SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2004; OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
_____________________________ TO ___________________________
0-17430
----------------------
Commission File Number
OBSIDIAN ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 35-2154335
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
111 MONUMENT CIRCLE, SUITE 4800
INDIANAPOLIS, INDIANA 46204
(Address of principal executive offices) (Zip code)
(317) 237-4122
-----------------------------------------------------
(Registrant's telephone number, including area code)
--------------------------------------------------------------------------
(Former name, former address and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock Outstanding at
$.0001 par value March 10, 2004
720,157 shares
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
INDEX
PAGE(S)
PART I - FINANCIAL INFORMATION:
Item 1 - Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets - January 31, 2004 and
October 31, 2003
Condensed Consolidated Statements of Operations Three Months
Ended January 31, 2004 and 2003
Condensed Consolidated Statement of Changes of Stockholders'
Deficit
Condensed Consolidated Statements of Cash Flows Three Months
Ended January 31, 2004 and 2003
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. FINANCIAL STATEMENTS
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
(unaudited)
January 31, October 31,
2004 2003
--------------------------
Assets
Current assets:
Cash and cash equivalents $ 556 $1,148
Marketable securities 74 114
Accounts receivable, net of allowance for
doubtful accounts of $494 for 2004
and $496 for 2003 2,868 3,665
Accounts receivable, related parties 57 52
Inventories, net 8,435 7,455
Prepaid expenses and other assets 1,325 1,081
---------------------
Total current assets 13,315 13,515
Property, plant and equipment, net 24,144 24,480
Other assets:
Intangible assets, net of accumulated
amortization of $1,052 for
2004 and $907 for 2003 7,756 7,878
Other 13 9
---------------------
$45,228 $45,882
=====================
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)
January 31, October 31,
2004 2003
--------------------------
Liabilities and Stockholders' Deficit
Current liabilities:
Current portion of long-term debt $ 9,634 $ 2,379
Accounts payable, trade 3,939 2,742
Accounts payable, related parties 461 837
Accrued expenses and customer deposits 1,097 1,512
---------------------
Total current liabilities 15,131 7,470
Accounts payable, related parties 556 --
Long-term debt, net of current portion 17,034 24,765
Long-term debt, related parties 15,005 13,937
Deferred income tax liabilities 661 651
Commitments and contingencies
Minority interest 203 172
Mandatory redeemable preferred stock:
Class of Series C Preferred Stock: 386,206 shares
outstanding for 2004 and 2003 1,942 1,803
Class of Series D Preferred Stock: 16,071 shares
outstanding for 2003 -- 337
Stockholders' equity (deficit):
Common stock, par value $.0001 per share; 10,000,000
shares authorized, 720,157 shares outstanding 1 1
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 2004 and 2003,
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, 134,758 and 118,687 shares issued and
outstanding in 2004 and 2003 -- --
Additional paid-in capital 12,122 11,745
Accumulated other comprehensive loss (40) --
Accumulated deficit (17,392) (15,004)
---------------------
Total stockholders' deficit (5,304) (3,253)
---------------------
$45,228 $45,882
=====================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share and share data)
(unaudited)
Three Months Ended
------------------------------------
January 31, 2004 January 31, 2003
------------------------------------
Net sales $ 12,046 $ 10,899
Cost of sales 10,979 9,739
------------------------------------
Gross profit 1,067 1,160
Selling, general and administrative expenses 2,345 2,055
------------------------------------
Loss from operations (1,278) (895)
Other income (expense):
Interest expense, net (969) (784)
Other income 29 4
------------------------------------
Loss before income taxes and discontinued operations (2,218) (1,675)
Income tax benefit -- 158
------------------------------------
Loss before discontinued operations (2,218) (1,517)
Loss from discontinued operations, net of tax -- (49)
------------------------------------
Loss before minority interest (2,218) (1,566)
Minority interest (31) --
------------------------------------
Net loss $ (2,249) $ (1,566)
====================================
Basic and diluted loss per share attributable to common shareholders:
From continuing operations $ (3.32) $ (2.25)
Discontinued operations, net of tax -- (.07)
------------------------------------
Net loss per share $ (3.32) $ (2.32)
====================================
Weighted average common and common equivalent shares outstanding, basic and diluted: 720,157 720,157
====================================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(dollars in thousands)
(unaudited)
Series C Convertible Series D Convertible
Comprehensive Common Stock Preferred Stock Preferred Stock
Loss Shares Amount Shares Amount Shares Amount
---------------------------------------------------------------------------------
Balance at October 31, 2003 720,157 $ 1 3,982,193 $ 5 118,687 $ --
Assignment of 16,071 shares of Series D
mandatory redeemable Preferred Stock $ --
-- -- -- -- 16,071 --
Extension of stock options -- -- -- -- -- -- --
Loss on available-for-sale marketable
securities (40) -- -- -- -- -- --
Fair value adjustment on redeemable
Preferred Stock -- -- -- -- -- -- --
Net loss (2,249) -- -- -- -- -- --
---------------------------------------------------------------------------------
Total comprehensive loss $(2,289)
=======
Balance at January 31, 2004 720,157 $ 1 3,982,193 $ 5 134,758 $ --
==================================================================
Additional Other
Paid-in Comprehensive Accumulated
Capital Loss Deficit Total
--------------------------------------------------
Balance at October 31, 2003 $11,745 $ -- $(15,004) $(3,253)
Assignment of 16,071 shares of Series D
mandatory redeemable Preferred Stock
337 -- -- 337
Extension of stock options 40 -- -- 40
Loss on available-for-sale marketable
securities -- (40) -- (40)
Fair value adjustment on redeemable
Preferred Stock -- -- (139) (139)
Net loss -- -- (2,249) (2,249)
--------------------------------------------------
Total comprehensive loss
Balance at January 31, 2004 $12,122 $ (40) $(17,392) $(5,304)
==================================================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
