, 2003.
o During 2002, the Board of Directors authorized the Chairman of the
Board to explore various options regarding the operations at Champion.
Options included divestiture, restructuring of operations or closing
the facility. It was determined in the best interests of the Company
to sell Champion. On January 30, 2003, the Company completed the sale
of substantially all assets of Champion to an entity owned by Messrs.
Durham and Whitesell, Chairman and President of the Company,
respectively. The sale resulted in an increase in equity of $1,142 as
further described in Note 3.
o During December 2002, the Company sold certain coaches of Obsidian
Leasing to DC Investments Leasing for assumption of the existing debt.
DC Investments Leasing then refinanced this debt at terms more
favorable than the previous terms.
o On April 1, 2003, the Company obtained an increase in its available
line of credit with Fair Holdings to $8,000.
o On January 3, 2003, Obsidian Leasing refinanced debt due to former
shareholders in the amount of $928 with Fair Holdings at terms further
described in Note 4.
o During January 2003, United and U.S. Rubber obtained modifications to
provide less stringent requirements on certain financial covenants
with their respective lenders.
o On March 28, 2003, Fair Holdings acquired the line of credit and term
debt due to the senior lender of Danzer in the amount of $1,488 under
an assignment and assumption agreement. The maturity date of the line
of credit included in the assignment and assumption agreement was
extended to April 2006, and the debt covenants required by the senior
lender were waived through the end of the term. All other terms of the
assumed notes remain the same.
o During March 2003, United completed a compensation review and update
and provided a revised pay scale which realigns the Company with its
industry and reduces compensation costs. United also continues to
develop its new production facility to increase productivity and plant
efficiency.
o During 2003, U.S. Rubber has continued to consolidate its butyl
reclaiming operations from two plants to one to maximize production
and efficiently utilize equipment. The consolidation has caused some
pieces of equipment to be temporarily idle until the Company completes
its implementation of a new production process for "fine grind
rubber". Existing and new equipment will be required to complete the
"fine grind" production line. The new process will maximize the use of
the existing raw materials in the Company's existing butyl reclaim
production and also provide additional products of natural rubber.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per-share data)
(unaudited)
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
The above factors combined with additional actions by management at the
operating subsidiaries are expected to contribute to an increase in the
Company's working capital and liquidity.
Although management believes the actions described above will improve operations
and liquidity, there can be no assurance that such actions will sufficiently
improve operations or liquidity. In addition, management is continuing to
explore various opportunities to refinance the current outstanding debt.
Significant Accounting Policies:
Earnings Per Share:
Basic per-share amounts are computed, generally, by dividing net income or loss
attributable to common shareholders by the weighted-average number of common
shares outstanding. Diluted per-share amounts are computed similar to basic
per-share amounts except that the weighted-average shares outstanding are
increased to include additional shares for the assumed conversion of Company's
Series C and Series D Preferred Stock and assumed exercise of stock options and
warrants, if dilutive.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per-share data)
(unaudited)
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
Basic and diluted earnings (loss) per share have been computed as follows:
Three Months Ended Nine Months Ended
-------------------------------------- -------------------------------------
July 31, 2003 July 31, 2002 July 31, 2003 July 31, 2002
------------------ ------------------- ------------------ ------------------
Income (loss) before discontinued
operations and cumulative effect of
change in accounting principle $ (307) $ 471 $ (2,730) $ (1,304)
Change in fair value of mandatory
redeemable preferred stock 411 (82) 275 341
------------------ ------------------- ------------------ ------------------
Income (loss) attributable to common
shareholders before discontinued
operations and cumulative effect of
change in accounting principle 104 389 (2,455) (963)
Loss from discontinued operations, net
of tax -- (364) (49) (1,085)
Cumulative effect of change in
accounting principle -- -- -- (2,015)
------------------ ------------------- ------------------ ------------------
Net income (loss) attributable to
common shareholders $ 10-4 $ 25 $ (2,504) $ (4,063)
================== =================== ================== ==================
Weighted average common shares outstanding:
Basic 36,007,855 36,007,855 36,007,855 36,007,855
================== =================== ================== ==================
Diluted 149,915,726 128,701,226 36,007,855 36,007,855
================== =================== ================== ==================
Earnings (loss) per share attributable
to common shareholders:
From continuing operations:
Basic $ .00 $ .01 $ (.07) $ (.03)
Diluted .00 .01 (.07) (.03)
Discontinued operations, net of tax:
Basic .00 (.01) (.00) (.03)
Diluted .00 (.00) (.00) (.03)
------------------ ------------------- ------------------ ------------------
Cumulative effect of change in
accounting principle:
------------------ ------------------- ------------------ ------------------
Basic .00 .00 .00 (.05)
Diluted .00 .00 .00 (.05)
------------------ ------------------- ------------------ ------------------
Net income (loss):
Basic $ .00 $ .00 $ (.07) $ (0.11)
================== =================== ================== ==================
Diluted $ .00 $ .00 $ (.07) $ (0.11)
================== =================== ================== ==================
The Company's Series C Preferred Stock and Series D Preferred Stock, which have
all the rights and privileges of the Company's common stock, are convertible at
rates of 20 to 1 and 175 to 1, respectively. The inclusion of these potential
common shares in the calculation of loss per share would have an antidilutive
effect. However, pursuant to the Acquisition Agreement and Plan of
Reorganization entered into in connection with the Reorganization, these shares
will be converted to common stock immediately upon approval by the stockholders.
Accordingly, we are presenting the following pro forma information to indicate
the effect on earnings per share had such shares been converted to common shares
for the periods presented.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per-share data)
(unaudited)
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
Pro forma basic and diluted loss per share have been computed below as if the
Series C and Series D Preferred Stock were converted to common stock. For the
three and nine months ended July 31, 2003, the Series C Preferred Stock has been
reflected on a weighted average basis outstanding as common shares of
87,367,980. For the three and nine months ended July 31, 2002, the Series C
Preferred Stock has been reflected on a weighted average basis outstanding as
common shares of 87,167,980 and 79,111,259, respectively. The Series D Preferred
Stock has been reflected on a weighted average basis outstanding as common
shares of 21,082,775 and 19,283,594 for the three and nine months ended July 31,
2003, respectively. There were no Series D Preferred Stock shares issued or
outstanding during the three and nine months ended July 31, 2002.
Three Months Ended Nine Months Ended
--------------------------------------- --------------------------------------
July 31, 2003 July 31, 2002 July 31, 2003 July 31, 2002
------------------- ------------------- ------------------ -------------------
Pro forma weighted average common shares outstanding:
Basic 144,458,610 123,175,835 142,659,429 115,119,114
Diluted 149,915,726 128,701,226 142,659,429 115,119,114
Pro forma basic and diluted income (loss) per share, attributable to common
shareholders:
From continuing operations:
Basic $ .00 $ .00 $ (.02) $ (.01)
=================== =================== ================== ===================
Diluted $ .00 $ .00 $ (.02) $ (.01)
=================== =================== ================== ===================
Discontinued operations, net of tax:
Basic $ .00 $ (.00) $ (.00) $ (.01)
=================== =================== ================== ===================
Diluted $ .00 $ (.00) $ (.00) $ (.01)
=================== =================== ================== ===================
Cumulative effect of change in accounting principle:
Basic $ .00 $ .00 $ .00 $ (.02)
=================== =================== ================== ===================
Diluted $ .00 $ .00 $ .00 $ (.02)
=================== =================== ================== ===================
Net income (loss):
Basic $ .00 $ .00 $ (.02) $ (.04)
=================== =================== ================== ===================
Diluted $ .00 $ .00 $ (.02) $ (.04)
=================== =================== ================== ===================
The pro forma net income (loss) per share is presented for informational
purposes only and is not indicative of the weighted average common shares
outstanding or net income (loss) per share presented in accordance with
accounting principles generally accepted in the United States of America.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per-share data)
(unaudited)
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
The Company has a note payable agreement which is convertible by the holder to
common stock totaling 5,000,000 shares at a conversion rate of $0.10 per share.