-----------------------------------
January 31, 2004 January 31, 2003
-----------------------------------
Cash flow from operating activities:
Net loss from continuing operations $(2,249) $(1,517)
Adjustments to reconcile net loss from continuing operations
to net cash used in operating activities:
Depreciation and amortization 776 687
Other 189 (93)
Changes in operating assets and liabilities
Accounts receivable, net 797 417
Inventories, net (980) (1,509)
Other, net 538 (534)
-----------------------------------
Net cash used in operating activities (929) (2,549)
-----------------------------------
Cash flows from investing activities:
Capital expenditures (318) (96)
-----------------------------------
Net cash used in investing activities (318) (96)
-----------------------------------
Cash flows from financing activities:
Advances from (repayments to) related parties, net 175 (652)
Net borrowings (repayments) on lines of credit (345) 1,574
Net borrowings on long-term debt, including related parties 825 1,277
-----------------------------------
Net cash provided by financing activities 655 2,199
Net cash used in discontinued operations -- (41)
-----------------------------------
Decrease in cash and cash equivalents (592) (487)
Cash and cash equivalents, beginning of period 1,148 920
-----------------------------------
Cash and cash equivalents, end of period $ 556 $ 433
===================================
Interest paid $ 545 $ 718
===================================
Taxes paid $ 15 $ 14
===================================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
---------------------------------------
January 31, 2004 January 31, 2003
---------------------------------------
Supplemental disclosure of noncash operating, investing and financing activities:
Acquisition of coaches and equipment through issuance of debt $ -- $2,278
Contribution to capital from sale of Champion to related party $ -- $1,142
Issuance of mandatory redeemable preferred stock in conjunction with the sale of Champion $ -- $ 675
Tax effect of sale of coaches to a related party $ -- $ 96
Fair value change on mandatory redeemable preferred stock $ (139) $ (103)
Assignment and assumption of mandatory redeemable preferred stock to Fair Holdings $ 337 $ --
The accompanying notes are an integral part of the condensed consolidated
financial statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share and share data)
(unaudited)
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS:
Obsidian Enterprises, Inc. ("Obsidian Enterprises"), formerly Danzer
Corporation, was reorganized (the "Reorganization") through an Acquisition and
Plan of Reorganization with U.S. Rubber Reclaiming, Inc. and Related Entities
("U.S. Rubber Companies"), which was consummated on June 21, 2001 (the
"Effective Date"). The Acquisition and Plan of Reorganization of Obsidian
Enterprises with U.S. Rubber Companies was accounted for as a reverse
acquisition as the shareholders of the U.S. Rubber Companies owned a majority of
the outstanding stock of Obsidian Enterprises subsequent to the Acquisition and
Plan of Reorganization. For accounting purposes, U.S. Rubber Reclaiming, Inc. is
deemed to have acquired Obsidian Enterprises.
Pursuant to the Plan of Acquisition and Reorganization, United Expressline, Inc.
was acquired July 31, 2001.
The accompanying financial data as of January 31, 2004 and for the three months
ended January 31, 2004 and 2003 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, 2003 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, 2003. The Company follows
the same accounting policies in preparation of interim reports.
In the opinion of management, all adjustments (which include normal recurring
adjustments except as disclosed herein) necessary to present a fair statement of
financial position as of January 31, 2004 and results of operations, cash flows
and stockholders' deficit for the three months ended January 31, 2004 have been
made. The results of operations for the three months ended January 31, 2004 are
not necessarily indicative of the operating results for the full fiscal year or
any future periods.
The entities resulting from the merger described above, considered accounting
subsidiaries of U.S. Rubber Reclaiming, Inc. (the accounting acquirer) and legal
subsidiaries of Obsidian Enterprises, Inc. after the Acquisition and Plan of
Reorganization are as follows:
U.S. Rubber Reclaiming, Inc. ("U.S. Rubber", the accounting acquirer), which is
engaged in reclaiming scrap butyl rubber into butyl reclaim for resale to
manufacturers of rubber products.
Obsidian Enterprises, Inc. (formerly Danzer, the legal acquirer), a holding
company.
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. In addition, these
entities meet the requirements for consolidation under FASB Interpretation No.
46 (FIN No. 46), Consolidation of Variable Interest Entities, an interpretation
of Accounting Research Bulletin No. 51. 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"), which manufactures and sells transport
trailers to be used primarily in the auto racing industry. Effective October
2002, the Company's Board of Directors agreed to a plan to dispose of Champion
as further described in Note 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:
In the period since June 2001, the Company has incurred losses and reductions in
equity. During this period losses and certain third-party debt repayments have
been financed with DC Investments, LLC ("DC Investments") and its subsidiary
Fair Holdings, Inc. ("Fair Holdings"), entities controlled by the Company's
Chairman. Borrowings from DC Investments and Fair Holdings have been on terms
that may not have been available from other sources. As of January 31, 2004,
total debt outstanding to DC Investments and Fair Holdings was $15,005. The
Company incurred a net loss for the year ended October 31, 2003 of $3,873, which
included a loss from discontinued operations of $49. In addition, the Company
incurred a net loss from continuing operations of $2,249 for the three months
ended January 31, 2004.
The Company has continued to address liquidity and working capital through
various means including operational changes and refinancing existing debt.
During the period these plans were put in place, the Company received financial
support from Fair Holdings.
During 2003, the Company undertook various actions to improve its operations and
liquidity. Such actions as described below include the sale of Champion,
conversion of debt to equity and refinancing of certain of its debt agreements.
Management believes that the Company has financing agreements in place to
provide adequate liquidity and working capital throughout fiscal 2004. 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 to provide, as needed, additional borrowings under a $15,000
line of credit agreement, which expires January 1, 2007. Currently, availability
under the agreement is approximately $8,303.
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, is taking the actions as described below.
Although management believes these actions will improve operations and
liquidity, there can be no assurance that such actions will sufficiently improve
operations or liquidity.
o We commenced a strategy in late 2003 of pursuing strategic acquisition
opportunities that include targets both in our traditional, basic
industries and manufacturing sectors as well as targets that possessed
assets (including cash) that, while outside our traditional areas of
focus, were available on terms that our management believed to be
attractive. While no material negotiations are currently active with
respect to any targets (other than Net Perceptions, Inc., which is
discussed below and with respect to which we have commenced an
exchange offer), we anticipate that over the course of 2004 we will
pursue acquisition opportunities that we deem attractive in a variety
of industry sectors. Ultimately, these acquisitions may (but cannot be
guaranteed to) result in our having increased financial resources and
potentially a broader asset base and more diversified sources of
revenue.
o Cost reduction initiatives for raw materials in the trailer and
related transportation manufacturing segment with the implementation
of alternative materials and additional vendor discounts through
purchasing.
o Implementation of the new fine grind production process in the butyl
rubber reclaiming segment. The new process provides the opportunity to
maximize the use of the existing raw materials in the existing butyl
reclaim production and also provides potential additional production
of natural rubber.
o Capitalize on the trailer production line at Danzer Industries that
provides a new product line at Danzer Industries to the existing
customers of Danzer. This production line and related sales effort
have allowed us to enter a new market along the East coast of the U.S.
Our ability to capitalize on this opportunity will be a determining
factor on our ability to reduce this operation's use of working
capital resources. Management will continue to evaluate the operations
on a continuous basis.
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
Our high level of debt creates liquidity issues for us and the stringent
financial covenants that are common for this type of debt increase the
probability that our subsidiaries may from time to time be in technical default
under these loans. These risks are mitigated, in part, for our United and U.S.
Rubber subsidiaries by the right described under "Guarantees of Partners." They
are also mitigated by the divestiture of Champion, and the completed refinancing
efforts over the past year with respect to U.S. Rubber and the coach leasing
segment.
Significant financial covenants in our credit agreements are the maintenance of
minimum ratios, levels of earnings to funded debt and fixed charge coverage
rate. We did not meet requirements and covenants in certain debt agreements as
further discussed in Note 4.
SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES:
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect reported amounts of
assets, liabilities, revenues and expenses and the related disclosures of
contingent assets and liabilities. Significant items subject to such estimates
and assumptions include valuation allowances for accounts receivable,
inventories and deferred tax assets, the fair values of assets and liabilities
when allocating the purchase price of acquisitions, and the carrying value of
property and equipment and goodwill. Actual results may differ from those
estimates.
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 exercise of stock options
and warrants, if dilutive.
All references in the financial statements related to share amounts, per share
amounts and average shares outstanding have been adjusted retroactively to
reflect the Company's 1-to-50 reverse stock split of its common stock effective
February 16, 2004.
The Company has a note payable agreement which is convertible by the holder to
common stock totaling 100,000 shares at a conversion rate of $5.00 per share. In
addition, the Company has options outstanding to purchase a total of 16,000
shares of common stock, at a weighted average exercise price of $4.50. However,
because the Company incurred a loss for the periods ended January 31, 2004 and
2003, respectively, the inclusion of those potential common shares in the
calculation of diluted loss per share would have an antidilutive effect.
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
Basic and diluted loss per share have been computed as follows:
Three Months Ended
-------------------------------------
January 31, 2004 January 31, 2003
-------------------------------------
Loss before discontinued operations $ (2,249) $ (1,517)
Change in fair value of mandatory redeemable preferred stock (139) (103)
-----------------------------
Loss attributable to common shareholders before discontinued operations (2,388) (1,620)
Loss from discontinued operations, net of tax -- (49)
-----------------------------
Net loss attributable to common shareholders $ (2,388) $ (1,669)
=============================
Weighted average common and common equivalent shares outstanding, basic and diluted 720,157 720,157
=============================
Loss per share, basic and diluted, attributable to common shareholders:
From continuing operations $ (3.32) $ (2.25)
Discontinued operations -- (.07)
-----------------------------
Net loss per share $ (3.32) $ (2.32)
=============================
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 .4 to 1 and 3.5 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 a Certificate of Designation, 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.
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
Pro forma basic and diluted loss per share have been computed below as if the
Series C and Series D Preferred Stock were converted to common stock. For the
three months ended January 31, 2004 and 2003, respectively, the Series C
Preferred Stock has been reflected on a weighted average basis outstanding as
common shares, adjusted for the reverse stock split, of 1,747,360, respectively.
The Series D Preferred Stock has been reflected on a weighted average basis
outstanding as common shares, adjusted for the reverse stock split, of 471,653
and 314,100 for the three months ended January 31, 2004 and 2003, respectively.
Three Months Ended
-------------------------------------
January 31, 2004 January 31, 2003
-------------------------------------
Pro forma weighted average common shares outstanding, including
effect of the conversion of Series C and D Preferred Stock, basic
and diluted 2,939,170 2,781,617
==============================
Pro forma net loss per share, basic and diluted, attributable to
common shareholders $ (.81) $ (.60)
==============================
The pro forma net loss per share is presented for informational purposes only
and is not indicative of the weighted average common shares outstanding or net
loss per share presented in accordance with accounting principles generally
accepted in the United States of America.