In addition, the Company has options outstanding to purchase a total of 800,000
shares of common stock, at a weighted average exercise price of $.09. These
additional shares have been included in the calculation of weighted average
common shares outstanding on a diluted basis for the three-month periods ended
July 31, 2003 and 2002, respectively. However, because the Company incurred a
loss for the nine months ended July 31, 2003 and 2002, respectively, the
inclusion of those potential common shares in the calculation of diluted loss
per share would have an antidilutive effect.
Asset Impairment
The Company's truck body division at Danzer continues to negatively impact the
Company's cash flows. The trailer production line was put in place in the fourth
quarter of 2002 to support the production needs at United and also provide a new
product line to the existing customers of Danzer and open a potential new market
along the East coast of the U.S. Given the current state of the
telecommunications industry and economic conditions, management will continue to
evaluate the operations and progress with the implementation of the trailer
production. Management also expects to make a decision to continue or
discontinue operations by the end of fiscal 2003. In conjunction with the
analysis of the Danzer operations, we are also analyzing the potential for asset
impairment at the Danzer operation. Total assets of Danzer as of July 31, 2003
were $3,395, which consists of $1,396 of current assets and $1,999 of net
property and equipment, and represents approximately 7% of total consolidated
assets.
Recently Issued Pronouncements:
In January 2003, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 46 (FIN No. 46), Consolidation of Variable Interest Entities,
an interpretation of Accounting Research Bulletin No., 51. This Interpretation
addresses the application of Accounting Research Bulletin No. 51, Consolidated
Financial Statements, to certain entities in which equity investors do not have
the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. The Interpretation
applies immediately to variable interest entities created after January 31,
2003, and to variable interest entities in which an enterprise obtains an
interest after that date. It applies in the first interim period beginning after
June 15, 2003, to variable interest entities in which an entity holds a variable
interest that it acquired prior to February 1, 2003. DW Leasing and DCI Leasing,
which are included in the Company's consolidated financial statements, may be
subject to the provisions of FIN No. 46. However, management does not expect the
adoption of FIN No. 46 to have a material impact on the Company's financial
position, results of operations, cash flows, or its debt covenants as these
entities have generated negative operating results in the past and the current
operating model does not anticipate income in excess of losses previously
recognized in the consolidated financial statements. Should future operating
results exceed expectations, income generated by these entities in excess of
previously recognized losses would be charged to minority interest in the
consolidated statement of operations and recognized as minority interest on the
consolidated balance sheet.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure. SFAS 148 amends FASB Statement No. 123
(SFAS 123), Accounting for Stock-Based Compensation, to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS 148 amends
the disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The transition guidance and annual disclosure provisions of SFAS 148
are effective for fiscal years ending after December 15, 2002. The interim
disclosure provisions are effective for financial reports containing financial
statements for interim periods beginning after December 15, 2002. The Company
plans to continue accounting for stock options under Accounting Principles
Bulletin Opinion No. 25, Accounting for Stock Issued to Employees, (APB No. 25)
and has adopted the disclosure provisions of SFAS 148.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, which amends SFAS No. 133. This
statement amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under FASB Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities. This statement is effective
for contracts entered into or modified after June 30, 2003. We do not anticipate
that the adoption of this statement will have a significant impact on our
financial statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per-share data)
(unaudited)
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. The standard
further defines the accounting for certain financial instruments that, under
previous guidance, issuers could account for as equity or report between the
liability and equity section of the balance sheet. The standard requires that
those instruments be classified as liabilities in statements of financial
position. This standard is effective for interim periods beginning after June
15, 2003. We believe the adoption of this standard will result in mandatory
redeemable preferred stock currently reported on our balance sheet between
equity and liabilities being reclassified as a liability. We do not expect the
adoption of SFAS No. 150 to have a material impact on the Company's results of
operations, cash flows, or its debt covenants.
2. INVENTORIES
Inventories are stated at the lower-of-cost (first-in, first-out method) or
market and are comprised of the following components:
July 31, October 31,
2003 2002
------------------ -------------------
Raw materials $ 4,819 $ 3,655
Work-in-process 618 709
Finished goods 2,614 3,417
Valuation reserve (359) (466)
------------------ -------------------
Total $ 7,692 $ 7,315
================== ===================
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per-share data)
(unaudited)
3. DISCONTINUED OPERATIONS
On October 30, 2002, the Company's Board of Directors agreed to sell the assets
of Champion to an entity controlled by Messrs. Durham and Whitesell (Officers of
the Company) for the assumption of all liabilities of Champion excluding its
subordinated debt. The decision to divest Champion was based on the entity's
inability to achieve profitable operations in the foreseeable future without
substantial cash infusion. The Company also agreed in principal to settle the
outstanding subordinated debt due to Markpoint Equity Fund J.V. ("Markpoint")
from Champion in exchange for a cash payment of $675 and issuance to the debt
holder of 32,143 shares of the Company's Series D Preferred Stock. In addition,
the agreement provides Markpoint the option to require the Company to repurchase
these shares at a price of $21 per share. The sale of Champion was completed on
January 30, 2003. Champion is accounted for as a discontinued operation and
therefore the results of operations and cash flows have been removed from the
Company's continuing operations for all periods presented. In addition, assets
and liabilities of Champion included in the sale have been removed from the
consolidated balance sheet as of July 31, 2003 and are included in the
consolidated balance sheet as of October 31, 2002 as "Assets of subsidiary held
for sale" and "Liabilities of subsidiary held for sale," respectively.
The sale of Champion resulted in an increase in equity of the Company of $1,142,
net of tax of $97. No gain or loss was recognized on the sale because of the
involvement of related parties.
A summary of the Company's discontinued operations for the three and nine months
ended July 31, 2003 and 2002 are as follows:
Three Months Ended Nine Months Ended
-------------------------------------- -------------------------------------
July 31, 2003 July 31, 2002 July 31, 2003 July 31, 2002
------------------ ------------------- ------------------ ------------------
Net sales $ -- $ 236 $ 170 $ 2,629
Operating expenses -- (530) (286) (3,501)
Interest -- (70) (85) (213)
Other -- -- 127 --
Tax benefit -- -- 25 --
------------------ ------------------- ------------------ ------------------
Net loss $ -- $ (364) $ (49) $ (1,085)
================== =================== ================== ==================
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per-share data)
(unaudited)
3. DISCONTINUED OPERATIONS, CONTINUED
A summary of assets and liabilities of Champion held for sale at October 31,
2002 are as follows:
October 31, 2002
---------------------
Inventories $ 551
Other current assets 177
Property and equipment, net 715
Other 95
---------------------
$ 1,538
=====================
Accounts payable and accrued expenses $ 709
Customer deposits 313
Long-term debt, related parties 1,826
---------------------
$ 2,848
=====================
4. FINANCING ARRANGEMENTS
Obsidian Leasing:
On January 3, 2003, Obsidian Leasing refinanced debt in the amount of $928 to
former shareholders of Pyramid and related companies. Terms of the new note with
Fair Holdings include monthly interest payments of 13% of the outstanding
principal amount and a balloon principal payment in January 2006.
On December 17, 2002, Obsidian Leasing sold four coaches to DC Investments
Leasing in exchange for DC Investments Leasing's satisfaction of the debt
outstanding on such coaches. In addition, DC Investments Leasing also acquired
five additional coaches that were previously to be purchased by the Company
thereby eliminating the Company's existing purchase commitment for such coaches.
The Company refinanced the debt on the four coaches in addition to financing the
five additional coaches. DC Investments Leasing entered into an agreement with
First Indiana for $2,741 of the debt with interest payable at prime plus 1/2%
and a maturity of December 2007. DC Investments Leasing also incurred debt with
Fair Holdings for the remaining 20% of the net book value of the transferred and
new coaches. Terms of the debt with Fair Holdings include monthly interest
payments on the principal amount of $677 at 14% and a maturity of January 2008.