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 loss per share would have been as follows:
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
Three Months Ended
---------------------------------------
January 31, 2004 January 31, 2003
---------------------------------------
Net loss as reported $ (2,249) $ (1,566)
Deduct total stock-based employee compensation
expense determined under fair value methods -- --
-------------------------------
Pro forma net loss (2,249) (1,566)
Loss per share:
As reported, basic and diluted: $ (3.32) $ (2.32)
Pro forma, basic and diluted: $ (3.32) $ (2.32)
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 $5.00
and $2.50 per share, respectively.
2. INVENTORIES
Inventories are stated at the lower-of-cost (first-in, first-out method) or
market and are comprised of the following components:
January 31, October 31,
2004 2003
-----------------------------
Raw materials $4,926 $4,647
Work-in-process 758 499
Finished goods 3,114 2,630
Valuation reserve (363) (321)
-----------------------------
Total $8,435 $7,455
=============================
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 provided 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.
The sale of Champion resulted in an increase in equity of the Company of $1,142,
net of tax of $97. No gain or loss was recognized on the sale because of the
involvement of related parties.
A summary of the Company's discontinued operations for the three months ended
January 31, 2003 is as follows:
Three Months Ended
January 31, 2003
------------------
Net sales $ 170
Operating expenses (286)
Interest (85)
Other 127
Tax benefit 25
------------------
Net loss $ (49)
==================
4. FINANCING ARRANGEMENTS
UNITED
At January 31, 2004, United had violated financial covenants with Huntington
Capital Investment Company. Huntington Capital Investment Company waived their
covenant violations and we are currently in discussions regarding modifications
to the covenants.
OBSIDIAN LEASING
Obsidian Leasing did not meet certain covenants with Old National Bank. Old
National Bank has not waived Obsidian Leasing's covenant violations as of
January 31, 2004. The total amount of $3,702 for Old National Bank is classified
as current as of January 31, 2004.
DC INVESTMENTS LEASING
In January 2004, DC Investments Leasing repaid debt in the amount of $324 to
Fair Holdings with proceeds from a note with Main Source Bank, which includes
monthly payments of $4, including interest at 7%, and a maturity of January
2014.
5. MINORITY INTEREST IN AFFILIATE
As discussed in Note 1, DW Leasing and DC Investments Leasing, entities
controlled by the Company's Chairman are included in consolidated financial
statements and are subject to the provisions of FIN No. 46. Historically, these
entities generated negative operating results and the operating model did not
anticipate income in excess of losses previously recognized in the consolidated
financial statements. During 2003 and the first quarter of 2004, DC Investments
Leasing reported positive operating results. As a result, minority interest
related to the income of DC Investments Leasing in the amount of $31 has been
recorded as a charge in the January 31, 2004 statement of operations and has
been recognized on the balance sheet. Future operating results of DC Investments
Leasing, if positive, will continue to be charged to minority interest. In
addition, should DW Leasing generate future income in excess of previously
recognized losses, such amounts would be charged to minority interest in the
consolidated statement of operations and recognized as minority interest on the
consolidated balance sheet. During the quarter ended January 31, 2004, DW
Leasing recorded a loss of $2. As of January 31, 2004, accumulated losses of DW
Leasing recognized in consolidated statements of operations exceeded income by
approximately $333.
6. MANDATORY REDEEMABLE PREFERRED STOCK
On November 10, 2003, Markpoint exercised its remaining Put Option that was
assigned to Fair Holdings, as discussed in Note 3. Markpoint was paid $337 by
Fair Holdings and the exercise of the option resulted in a reduction in
mandatory redeemable preferred stock and an increase in additional paid-in
capital of $337.
7. STOCKHOLDERS' DEFICIT
On December 3, 2003, the Company's stockholders and Board of Directors approved
a 50-to-1 reverse stock split. The reverse stock split was effective for trading
purposes as of February 18, 2004. As a result of the reverse stock split and the
amendment to the Certificate of Incorporation, approximately 720,157 shares of
common stock are now outstanding and the number of authorized shares of common
stock has been reduced to 10,000,000.
On December 31, 2003, the Company's Board of Directors approved the extension of
the expiration date of 4,000 fixed stock options, exercisable at $2.50. The
original expiration date of December 31, 2003 was extended to June 30, 2004. The
Company recognized $40 of compensation expense related to the extension of the
options during the three months ended January 31, 2004.