DC Investments Leasing also entered into a management agreement with Pyramid
under which all nine coaches described above will be leased by Pyramid.
United:
On December 26, 2002, United amended its credit agreement to provide additional
working capital during the winter months. The amendment included a "temporary
overline" line of credit with maximum borrowings not to exceed the lesser of
$650 or the remainder of the borrowing base less the outstanding principal
amount of the revolving line of credit. Interest is payable monthly at a rate of
prime plus 3/4%. The temporary overline line of credit matured on June 30, 2003.
The Company is currently in negotiations with its lender to convert the
temporary overline to additional availability under the current line of credit.
Should such an agreement not be reached, the line will be repaid from borrowings
under the Company's line of credit with Fair Holdings and from operating cash
flow.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per-share data)
(unaudited)
4. FINANCING ARRANGEMENTS, CONTINUED
United was in technical default of certain loan covenants with its subordinated
lender at July 31, 2003. United has obtained a waiver of the violations from the
lender.
Obsidian Enterprises:
On April 1, 2003, Obsidian Enterprises, Inc.'s line of credit with Fair Holdings
was amended. Maximum borrowings were increased from $5,000 to $8,000.
At October 31, 2002, the Company was in violation of negative covenants with
Renaissance US Growth & Income Trust PLC and FBSUS Special Opportunities Trust
PLC, the holders of debentures that completed the financing of United. During
January 2003, the Company received a waiver of the violations and obtained
modifications of terms with the debenture holders to provide for less stringent
covenants. In exchange for the waiver and modifications, the Company issued
warrants to the debenture holders to purchase up to 16,000 shares of the
Company's common stock at an exercise price of $.20 per share.
Danzer:
As of January 31, 2003, Danzer was in violation of certain covenants included in
its credit agreement and First Forbearance Agreement dated October 14, 2002 with
its senior lender. On February 28, 2003, the Company and the lender entered into
a Second Forbearance Agreement waiving these violations. On March 28, 2003, the
credit agreement was assumed by Fair Holdings under an assumption and
continuation agreement. An amendment was made as of the effective date of the
agreement to extend the maturity date of the line of credit agreement to April
1, 2006 and the debt covenants required by the senior lender were waived through
the end of the term. All other terms of the agreement will continue as stated in
the original agreement dated August 15, 2001.
5. MANDATORY REDEEMABLE PREFERRED STOCK
In conjunction with the sale of Champion discussed in Note 3, the Company agreed
to settle the outstanding subordinated debt due to Markpoint from Champion in
exchange for a cash payment of $675 and issuance to the debt holder of 32,143
shares of the Company's Series D Preferred Stock. The agreement provides
Markpoint the option to require the Company to repurchase these shares at a
price of $21 per share. The repurchase option is available to Markpoint as
follows: 16,072 shares during the period May 1, 2003 to June 1, 2003 and 16,071
shares during the period November 1, 2003 to December 1, 2003. On May 12, 2003,
under an Assignment Agreement, the Company transferred all rights, title and
interest in the Put Option to Fair Holdings. Markpoint exercised its option on
May 12, 2003 and was paid $338 by Fair Holdings. The exercise of the option
resulted in the reduction of the liability and an increase in additional paid in
capital of $338.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per-share data)
(unaudited)
6. STOCKHOLDERS' DEFICIT
Stock Options
The Company accounts for stock-based compensation under the provisions of APB
No. 25. The Company has adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. Accordingly, no compensation expense is
recognized if the exercise price of stock options equals the fair market value
of the underlying stock at the date of grant. Had compensation expense for the
Company's stock option plans been determined based on the fair value at the
grant date for awards consistent with the provisions of SFAS No. 123, the
Company's basic and diluted net income (loss) per share would have been as
follows:
Three Months Ended Nine Months Ended
-------------------------------------- -------------------------------------
July 31, 2003 July 31, 2002 July 31, 2003 July 31, 2002
------------------ ------------------- ------------------ ------------------
Net income (loss) as reported $ (307) $ 107 $ (2,779) $ (4,404)
Deduct total stock-based employee
compensation expense determined under
fair value methods -- -- -- --
------------------ ------------------- ------------------ ------------------
Pro forma net income (loss) (307) 107 (2,779) (4,404)
Income (loss) per share:
As reported:
Basic $ .00 $ .00 $ (.07) $ (.11)
Diluted $ .00 $ .00 $ (.07) $ (.11)
Pro forma:
Basic $ .00 $ .00 $ (.07) $ (.11)
Diluted $ .00 $ .00 $ (.07) $ (.11)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 2000 and 1999, respectively: risk-free interest
rates of 6.4 and 5.5 percent; dividend yield of 0 percent in both years;
expected lives of 5 years; and volatility of 978 and 170 percent. The estimated
weighted average fair value of options granted during 2000 and 1999 were $0.10
and $0.05 per share, respectively.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per-share data)
(unaudited)
7. BUSINESS SEGMENT DATA AND GEOGRAPHIC DATA
The Company operates in three industry segments comprised of trailer and related
transportation equipment manufacturing (trailer manufacturing); coach leasing;
and butyl rubber reclaiming. All sales are in North and South America primarily
in the United States, Canada and Brazil. Selected information by segment
follows:
Three Months Ended July 31, 2003
------------------------------------------------------------------------------
Trailer Manufacturing Coach Leasing Butyl Rubber Total
Reclaiming
------------------------------------------------------------------------------
Sales:
Domestic $ 10,402 $ 2,562 $ 2,338 $ 15,302
Foreign 1,132 -- 361 1,493
------------------------------------------------------------------------------
Total $ 11,534 $ 2,562 $ 2,699 $ 16,795
Cost of goods sold $ 10,378 $ 1,525 $ 2,487 $ 14,390
Income (loss) before taxes $ (427) $ 153 $ (141) $ (415)*
Identifiable assets $ 20,163 $ 14,167 $ 10,993 $ 45,323**
Depreciation and amortization expense $ 176 $ 281 $ 329 $ 786
Interest expense $ 357 $ 311 $ 117 $ 785***
*Identifiable income (loss) before taxes, as stated above $ (415)
Corporate-level loss before taxes, not identifiable with a specific segment (104)
--------------------
Total loss before taxes $ (519)
====================
**Identifiable assets, as stated above $ 45,323
Corporate-level intangibles 650
Other corporate-level assets 152
--------------------
Total assets $ 46,125
====================
***Identifiable interest expense, as stated above $ 785
Corporate-level interest expense, not identified with a specific segment 104
--------------------
Total interest expense $ 889
====================
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per-share data)
(unaudited)
7. BUSINESS SEGMENT DATA AND GEOGRAPHIC DATA, CONTINUED
Three Months Ended July 31, 2002
------------------------------------------------------------------------------
Trailer Coach Leasing Butyl Rubber Total
Manufacturing Reclaiming
------------------------------------------------------------------------------
Sales:
Domestic $ 10,475 $ 1,959 $ 2,672 $ 15,106
Foreign -- -- 133 133
------------------------------------------------------------------------------
Total $ 10,475 $ 1,959 $ 2,805 $ 15,239
Cost of goods sold $ 8,952 $ 997 $ 2,451 $ 12,400
Income before taxes $ 34 $ 163 $ 305 $ 502*
Identifiable assets $ 19,897 $ 12,670 $ 10,650 $ 43,217**
Depreciation and amortization expense $ 178 $ 169 $ 289 $ 636
Interest expense $ 321 $ 365 $ 122 $ 808***
*Identifiable income before taxes, as stated above $ 502
Corporate-level loss before taxes, not identifiable with a specific segment (31)
--------------------
Total income before taxes $ 471
====================
**Identifiable assets, as stated above $ 43,217
Corporate-level intangibles 650
--------------------
Total assets $ 43,867
***Identifiable interest expense, as stated above $ 808
Corporate-level interest expense, not identified with a specific segment 31
--------------------
Total interest expense $ 839
====================
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per-share data)
(unaudited)
7. BUSINESS SEGMENT DATA AND GEOGRAPHIC DATA, CONTINUED
Nine Months Ended July 31, 2003