8. BUSINESS SEGMENT DATA AND GEOGRAPHIC DATA
The Company operates in three industry segments comprised of trailer and related
transportation equipment manufacturing (trailer manufacturing); coach leasing;
and butyl rubber reclaiming. All sales are in North and South America primarily
in the United States, Canada and Brazil. Selected information by segment
follows:
Three Months Ended January 31, 2004
------------------------------------------------------------------------------------------------
Trailer Coach Butyl Rubber Total
Manufacturing Leasing Reclaiming Segments Corporate Consolidated
------------------------------------------------------------------------------------------------
Sales:
Domestic $ 7,504 $ 1,040 $ 2,314 $10,858 $ -- $ 10,858
Foreign 980 -- 208 1,188 -- 1,188
---------------------------------------------------------------------------------------------
Total $ 8,484 $ 1,040 $ 2,522 $12,046 $ -- $ 12,046
Cost of goods sold $ 7,887 $ 587 $ 2,505 $10,979 $ -- $ 10,979
Loss before taxes $ (1,228) $ (439) $ (422) $(2,089) $ (160) $ (2,249)
Identifiable assets $ 19,863 $ 13,761 $ 10,535 $44,159 $1,069 $ 45,228
Depreciation and
amortization expense $ 178 $ 214 $ 353 $ 745 $ 31 $ 776
Interest expense $ 397 $ 328 $ 117 $ 842 $ 127 $ 969
Three Months Ended January 31, 2003
------------------------------------------------------------------------------------------------
Trailer Coach Butyl Rubber Total
Manufacturing Leasing Reclaiming Segments Corporate Consolidated
------------------------------------------------------------------------------------------------
Sales:
Domestic $ 7,012 $ 1,107 $ 2,212 $10,331 $ -- $ 10,331
Foreign 347 -- 221 568 -- 568
---------------------------------------------------------------------------------------------
Total $ 7,359 $ 1,107 $ 2,433 $10,899 $ -- $ 10,899
Cost of goods sold $ 6,720 $ 622 $ 2,397 $ 9,739 $ -- $ 9,739
Loss before taxes $ (1,066) $ (248) $ (361) $(1,675) $ -- $ (1,675)
Identifiable assets $ 20,466 $ 14,043 $ 10,977 $45,486 $ 803 $ 46,289
Depreciation and
amortization expense $ 189 $ 190 $ 308 $ 687 $ -- $ 687
Interest expense $ 333 $ 270 $ 123 $ 726 $ 58 $ 784
8. 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 ended January 31, 2004 and 2003,
allocated corporate expenses by segment were as follows:
Three Months Ended
-------------------------
January 31, January 31,
2004 2003
-------------------------
Trailer manufacturing $385 $318
Coach leasing 69 48
Butyl rubber reclaiming 115 99
-------------------------
$569 $465
=========================
9. RELATED PARTIES
The Company makes advances, receives loans and conducts other business
transactions with affiliates resulting in the following amounts for the periods
ended:
January 31, October 31,
2004 2003
----------------------------
Balance sheet:
Current assets:
Accounts receivable, Obsidian Capital Company $ 9 $ 8
Accounts receivable, other affiliated entities 48 44
----------------------------
Total assets $ 57 $ 52
============================
Current liabilities:
Accounts payable, Obsidian Capital Company $ -- $
275
Accounts payable, stockholders & other affiliates 31 341
Accounts payable, DC Investments and Fair Holdings 430 221
Long-term portion:
Accounts payable, stockholders
Notes payable, DC Investments 556
700 --
700
Notes payable, Fair Holdings 7,608 7,192
Line of credit, Fair Holdings 6,697 6,045
----------------------------
Total liabilities $16,022 $14,774
============================
9. RELATED PARTIES, CONTINUED
Three Months Ended
-----------------------------------
January 31, 2004 January 31, 2003
-----------------------------------
Income statement:
Interest expense, DC Investments and Fair Holdings $502 $179
Rent expense, Obsidian Capital Company $ -- $ 21
Rent expense, Fair Holdings $ 9 $ 4
Related-party amounts classified as current reflect those portions of the total
receivable or payable that were currently due in accordance with the terms.
Amounts classified as long term represent amounts not currently due, amounts
that are expected to be converted to equity subsequent to January 31, 2004 and
October 31, 2003, respectively, or amounts converted to long-term debt
subsequent to January 31, 2004.
10. 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.
11. SUBSEQUENT EVENTS
Obsidian Enterprises, Inc.'s line of credit with Fair Holdings was amended on
February 2, 2004 and March 10, 2004. Maximum borrowings were increased from
$8,000 to $15,000, and the maturity date was extended from January 2005 to
January 2007.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
IMPORTANT NOTE ABOUT FORWARD-LOOKING STATEMENTS.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. The Company and its representatives may from time to
time make written or oral forward-looking statements, including statements
included in or incorporated by reference into this Quarterly Report on Form 10-Q
and the Company's other filings made with the Securities and Exchange
Commission. These forward-looking statements are based on management's views and
assumptions and involve risks, uncertainties and other important factors, some
of which may be beyond the control of the Company, that could cause actual
results to differ materially from those expressed or implied in the
forward-looking statements. Factors that might cause or contribute to such
differences include, but are not limited to, those discussed in this Item 2.
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
months ended January 31, 2004 compared to the three months ended January 31,
2003 were adversely affected by the limited availability of raw materials in the
butyl reclaiming segment, adverse weather conditions in the Midwest that
affected the Company's ability to deliver orders in the trailer and related
transportation equipment manufacturing segment, and increased material costs
also in the trailer and related transportation manufacturing segment.
We commenced a strategy in late 2003 of pursuing strategic acquisition
opportunities that include targets both in our traditional, basic industries and
manufacturing sectors as well as targets that possessed assets (including cash)
that, while outside our traditional areas of focus, were available on terms that
our management believed to be attractive. While no material negotiations are
currently active with respect to any targets (other than Net Perceptions, Inc.,
which is discussed below and with respect to which we have commenced an exchange
offer), we anticipate that over the course of 2004 we will pursue acquisition
opportunities that we deem attractive in a variety of industry sectors.
Ultimately, these acquisitions may (but can not be guaranteed to) result in our
qualifying for listing on the Nasdaq SmallCap Market or a national securities
exchange, having increased financial resources and potentially a broader asset
base and more diversified sources of revenue.
The following table shows net sales by product segment:
Three Months Ended
---------------------------------------
January 31, 2004 January 31, 2003
---------------------------------------
Trailer manufacturing $ 8,484 $ 7,359
Butyl rubber reclaiming 2,522 2,433
Coach leasing 1,040 1,107
---------------------------------------
Net Sales $12,046 $10,899
=======================================
The following is a discussion of the major elements impacting the Company's
operating results by segment for the three months ended January 31, 2004
compared to the three months ended January 31, 2003. The comments that follow
should be read in conjunction with the Company's condensed consolidated
financial statements and related notes contained in this Form 10-Q.
TRAILER AND RELATED TRANSPORTATION EQUIPMENT MANUFACTURING
The following table shows sales, cost of sales and gross profit for this segment
for the periods indicated:
Three Months Ended
-----------------------------------------
January 31, 2004 January 31, 2003
-----------------------------------------
Net Sales $8,484 $7,359
Cost of Sales 7,887 6,720
-----------------------------------------
Gross Profit $ 597 $ 639
=========================================
Gross Profit % 7.1% 8.7%
=========================================
Three Months Ended January 31, 2004 Compared to The Three Months Ended January
31, 2003
Sales in this segment increased $1,125 or 15.3% over the comparable period of
2003. The increase was primarily due to the acceptance of our new product
introduction of the economy line trailer as well a stronger order position for
our cargo trailers as compared to 2003. Although we did increase our sales as
compared to 2003, the adverse winter weather conditions delayed our ability to
ship orders to our customers. The truck body line continues to be depressed as
capital spending in the telecommunications industries has remained low.
Looking ahead, sales for the trailer and related equipment manufacturing segment
are expected to grow in fiscal 2004 compared to fiscal 2003 because we expect
our new product line for cargo trailers, which has been well received, will
eliminate the need for a sales discounting program. We also have additional
production capacity in our new leased facility and at Danzer. We believe sales
of truck bodies will continue at about the same level as 2003 unless a
replacement market can be developed.
The gross profit decrease was primarily a result of increased material cost. The
cost of plywood, a major component of our cargo trailers, increased
significantly starting in August 2003. The increase in price on average has been
approximately 55%. We have and will continue to evaluate alternative materials
to replace the plywood. Management is also negotiating with new suppliers. We
also believe gross profits will continue to be adversely impacted by the lack of
sales volume in truck bodies during 2004 at the Hagerstown, Maryland, plant.
Although the Hagerstown plant has increased its production and sales of cargo
trailers, the volume is currently below levels to fully absorb its fixed
overhead costs.
BUTYL RUBBER RECLAIMING
The following table shows sales, cost of sales and gross profit for this segment
for the periods indicated:
Three Months Ended
------------------------------------
January 31, 2004 January 31, 2003
------------------------------------
Net Sales $2,522 $2,433
Cost of Sales 2,505 2,397
------------------------------------
Gross Profit $ 17 $ 36
====================================
Gross Profit % 0.7% 1.5%
====================================
Three Months Ended January 31, 2004 Compared To The Three Months Ended January
31, 2003
Net sales in this segment for the three months ended January 31, 2004 as
compared to the three-month period ended January 31, 2003 increased 3.7% in the
amount of $89.
Sales in this segment were higher than the three months ended January 31, 2003
due to increased demand from Company's tire manufacturing customers and the
demand for pipeline mastic wraps. While the Company experienced an increase in
sales in the three months ended January 31, 2004, overall, the lack of
consistent sources of raw materials limits the Company's ability to increase its
sales significantly. Looking ahead, sales are expected to remain consistent in
fiscal 2004 as compared to fiscal 2003. Future sales growth will depend greatly
on successful implementation of our recycling program with the chapters of The
National FFA Organization and finding other sources of material. In addition,
the continued implementation of our fine grind process will increase the ability
to utilize some additional rubber products in our butyl reclaim process and add
potential new products.
Gross profit percentage decreased .8% for the three months ended January 31,
2004 as compared to the three months ended January 31, 2003. The primary reasons
for this decrease are a lack of a consistent supply of raw materials, increased
energy costs and increased repairs and maintenance on machinery and equipment.
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. 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.
COACH LEASING
The following table shows sales, cost of sales and gross profit for this segment
for the periods indicated:
Three Months Ended
----------------------------------
January 31, 2004 January 31, 2003
----------------------------------
Net Sales $1,040 $1,107
Cost of Sales 587 622
----------------------------------
Gross Profit $ 453 $ 485
==================================
Gross Profit % 43.6% 43.8%
==================================
Three Months Ended January 31, 2004 Compared To The Three Months Ended January
31, 2003
Sales for the three months ended January 31, 2004 decreased 6.1% in the amount
of $67 over the comparable three-month period ended January 31, 2003. The
decrease in sales is attributable to decreased utilization of the coach fleet
compared to the same period in 2003. Management believes the decreased
utilization is a result of increased market competition. The first quarter is
typically the segment's lowest sales period due to seasonality. Business is
historically stronger in the spring, summer and fall. Looking ahead, we expect
segment sales in fiscal 2004 to increase as a result of the full-year impact
increase in the total number of coaches added to our fleet. We are also working
to continually improve our utilization percentage.
Gross profit for this segment was 43.6% for the three months ended January 31,
2004 compared to 43.8% for the comparable three-month period ended January 31,
2003.
Looking ahead, we expect fiscal 2004 gross profit to be higher than 2003 with
the additional sales related to the six new coaches added which reduces the need
to sublease from third parties.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES
The Company's selling, general and administrative expenses for the three months
ended January 31, 2004 increased $290 or 14.1% over the three-month period ended
January 31, 2003. The increase relates primarily to increases in depreciation
related to the addition of new coaches in 2003 and increased amortization
expense of intangible assets and other general increases for compensation and
other general and administrative expenses.
INTEREST EXPENSE
Interest expense for the three months ended January 31, 2004 as a percentage of
average debt borrowings of $41,377 was 2.3% (9.2% on an annual basis). Interest
expense for the three months ended January 31, 2003 as a percentage of average
debt borrowings of $37,318 was 2.1% (8.4% on an annual basis). The increase is
primarily due to additional borrowings from Fair Holdings at higher interest
rates.