------------------------------------------------------------------------------
Trailer Coach Leasing Butyl Rubber Total
Manufacturing Reclaiming
------------------------------------------------------------------------------
Sales:
Domestic $ 27,391 $ 5,082 $ 6,989 $ 39,462
Foreign 2,355 -- 985 3,340
------------------------------------------------------------------------------
Total $ 29,746 $ 5,082 $ 7,974 $ 42,802
Cost of goods sold $ 27,132 $ 2,879 $ 7,434 $ 37,445
Loss before taxes $ (2,317) $ (246) $ (669) $ (3,232)*
Identifiable assets $ 20,163 $ 14,167 $ 10,993 $ 45,323**
Depreciation and amortization expense $ 364 $ 704 $ 570 $ 1,638
Interest expense $ 1,038 $ 914 $ 356 $ 2,308***
*Identifiable loss before taxes, as stated above $ (3,232)
Corporate-level loss before taxes, not identifiable with a specific segment (269)
--------------------
Total loss before taxes $ (3,501)
====================
**Identifiable assets, as stated above $ 45,323
Corporate-level intangibles 650
Other corporate-level assets 152
--------------------
Total assets $ 46,125
====================
***Identifiable interest expense, as stated above $ 2,308
Corporate-level interest expense, not identified with a specific segment 269
--------------------
Total interest expense $ 2,577
====================
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per-share data)
(unaudited)
7. BUSINESS SEGMENT DATA AND GEOGRAPHIC DATA, CONTINUED
Nine Months Ended July 31, 2002
------------------------------------------------------------------------------
Trailer Coach Leasing Butyl Rubber Total
Manufacturing Reclaiming
------------------------------------------------------------------------------
Sales:
Domestic $ 30,210 $ 4,513 $ 7,134 $ 41,857
Foreign -- -- 445 445
------------------------------------------------------------------------------
Total $ 30,210 $ 4,513 $ 7,579 $ 42,302
Cost of goods sold $ 26,134 $ 2,336 $ 6,850 $ 35,320
Loss before taxes $ (772) $ (237) $ (297) $ (1,306)*
Identifiable assets $ 19,897 $ 12,670 $ 10,650 $ 43,217**
Depreciation and amortization expense $ 639 $ 579 $ 800 $ 2,018
Interest expense $ 936 $ 1,097 $ 430 $ 2,463***
*Identifiable income (loss) before taxes, as stated above $ (1,306)
Corporate-level loss before taxes, not identifiable with a specific segment (153)
--------------------
Total loss before taxes $ (1,459)
====================
**Identifiable assets, as stated above $ 43,217
Corporate-level intangibles 650
--------------------
Total assets $ 43,867
***Identifiable interest expense, as stated above $ 2,463
Corporate-level interest expense, not identified with a specific segment 153
--------------------
Total interest expense $ 2,616
====================
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per-share data)
(unaudited)
7. BUSINESS SEGMENT DATA AND GEOGRAPHIC DATA, CONTINUED
Obsidian Enterprises, Inc. (legal parent) allocates selling, general and
administrative expenses to the respective companies primarily based on a
percentage of sales. For the three months and nine months ended July 31, 2003
and 2002, allocated corporate expenses by segment were as follows:
Three Months Ended Nine Months Ended
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
July 31, 2003 July 31, 2002 July 31, 2003 July 31, 2002
-------------------------------------------------------------------------------
Trailer manufacturing $ 199 $ 146 $ 856 $ 828
Coach leasing 42 27 134 120
Butyl rubber reclaiming 45 38 234 185
-------------------------------------------------------------------------------
$ 286 $ 211 $ 1,224 $ 1,133
===============================================================================
8. RELATED PARTIES
The Company makes advances, receives loans and conducts other business
transactions with affiliates resulting in the following amounts for the periods
ended:
July 31, October 31,
2003 2002
------------------ ------------------
Balance sheet:
Current assets:
Accounts receivable, Obsidian Capital Partners $ 156 $ 181
Accounts receivable, Fair Holdings 12 --
Accounts receivable, Obsidian Capital Company 12 13
Accounts receivable, other affiliated entities 49 12
------------------ ------------------
Total assets $ 229 $ 206
================== ==================
Current liabilities:
Accounts payable, Obsidian Capital Company $ 274 $ 279
Accounts payable, stockholders 321 338
Accounts payable, DC Investments and Fair Holdings 197 42
Accounts payable, other affiliated entities 13 9
Notes payable, Fair Holdings 73 --
Long-term portion:
Notes payable, DC Investments 700 700
Notes payable, Fair Holdings 7,025 3,020
Line of credit, Fair Holdings 5,382 1,798
------------------ ------------------
Total liabilities $ 13,985 $ 6,186
================== ==================
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per-share data)
(unaudited)
8. RELATED PARTIES, CONTINUED
Three Months Ended Nine Months Ended
-------------------------------------- -------------------------------------
July 31, 2003 July 31, 2002 July 31, 2003 July 31, 2002
------------------- ------------------ ------------------ ------------------
Statement of operations:
Interest expense, DC Investments and
Fair Holdings $ 432 $ 58 $ 935 $ 140
Interest expense, Obsidian Capital
Partners $ -- $ -- $ -- $ 58
Rent expense, Obsidian Capital Company $ 15 $ 16 $ 30 $ 41
Rent expense, Fair Holdings $ 13 $ -- $ 31 $ --
Related-party amounts classified as current reflect those portions of the total
receivable or payable that were currently due in accordance with the terms, or
were collected or paid subsequent to July 31, 2003 or October 31, 2002,
respectively. Amounts classified as long term represent amounts not currently
due, amounts that are expected to be converted to equity subsequent to July 31,
2003 and October 31, 2002, respectively, or amounts converted to long-term debt
subsequent to July 31, 2003.
In addition to the transactions described above, Fair Holdings acquired from the
Company all rights and interest in a Put Option for Series D Preferred Stock
held by Markpoint as discussed in Note 5. Fair Holdings has also agreed to
purchase shares subject to the second put option held by Markpoint which may be
exercised in November 2003.
9. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company is liable for contract completion
and product performance. In the opinion of management, such obligations will not
significantly affect the Company's financial position or results of operations.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
IMPORTANT NOTE ABOUT FORWARD-LOOKING STATEMENTS.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. The Company and its representatives may from time to
time make written or oral forward-looking statements, including statements
included in or incorporated by reference into this Quarterly Report on Form 10-Q
and the Company's other filings made with the Securities and Exchange
Commission. These forward-looking statements are based on management's views and
assumptions and involve risks, uncertainties and other important factors, some
of which may be beyond the control of the Company, that could cause actual
results to differ materially from those expressed or implied in the
forward-looking statements. Factors that might cause or contribute to such
differences include, but are not limited to, those discussed in this Item 2.,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, in this Form 10-Q. Readers should carefully review the risks
described in this and other documents that the Company files from time to time
with the Securities and Exchange Commission. The forward-looking statements
speak only as of the date that they are made and the Company undertakes no
obligation to update or revise any of the forward-looking statements.
OVERVIEW
The Company operates in three industry segments, comprised of trailer and
related transportation equipment manufacturing, butyl rubber reclaiming, and
coach leasing. Trailer and related transportation equipment manufacturing
includes the operations of United and Danzer Industries. Butyl rubber reclaiming
includes the operations of U.S. Rubber and coach leasing includes the operations
of Pyramid, DW Leasing, Obsidian Leasing and DC Investments Leasing.
Champion is accounted for as a discontinued operation, therefore, its results of
operations and cash flow have been removed from the Company's continuing
operations for all periods presented.
RESULTS OF OPERATIONS
The Company's overall operating results and financial condition during the three
and nine months ended July 31, 2003 compared to the three and nine months ended
July 31, 2002 continue to be adversely affected by the overall economic
situation in the United States through lower than anticipated product demand in
the trailer and related transportation equipment manufacturing segment and by
the limited availability of raw materials in the butyl reclaiming segment.
The following table shows net sales by product segment:
Three Months Ended Nine Months Ended
------------------------------------------ -------------------------------------------
July 31, 2003 July 31, 2002 July 31, 2003 July 31, 2002
--------------------- -------------------- --------------------- ---------------------
Trailer manufacturing $ 11,534 $ 10,475 $ 29,746 $ 30,210
Butyl rubber reclaiming 2,699 2,805 7,974 7,579
Coach leasing 2,562 1,959 5,082 4,513
--------------------- -------------------- --------------------- ---------------------
Net Sales $ 16,795 $ 15,239 $ 42,802 $ 42,302
===================== ==================== ===================== =====================
The following is a discussion of the major elements impacting the Company's
operating results by segment for the three-month and nine-month periods ended
July 31, 2003 compared to the three-month and nine-month periods ended July 31,
2002. The comments that follow should be read in conjunction with the Company's
condensed consolidated financial statements and related notes contained in this
Form 10-Q.
TRAILER AND RELATED TRANSPORTATION EQUIPMENT MANUFACTURING
The following table shows sales, cost of sales and gross profit for this segment
for the periods indicated:
Three Months Ended Nine Months Ended
------------------------------------------ -------------------------------------------
July 31, 2003 July 31, 2002 July 31, 2003 July 31, 2002
--------------------- -------------------- --------------------- ---------------------
Net Sales $ 11,534 $ 10,475 $ 29,746 $ 30,210
Cost of Sales 10,378 8,952 27,132 26,134
--------------------- -------------------- --------------------- ---------------------
Gross Profit $ 1,156 $ 1,523 $ 2,614 $ 4,076
===================== ==================== ===================== =====================
Gross Profit % 10.0% 14.5% 8.8% 13.5%
===================== ==================== ===================== =====================
Three Months Ended July 31, 2003 Compared to The Three Months Ended July 31,
2002
Net sales in this segment for the three months ended July 31, 2003 as compared
to the comparable three month period ended July 31, 2002 increased 10.1% in the
amount of $1,059. Sales in this segment were higher than the prior year due
primarily to the sales of cargo trailers. Production and sales of the cargo
trailers increased due to the additional cargo manufacturing facility and the
implementation of a discount/rebate program that was implemented in February
2003 for the cargo trailers to stimulate sales. Additional sales of cargo
trailers were also made to existing customers that historically purchased truck
bodies. The trailer market remains very price competitive and all major
competitors are offering similar discount programs. The sales of truck bodies
for the three months ended July 31, 2003 decreased $36 compared to July 31,
2002. The decrease in sales was due primarily to the loss of this segment's
primary truck body customer due to the customer's bankruptcy. We believe sales
of truck bodies will continue at a level below 2002 as the Company does not
anticipate any orders from this segment's primary truck body customer in the
future.
o The gross profit percentage decreased 4.5% for the three months ended
July 31, 2003. The reduction in gross profit is attributable to three
primary factors. First, the sales discount/rebate program discussed
above has reduced gross profit by approximately 3.3%. Second, during
the fourth quarter of 2002, the Company opened an additional cargo
trailer manufacturing facility. This facility did not obtain a level
of efficiency of existing facilities until the end of the third
quarter. Efficiency improved during the third quarter and is expected
to be in line with existing facilities through the end of fiscal 2003.
Lastly, gross profit has been negatively impacted by a reduction in
sales of truck bodies, which has reduced the ability to absorb
overhead at the truck body manufacturing facility. During late 2002,
the Company began manufacturing cargo trailers in this facility to
provide additional capacity and serve new markets. Production levels
are increasing but have not yet reached a level of efficiency of
existing cargo trailer facilities. Management is currently analyzing
the use of the truck body facility and considering options of
continuing production of truck bodies and cargo trailers,
discontinuing one of these lines at this facility or closing the
facility. A decision is expected prior to October 31, 2003. In
conjunction with the analysis of operations at the truck body
manufacturing facility, management is also analyzing any potential
asset impairment at this facility. Total assets of Danzer at July 31,
2003 were $3,395, which consists of $1,396 of current assets and
$1,999 of net property and equipment, and represents approximately 7%
of consolidated total assets.
Nine Months Ended July 31, 2003 Compared to The Nine Months Ended July 31, 2002
Sales in this segment decreased $464 or 1.5% over the comparable period of 2002.
The decrease was primarily related to the following factors. First the sales of
cargo trailers have increased approximately $900 over the nine months ended July
31, 2002 as a result of additional production facilities and sales to existing
customers in new markets. The Company also began a sales discount/rebate program
to stimulate sales. While this program did increase the units sold, it resulted
in a lower average price per unit. This increase was offset by the decrease in
sales of truck bodies by approximately $1,400 over the nine months ended July
31, 2003. This reduction was related to the continued depressed condition of the
telecommunications industry which has historically been a significant consumer
of truck bodies, as well as the bankruptcy filing of a significant truck body
customer in late 2002. We believe sales of truck bodies will continue at a level
below 2002, as we do not anticipate any orders from this segment's primary truck
body customer in the future, and a replacement market has not yet been
developed.
The gross profit decreased 4.7% primarily as a result of decreased volume at the
Company's truck body plant which resulted in an inability to absorb fixed
overhead costs. To offset these costs, management began production of cargo
trailers in this facility during late 2002. Inefficiencies in the start up of
this operation and additional production facilities have also had a negative
impact in gross profit margins as compared to the nine months ended July 31,
2002. Management believes gross profits will continue to be adversely impacted
by the lack of sales volume in truck bodies. The sales discounts/rebates offered
during 2003 have ended as of July 31, 2003 with the introduction of new product
lines to compete in the market at higher gross margins than the discounted cargo
trailers.
BUTYL RUBBER RECLAIMING
The following table shows sales, cost of sales and gross profit for this segment
for the periods indicated:
Three Months Ended Nine Months Ended
------------------------------------------ -------------------------------------------
July 31, 2003 July 31, 2002 July 31, 2003 July 31, 2002
--------------------- -------------------- --------------------- ---------------------
Net Sales $ 2,699 $ 2,805 $ 7,974 $ 7,579
Cost of Sales 2,487 2,451 7,434 6,850
--------------------- -------------------- --------------------- ---------------------
Gross Profit $ 212 $ 354 $ 540 $ 729
===================== ==================== ===================== =====================
Gross Profit % 7.9% 12.6% 6.8% 9.6%
===================== ==================== ===================== =====================
Three Months Ended July 31, 2003 Compared to The Three Months Ended July 31,
2002
Net sales for the three months ended July 31, 2003 compared to same period for
2002 decreased $106 or 3.7%. The decrease relates to the demand from the
Company's tire manufacturing customers for the three months ended July 31, 2003.
The decreased demand was partially offset by a price increase of 2.2% over the
comparable period for 2002. While sales have been steady with the additional
price increase, management does not anticipate the return to historical levels
due to the availability of raw materials discussed below.
The gross profit percentage decreased 4.7% for the three months ended July 31,
2003. This decrease was due to the decrease in volume, increase in the cost to
obtain raw material and ongoing equipment maintenance. The Company has
consolidated part of its equipment from two plants into one to maximize the
production facilities. A portion of the equipment not consolidated with a
carrying value of approximately $650 is used at various times for additional
capacity and toll grinding but at times may be temporarily idle. The equipment
is being evaluated on an ongoing basis for its use in a production process for
"fine ground" rubber. Existing and new equipment will be required to complete
the "fine grind" production line. If it is determined the idle equipment does
not have any foreseeable use, the equipment will be reclassified as idle
equipment on the balance sheet, not depreciated and tested for impairment.
Reserves have been established primarily for inventory not usable without
additional processing costs and currently usable only when mixed in the
production process at a low rate with quality raw material. Reserves are
reversed when such inventory is used in production. For the three months ended
July 31, 2003, the Company utilized $19 of its reserve.