INCOME TAX PROVISION
There was no income tax benefit recorded for the three-month period ended
January 31, 2004 as compared to $158 of tax benefit in the three-month period
ended January 31, 2003. Income tax benefits are created primarily through NOL
carry forwards recognized to the extent they are available to offset the
Company's net deferred tax liability. Operating losses during the quarter ended
January 31, 2004 have been reserved with a valuation allowance. Any quarterly
tax benefits are based on the estimated effective tax rate for the full year.
DISCONTINUED OPERATIONS
On October 30, 2002, the Company's Board of Directors agreed to sell
substantially all assets of Champion to an entity controlled by Messrs. Durham
and Whitesell in exchange for assumption of all liabilities of Champion, other
than its subordinated debt. In accordance with the criteria provided for in
Statement of Financial Accounting Standards ("SFAS") No. 144, Accounting for
Impairment of Long-Lived Assets, the operating results of Champion have been
classified as discontinued operations. The losses from discontinued operations
for the three months ended January 31, 2003 represents the losses of Champion
during the period, net of tax benefit of $97.
Substantially all assets of Champion subject to its liabilities were sold on
January 30, 2003. No gain or loss was recognized in the consolidated statement
of operations due to the involvement of related parties. The benefit of
liabilities assumed by the purchaser in excess of assets sold in the amount of
$1,142 was recorded as additional paid in capital.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
In June 2001, we purchased four new businesses and began operations as a
consolidated holding company with multiple operating subsidiaries. In the period
since June 2001, we have incurred losses and reductions in our equity. During
this period we have financed our losses and have been able to refinance certain
third-party obligations with DC Investments, LLC and its subsidiary, Fair
Holdings, and other third parties. Our borrowings from Fair Holdings have been
on terms that may not have been available from other sources. As of January 31,
2004, our total debt outstanding to DC Investments and Fair Holdings was
$15,005.
We are continuing to address our liquidity and working capital through various
means including operational changes and financing matters which are discussed
below. During the period these plans are put in place, we have continued to
receive financing, and have in place arrangements to receive additional
financial support from Fair Holdings, if necessary.
WORKING CAPITAL
Our businesses are working capital intensive and require funding for purchases
of production inventory, capital expenditures and expansion and upgrading of
facilities. Each of our subsidiaries have separate revolving credit agreements
and term loan borrowings through which the subsidiary finances its operations
together with cash generated from operations. Our working capital position
(current assets over current liabilities) was negative at January 31, 2004 by
$1,816. At October 31, 2003, our working capital position was positive by
$6,045. The decrease in working capital is primarily attributable to a balloon
payment on our coach group debt of approximately $3,540 that is due in December
2005 and reclassification of approximately $4,100 of debt under revolving credit
lines that are due for renewal in November 2004. Other unfavorable changes
include increases in accounts payable.
We continue to address liquidity and working capital issues in a number of ways.
At January 31, 2004, net cash used in continuing operations was $929 compared to
$2,549 in 2003. The use of cash and working capital was primarily related to
operating losses and business seasonality. In 2004, we expect our operations to
generate positive cash and increase our overall working capital through improved
operations as follows:
o We continue to look for ways to strengthen our liquidity, equity and
working capital through ongoing evaluations of merger and acquisition
candidates. As fully described in the Registration Statement on Form
S-4 and the other filings we have made with the SEC, on December 15,
2003 we commenced an exchange offer for all of the outstanding shares
of Net Perceptions, Inc., a
developer of software products for the retail industry which has been
winding down its operations and whose assets are predominately cash or
cash equivalents. We cannot predict whether we will be successful in
acquiring some or all of the outstanding shares of Net Perceptions in
exchange for our common shares due to the fact that several important
conditions are in the control of the Board of Directors of Net
Perceptions. If we are successful in acquiring all of the outstanding
shares based upon our latest proposal, the effect of the transaction
would be to substantially increase our working capital and equity and
to substantially increase the number of our outstanding common shares.
If we are unsuccessful in acquiring Net Perceptions, we will have
incurred substantial expenses which will impact our operating results
and available working capital.
o Discontinuing the cargo trailer discounting program that ended in July
2003 with the introduction of a new product line to replace the need
to provide discounts to maintain market share. The new product line
has a competitive price, while providing gross profits at historic
levels.
o Cost reduction initiatives for raw materials in the trailer and
related transportation manufacturing segment with the implementation
of alternative materials and additional discounts through purchasing.
o Implementation of the new fine grind production process in the butyl
rubber reclaiming segment. The new process will maximize the use of
the existing raw materials in the existing butyl reclaim production
and also provide potential additional production of natural rubber.
o Capitalize on the trailer production line put in place in the fourth
quarter of 2002 that provides a new product line to the existing
customers of Danzer. This production line and related sales effort
have allowed us to enter a new market along the East coast of the U.S.
Our ability to capitalize on this opportunity will be a determining
factor on our ability to reduce this operation's use of working
capital resources. Management will continue to evaluate the operations
on a continuous basis.
o We secured an additional financial commitment from Fair Holdings to
provide, as needed, additional borrowings under a $15,000 line of
credit agreement, which expires on January 1, 2007. Currently,
approximately $8,303 is available to us under the agreement.
Management believes the steps taken to improve our operations will positively
impact our liquidity and working capital for fiscal 2004. However, success is
dependent on our ability to restore gross profits and capitalize on potential
new markets in the trailer and related transportation manufacturing segment,
obtain consistent material supply in the butyl rubber reclaiming segment and
continue to grow the coach leasing segment. If our operating results are less
than expected, the increased commitment from Fair Holdings will provide
additional liquidity in 2004.