Nine Months Ended July 31, 2003 Compared to The Nine Months Ended July 31, 2002
Net sales in this segment for the nine months ended July 31, 2003 as compared to
the nine-month period ended July 31, 2002 increased 5.2% in the amount of $395.
Sales in this segment were higher than the nine months ended July 31, 2002
because of increased demand from Company's tire manufacturing customers and an
increase in pricing. While the Company experienced an increase in sales
throughout calendar year 2002, management does not anticipate a return to
historic levels of sales of reclaimed butyl rubber to tire manufacturers during
fiscal 2003, in part due to the lack of consistent sources of raw materials. Net
sales also increased over the third quarter of 2002 due to increased demand for
pipeline mastic wraps produced with reclaimed butyl rubber. Demand for this
product fell dramatically beginning in October 2001 as a result of a decline in
the price of crude oil in late 2001, which caused a decline in new oil
exploration. As the price of crude oil increased, the demand for those uses has
also increased. Although this demand has increased from its lows at the end of
fiscal 2001 and beginning of fiscal 2002, demand has not returned to historical
levels.
Gross profit percentage decreased 2.8% for the nine months ended July 31, 2003
compared to the nine months ended July 31, 2002. The primary reason for this
decrease is a lack of a consistent supply of raw materials and increasing energy
costs. The Company's reclaim process is most efficient when raw material
consists of primarily road worn inner tubes with a mix of other butyl rubber.
Since the introduction of the tubeless tire for automobiles in the 1970s,
sources of material have declined substantially and the cost of available raw
materials has increased. As a result of having to use less than optimum raw
material mix in the reclaiming process, additional processing time is incurred
to ensure delivery of quality product. Management has been testing other
materials including butyl pad scrap as a replacement material for the past
several years with some success. In addition, alternative sources of material,
including overseas sources, are being pursued to provide a consistent supply of
material in the future. Until such time that consistent sources of raw materials
are available, sales growth and gross profit in this segment will be limited.
COACH LEASING
The following table shows sales, cost of sales and gross profit for this segment
for the periods indicated:
Three Months Ended Nine Months Ended
------------------------------------------ -------------------------------------------
July 31, 2003 July 31, 2002 July 31, 2003 July 31, 2002
--------------------- -------------------- --------------------- ---------------------
Net Sales $ 2,562 $ 1,959 $ 5,082 $ 4,513
Cost of Sales 1,525 997 2,879 2,336
--------------------- -------------------- --------------------- ---------------------
Gross Profit $ 1,037 $ 962 $ 2,203 $ 2,177
===================== ==================== ===================== =====================
Gross Profit % 40.5% 49.1% 43.3% 48.2%
===================== ==================== ===================== =====================
Three Months Ended July 31, 2003 Compared To The Three Months Ended July 31,
2002
Sales for the three months ended July 31, 2003 increased $603 or 30.7% from the
period July 31. 2002. The increase in sales relates to a higher utilization of
the fleet for three months ended July 31, 2003 compared to the same period for
2002. The Company has increased its fleet size by adding four new buses during
the current fiscal year to a total of 37 coaches as of July 31, 2003 compared to
30 coaches for the same period for 2002. The increase in number of coaches to
the fleet is expected to increase revenues during the remainder of 2003.
Gross profit percentage decreased 8.6% for the three months ended July 31, 2003
compared to the period July 31, 2002. The reduction is attributable primarily to
the cost of maintaining a larger fleet and the need to sublease additional buses
from third parties for the three months ended July 31, 2003 to meet current
demand. The Company has also had increased operating costs for insurance.
Nine Months Ended July 31, 2003 Compared To The Nine Months Ended July 31, 2002
Sales for the nine months ended July 31, 2003 increased 12.6% in the amount of
$569 over the comparable nine-month period ended July 31, 2002. The increase in
sales is attributable to increased utilization of the coach fleet. Management
believes the increased utilization resulted from its marketing efforts and
specialized tour groups (i.e. golf course trips) and corporate customers. These
customers are in addition to the traditional country and western performers who
have traditionally been this segment's primary customer base.
Gross profit percentage for this segment was 43.3% for the nine months ended
July 31, 2003 compared to 48.2% for the comparable nine-month period ended July
31, 2002. As noted above the reduction is attributable primarily to the need to
sublease additional buses from third parties to meet current demand and
increased operating costs for insurance.
Selling, General And Administrative (SG&A) Expenses
The Company's selling, general and administrative expenses increased $121 or
6.5% for the three months ended July 31, 2003 compared to the three-month period
ended July 31, 2002 and $111 or 1.8% for the nine months ended July 31, 2003
compared to the nine-month period ended July 31, 2002. The increases are related
primarily to the overall increase in the use of outside professionals for
services in assisting with amended filings for restatements.
Interest Expense
Interest expense as a percentage of average borrowings is as follows:
Three Months Ended Nine Months Ended
------------------------------------------ -------------------------------------------
July 31, 2003 July 31, 2002 July 31, 2003 July 31, 2002
--------------------- -------------------- --------------------- ---------------------
Average debt borrowings $ 40,101 $ 35,893 $ 37,844 $ 36,448
Interest expense as a
percentage of average debt
borrowings 2.2% 2.4 % 6.8% 7.8%
Interest expense as a
percentage of average debt
borrowings, annualized 8.8% 9.6% 9.5% 10.8%
===================== ==================== ===================== =====================
The decrease is primarily due to the reduction of the prime rate and refinancing
of a significant portion of the coach debt at lower rates during the fourth
quarter of fiscal 2002.
Income Tax Provision
The income tax benefit for the three-month period ended July 31, 2003 increased
by $212 compared to the three-month period ended July 31, 2002 and increased
$616 for the nine-month period ended July 31, 2003 as compared to the nine-month
period ended July 31, 2002. The income tax benefit is created primarily through
net operating loss carryforwards recognized to the extent they are available to
offset the Company's net deferred tax liability. Any quarterly tax benefits are
based on the estimated effective tax rate for the full year.
Discontinued Operations
On October 30, 2002, the Company's Board of Directors agreed to sell
substantially all assets of Champion to an entity controlled by Messrs. Durham
and Whitesell in exchange for assumption of all liabilities of Champion, other
than its subordinated debt. In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 144, Accounting for Impairment of Long-Lived Assets, the
operating results of Champion have been classified as discontinued operations.
The losses from discontinued operations for the nine months ended July 31, 2003
and 2002 represent the losses of Champion during these periods, net of tax
benefit of $25 and $0, respectively. The loss from discontinued operations for
the three and nine months ended July 31, 2003 and were $0 and $49, respectively,
as compared to the three and nine months ended July 31, 2002 and totaled $364
and $1,085, respectively.
Substantially all assets of Champion subject to its liabilities were sold on
January 30, 2003. No gain or loss was recognized in the consolidated statement
of operations due to the involvement of related parties. This transaction
resulted in an increase in equity of $1,142.
Liquidity And Capital Resources
Each of the subsidiaries of the Company have separate revolving credit
agreements and term loan borrowings through which the subsidiary finances its
operations together with cash generated from operations. The principal balances
of some of these loans reflect the fact that Obsidian Capital Partners
("Partners"), from whom three of the four subsidiaries were purchased, entered
into highly leveraged acquisitions of U.S. Rubber, Pyramid, and United.
This high level of debt has created liquidity issues for the Company and the
stringent financial covenants that are common for this type of debt increase the
probability that the Company's subsidiaries may from time to time be in
technical violation of their credit agreements. These risks are mitigated, in
part, for the Company's United and U.S. Rubber subsidiaries by the right
described below under "Guarantees of Partners." Liquidity and capital resources
have also been negatively impacted by consolidated losses.
The high level of debt also subjects the Company to additional liquidity risk
should interest rates increase by a material amount. Approximately 46% of the
Company's outstanding debt is variable and based on market factors such as the
prime rate or LIBOR rates. A significant increase in these market indexes could
have a material adverse affect on the Company's liquidity.
The Company's working capital position (current assets over current liabilities)
was positive at July 31, 2003 by $1,192. The working capital position was $1,591
at October 31, 2002. This decrease is attributable to the lack of positive
results primarily from the Trailer manufacturing segment and certain line of
credit renewal dates which resulted in reclassification of $4,288 to current
liability as of July 31, 2003. This is partially offset by the assumption of
Danzer Industries bank debt by Fair Holdings and the extension of the term
resulting in a reclassification of $1,488 of debt from current to long term.
The Company continues to address liquidity and working capital issues.
Management believes that the steps started in 2002 and currently underway will
continue to improve the Company's working capital, strengthen its equity and
place the Company in a position to successfully enhance its liquidity. These
steps include:
o During 2002, the Board of Directors authorized the Chairman of the
Board to explore various options regarding the operations at Champion.
Options included divestiture, restructuring of operations or closing
the facility. It was determined in the best interests of the Company
to sell Champion. On January 30, 2003, the Company completed the sale
of substantially all assets of Champion to an entity owned by Messrs.
Durham and Whitesell, Chairman and President of the Company,
respectively. The sale resulted in an increase in equity of $1,142 as
further described in Note 3.
o During December 2002, the Company sold certain coaches of Obsidian
Leasing to DC Investments Leasing for assumption of the existing debt.
DC Investments Leasing then refinanced this debt at terms more
favorable than the previous terms.
o On April 1, 2003, the Company obtained an increase in its available
line of credit with Fair Holdings to $8,000.
o On January 3, 2003, Obsidian Leasing refinanced debt due to former
shareholders in the amount of $928 with Fair Holdings at terms further
described in Note 4.
o During January 2003, United and U.S. Rubber obtained modifications to
provide less stringent requirements on certain financial covenants
with their respective lenders.
o On March 28, 2003, Fair Holdings acquired the line of credit and term
debt due to the senior lender of Danzer in the amount of $1,488 under
an assignment and assumption agreement. The maturity date of the line
of credit included in the assignment and assumption agreement was
extended to April 2006, and the debt covenants required by the senior
lender were waived through the end of the term. All other terms of the
assumed notes remain the same.
o During March 2003, United completed a compensation review and update
and provided a revised pay scale which realigns the Company with its
industry and reduces compensation costs. United also continues to
develop its new production facility to increase productivity and plant
efficiency.
o During 2003, U.S. Rubber has continued to consolidate its butyl
reclaiming operations from two plants to one to maximize production
and efficiently utilize equipment. The consolidation has provided some
pieces of equipment to be at times temporarily idle until the Company
completes its implementation of a new production process for "fine
ground rubber". Existing and new equipment will be required to
complete the "fine grind" production line. The new process will
maximize the use of the existing raw materials in the Company's
existing Butyl reclaim production and also provide additional products
of natural rubber.
o The Company's truck body division at Danzer continues to negatively
impact the Company's cash flows. The trailer production line was put
in place in the fourth quarter of 2002 to support the production needs
at United and also provide a new product line to the existing
customers of Danzer and open a potential new market along the East
coast of the U.S. Given the current state of the Telecommunications
industry and economic conditions management will continue to evaluate
the operations and progress with the implementation of the trailer
production. Management also expects to make a decision to continue or
discontinue operations by the end of fiscal 2003.
o As a result of the actions described above, management believes that
the Company has financing agreements in place to provide adequate
liquidity and working capital for the remainder of fiscal 2003.
However, there can be no assurance that refinancing will be obtained
or that such working capital and liquidity will, in fact, be adequate.
Future liquidity is also dependent upon the ability of the company to
generate profitable operations and positive cash flow from its
operating entities and maintain compliance with its credit agreements.
Financial Covenant Waivers
At July 31, 2003, United Expresslines and US Rubber were in violation of certain
financial covenants with Huntington Capital Investment Company and PNC Bank,
respectively. United and US Rubber have received waivers of these violations.
Funds Availability
On a consolidated basis, as of July 31, 2003, the Company had approximately $329
of cash and cash equivalents. Danzer Industries, U.S. Rubber, United and
Obsidian Enterprises each have revolving credit lines available for working
capital at each individual entity. Borrowings under the credit facilities are
available to the lesser of the maximum amount or the borrowing base as defined
in the credit agreement. At July 31, 2003, additional current availability under
these credit lines and maximum additional availability if supported by their
individual borrowing base are:
Company Current Availability Maximum Availability
- ------------------------ --------------------------- --------------------------
Danzer Industries $ 0 $ 0
U.S. Rubber 62 2,240
United 0 0
Obsidian Enterprises 2,480 2,480
The Company generated negative net cash flow of $2,953 from operations during
the nine months ended July 31, 2003. Cash used in operations during this period
is primarily due to increases in inventories and accounts receivable and
decreases in accounts payable. The Company increased inventories during the
first and second quarters primarily in the Trailer Manufacturing segment to
improve the Company's ability to deliver orders during the balance of the year
when demand was expected to increase. Inventory has continued to be above
historic levels primarily due to lower than expected demand of Cargo Trailers.
Accounts receivable increased in both the Trailer Manufacturing and Coach
Leasing segments primarily due to increasing sales in the summer months in both
segments. Funding during this period was provided through borrowings on lines of
credit and from related parties.
Refinancing Activities
Refinancing activity during the nine months ended July 31, 2003 included the
following:
o On December 17, 2002, Obsidian Leasing sold four coaches to DC
Investments Leasing in exchange for DC Investments Leasing's
satisfaction of the debt outstanding on such coaches. DC Investments
Leasing paid this debt through a refinancing at terms that included a
reduction in interest rates. In addition, DC Investments Leasing also
acquired five additional coaches that were previously to be purchased
by the Company thereby eliminating the Company's existing purchase
commitment for such coaches. DC Investments Leasing also entered into
a management agreement with Pyramid under which all nine coaches
described above will be leased by Pyramid.
o On January 5, 2003, Obsidian Leasing refinanced debt in the amount of
$928 to former shareholders of Pyramid and related companies. Terms of
the new note with Fair Holdings include monthly interest payments of
13% of the outstanding principal amount and a balloon principal
payment in January 2006.
o On March 28, 2003, Danzer's line of credit and term loan were assumed
by Fair Holdings. The maturity date on the line of credit was extended
to April 1, 2006 and all covenants were waived.
Guarantees Of Partners
The Company has an agreement with Partners that gives it the right to mandate a
capital contribution from Partners if the lenders to U.S. Rubber or United were
to declare a default. In either of those events, the Company has the right to
enforce a capital contribution agreement with Partners up to $1,620,000 on U.S.
Rubber and $1,000,000 on United to fund the respective subsidiary's shortfall.
These payments, if any, would be applied directly to reduce the respective
subsidiary's debt obligations to the lender.
Cash Flows
A summary of our contractual cash obligations for the fiscal years ending 2003
through 2006 and 2007 and thereafter at July 31, 2003 is as follows:
2007 and
Contractual Obligations Total 2003 2004 2005 2006 Thereafter
------------ ------------- ------------ ------------ ------------ ------------
Long-term debt, and all debt service
interest payments $ 54,931 $ 4,284 $ 8,931 $ 20,640 $ 10,239 $ 10,837
Operating leases 1,397 450 353 274 189 131
Mandatory redeemable preferred stock 1,462 -- 337 -- 1,125 --
------------ ------------- ------------ ------------ ------------ ------------
Total contractual cash obligations $ 57,790 $ 4,734 $ 9,621 $ 20,914 $ 11,553 $ 10,968
============ ============= ============ ============ ============ ============
Cash flow and liquidity are discussed further below, and the footnotes to our
financial statements discuss cash flow, liquidity and the current classification
of debt.
We also have a commercial commitment as described below:
Other Commercial Commitment Total Amount Committed Outstanding at July 31, Date of Expiration
2003
- ----------------------------------- -------------------------- --------------------------- ---------------------------
Line of credit, related party $ 1,000 $ 1,000 April 1, 2006
Line of credit 3,750 3,750 February 1, 2004
Line of credit 4,000 2,068 October 1, 2005
Line of credit 650 650 June 30, 2003*
Line of credit, related party 8,000 5,519 January 9, 2005
*Currently in negotiations with lender.
The Company's net cash used in operations for the nine months ended July 31,
2003 was $2,953. This is comprised of a loss from continuing operations of
$2,730, offset by noncash changes as follows: depreciation and amortization of
$2,232, deferred tax benefit of $820, accretion of interest expense of $286, and
the extension of stock options of $30. In addition, the Company had increases in
accounts receivable of $1,289, inventories of $376, accrued expenses and
customer deposits of $915, and other assets of $146 and a decrease in accounts
payable of $1,055.
Net cash flow provided from financing activities for the nine months ended July
31, 2003 was $2,940. This is comprised of borrowings of long-term debt and net
borrowings of short-term debt of $1,984 and borrowings from related parties of
$4,982, offset by principal repayments of long-term debt of $2,612. In addition,
the Company repaid $1,414 of related-party payables.
Cash flow used in investing activities for the nine months ended July 31, 2003
was $537 This is comprised of purchases of equipment of $560 and other of $23.
The total decrease in cash is summarized as follows:
Nine Months Ended
--------------------------------------
July 31, July 31,
2003 2002
------------------- ------------------
Net cash used in operations $ (2,953) $ (110)
Net cash used in investing activities (537) (559)
Net cash provided by financing activities 2,940 593
Net cash provided by (used in) discontinued operations (41) 6
------------------- ------------------
Decrease in cash and cash equivalents $ (591) $ (70)
=================== ==================
Critical Accounting Policies
Our significant accounting policies are summarized in Note 2 to the consolidated
financial statements in the Annual Report on Form 10-K for the fiscal year ended
October 31, 2002 and describe the significant accounting policies and methods
used in the preparation of the consolidated financial statements. Some of the
most critical policies are also discussed below.
As a matter of policy, we review our major assets for impairment. Our major
operating assets are accounts receivable, inventory, intangible assets and
property and equipment. We have not historically experienced significant bad
debts expense, although the filing of Chapter 11 bankruptcy during 2002 of a
customer resulted in a bad debt charge of $379. However, we believe our reserve
for doubtful accounts of $492 should be adequate for any exposure to loss in our
July 31, 2003 accounts receivable. We have also established reserves for
slow-moving and obsolete inventories and believe the reserve of $359 is
adequate. We depreciate our property and equipment and amortize intangible
assets (except for goodwill) over their estimated useful lives. Property and
equipment are reviewed for impairment when events and circumstances indicate
impairment factors may be present. Currently, operating results at our truck
body manufacturing facility, including the bankruptcy of a significant truck
body customer, indicate the assets of this facility may be subject to
impairment. Accordingly, we are analyzing these assets for impairment in
conjunction with our analysis of the continuing operations of this facility. In
addition, consolidation of facilities at our butyl rubber reclaiming operation
has resulted in some equipment at that facility being temporarily idle as we
implement a new production line for "fine grind" rubber. Should this new process
not utilize all of the idle equipment, we will analyze such equipment for
impairment.
Goodwill and intangibles are reviewed annually for impairment or more frequently
when events and circumstances indicate potential impairment factors are present.
The Company has established the first day of the fourth quarter as the date for
its annual goodwill impairment test. In assessing the recoverability of the
Company's goodwill, the Company must make various assumptions regarding
estimated future cash flows and other factors in determining the fair values of
the respective assets. If these estimates or their related assumptions change in
the future, the Company may be required to record impairment charges for these
assets in future periods. Any such resulting impairment charges could be
material to the Company's results of operations.
The initial cost of coaches acquired is depreciated over a straight-line basis
to a salvage value of 38% of original cost. Subsequent enhancements and
refurbishments of coaches are depreciated over five years using the
straight-line method. The age of coaches in our fleet range from less than one
year to nine years, with an average age of approximately four years. Actual
value of coaches after 15 years is dependent on several factors including the
level of maintenance and the market conditions at the time of disposal. We have
not disposed of a material number of coaches, and our estimate of depreciation
is based on information other than actual disposal experience. Accordingly, we
continue to evaluate our estimates with respect to the actual depreciation of
such vehicles based on market conditions and our experience in disposals when
they occur. Should future factors indicate the current depreciation policy is
not adequate, we will adjust the depreciation rates, and such adjustments may
have an adverse impact on our results of operations.
In conjunction with financing of the acquisition of United, the Company issued
386,206 shares of Series C preferred stock to Huntington Capital Investment
Corporation ("Huntington"). The note purchase agreement includes a provision
that gives Huntington the option to require the Company to repurchase these
shares at 90% of market value upon the earlier of: a) fifth anniversary of
issuance of such shares, b) default under the subordinated debt agreement, c)
other factors related to a sale of substantially all assets of the Company as
defined in the agreement. Increases in the value of the Company's stock will
result in a corresponding increase to this repurchase requirement. Accordingly,
a substantial increase in stock price at the repurchase date may have an adverse
impact on the Company's liquidity. At July 31, 2003, the Company had violated
certain financial covenants defined in the subordinated debt agreement with
Huntington. The Company received a waiver of these violations as of July 31,
2003.
Item 3 Quantitative And Qualitative Disclosures About Market Risk
The Company is exposed to market risk related to interest rate changes. See the
discussion of market risk in Management's Discussion and Analysis of Financial
Condition and Results of Operations in Item 2, which discussion is incorporated
by reference herein.
Item 4 Controls And Procedures
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the reports we file pursuant
to the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms. Such
information is accumulated and communicated to the Company's management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. The
Company's management recognizes that, because the design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events and also is subject to other inherent limitations, any controls
and procedures, no matter how well designed and operated, can provide only
reasonable, and not absolute, assurance of achieving the desired objectives. The
Company's management believes, however, that the Company's disclosure controls
and procedures provide reasonable assurance that the disclosure controls and
procedures are effective.
The Company has carried out as of July 31, 2003, an evaluation, under the
supervision and with the participation of the Company's management, including
the Company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on this evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures were effective. There have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
internal controls subsequent to the July 31, 2003 evaluation.
Part II--Other Information
Item 1. Legal Proceedings
The Company is party to ordinary litigation incidental to its business. No
current pending litigation is expected to have a material adverse effect on
results of operations, financial condition or cash flows.
Item 2. Changes In Securities And Use Of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission Of Matters To A Vote Of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits And Reports On Form 8-K
Exhibits
The exhibits filed as part of this Form 10-Q are listed in the Exhibit Index,
which is incorporated herein by reference.
Reports on Form 8-K
None.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OBSIDIAN ENTERPRISES, INC.
September 15, 2003 By: /s/ Timothy S. Durham
- -------------------- -----------------------------------------------------
Date Timothy S. Durham, Chairman and Chief
Executive Officer
September 15, 2003 By: /s/ Rick D. Snow
- -------------------- -----------------------------------------------------
Date Rick D. Snow, Executive Vice President/
Chief Financial Officer
Exhibit Index
Exhibit No. Description
- ------------------ --------------------------------------------------------------- ------------------
10.1 Employment Agreement, dated April 30, 2003, between Obsidian Attached
Enterprises, Inc. and Rick D. Snow.*
31.1 Certification of Timothy S. Durham. Attached
31.2 Certification of Rick D. Snow. Attached
32.1 Statement Regarding Certification Pursuant to 18 U.S.C.ss. Attached
1350 by Timothy S. Durham, Chief Executive Officer.
32.2 Statement Regarding Certification Pursuant to 18 U.S.C.ss. Attached
1350 by Rick D. Snow, Chief Financial Officer.
* Indicates exhibits that describe or evidence management contracts or
compensatory plans or arrangements required to be filed as exhibits.