FINANCIAL COVENANT WAIVERS
Significant financial covenants in our credit agreements are the maintenance of
minimum ratios, levels of earnings to funded debt and fixed charge coverage
rate. We did not meet requirements and covenants in certain debt agreements. At
January 31, 2004, United had violated financial covenants with Huntington
Capital Investment Company. Huntington Capital Investment Company waived their
covenant violations and we are currently in discussions regarding modifications
to the covenants.
Obsidian Leasing did not meet certain covenants with Old National Bank. Old
National Bank has not waived Obsidian Leasing's covenant violations as of
January 31, 2004. The total amount of $3,702 for Old National Bank is classified
as current as of January 31, 2004.
FUNDS AVAILABILITY
On a consolidated basis, as of January 31, 2004, the Company had approximately
$556 of cash and cash equivalents. Danzer Industries, U.S. Rubber, United and
Obsidian Enterprises each have revolving credit lines available for working
capital at each individual entity. Borrowings under the credit facilities are
available to the lesser of the maximum amount or the borrowing base as defined
in the credit agreement. At January 31, 2004, additional current availability
under these credit lines and maximum availability if supported by their
individual borrowing base are:
Company Current Availability Maximum Availability
Danzer Industries $ 231 $ 231
U.S. Rubber 288 2,154
United -- --
Obsidian Enterprises 8,303 8,303
The Company generated negative net cash flow of $929 from operations during the
three months ended January 31, 2004. Cash used in operations during the quarter
is primarily due to operating losses and increases in inventories offset by
increases in accounts payable. The Company has increased inventories during the
first quarter primarily in the trailer and related transportation equipment
manufacturing segment. The first quarter is historically the lowest volume
quarter due to seasonality of this business. Inventories were increased during
this quarter to provide an increase in the Company's ability to deliver orders
during the second and third quarters when sales have historically been higher
than in the first quarter. Funding during the quarter was provided through
borrowings on lines of credit and from related parties.
GUARANTEES OF PARTNERS
We have an agreement with Partners that gives us the right to mandate a capital
contribution from the Partners if the lenders to U.S. Rubber or United were to
declare a default. In either of those events, the Company has the right to
enforce a capital contribution agreement with Partners up to $1,370 on U.S.
Rubber and $1,000 on United to fund the respective subsidiary's shortfall. These
payments, if any, would be applied directly to reduce the respective
subsidiary's debt obligations to the lender.
CASH FLOWS
A summary of our contractual cash obligations for the fiscal years ending 2004
through 2007 and 2008 and thereafter at January 31, 2004 is as follows:
2008 and
Contractual Obligations Total 2004 2005 2006 2007 Thereafter
------------------------------------------------------------------------
Long-term debt, and all debt service
interest payments $51,900 $12,408 $ 9,864 $11,715 $10,692 $7,221
Operating leases 1,177 452 314 220 173 18
Mandatory redeemable preferred stock 1,942 -- -- 1,942 -- --
------------------------------------------------------------------------
Total contractual cash obligations $ 55,019 $12,860 $10,178 $13,877 $10,865 $7,239
=======================================================================
Cash flow and liquidity are discussed further below, and the footnotes to our
financial statements discuss cash flow, liquidity and the current classification
of debt due to loan covenant violations.
We also have a commercial commitment as described below:
Total Amount Outstanding at
Other Commercial Commitment Committed January 31, 2004 Date of Expiration
- -------------------------------------------------------------------------------------------
Line of credit, related party $ 1,500 $1,269 April 1, 2006
Line of credit 4,000 4,000 February 1, 2005
Line of credit 4,000 1,846 October 1, 2005
Line of credit, related party 15,000 6,697 January 1, 2007
Our net cash used in continuing operations for the three months ended January
31, 2004 was $929. This is comprised of a loss from continuing operations of
$2,249, offset by noncash depreciation and amortization of $776, increases in
inventories of $980, other assets of $244, accounts payable of $1,197 and
deferred taxes of $6 and decreases in accounts receivable of $797, customer
deposits of $245 and accrued expenses of $170. In addition, we had minority
interest of $30, accretion of interest of $112 and stock-based compensation of
$40.
Net cash flow provided from financing activities for the three months ended
January 31, 2004 was $655. This is comprised of borrowings of long-term debt of
$1,751 and related parties of $175, offset by principal repayments of short-term
and long-term debt of $1,271.
Cash flow was used in investing activities for the three months ended January
31, 2004 of $318. This is comprised of purchases of equipment.
The total decrease in cash is summarized as follows:
Three Months Ended
-----------------------------
January 31, January 31,
2004 2003
-----------------------------
Net cash used in operations $ (929) $(2,549)
Net cash used in investing activities (318) (96)
Net cash provided by financing activities 655 2,199
Net cash used in discontinued operations -- (41)
-----------------------------
Decrease in cash and cash equivalents $ (592) $ (487)
=============================
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, 2003 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 $494 should be adequate for any exposure to loss in our
January 31, 2004 accounts receivable. We have also established reserves for
slow-moving and obsolete inventories and believe the reserve of $363 is
adequate. We depreciate our property and equipment and amortize intangible
assets (except for goodwill) over their estimated useful lives. Property and
equipment is reviewed for impairment when events and circumstances indicate
potential impairment factors are present. In assessing the recoverability of the
Company's property and equipment, the Company must make various assumptions
regarding estimated future cash flows and other factors in determining the fair
values of the respective assets. If these estimates or their related assumptions
change in the future, the Company may be required to record impairment charges
for these assets in future periods. Any such resulting impairment charges could
be material to the Company's results of operations.
Goodwill and intangibles are reviewed annually for impairment as of the first
day of the fourth quarter or more frequently when events and circumstances
indicate potential impairment factors are present. The realization of the
goodwill of $5,784 is primarily dependent on the future operations of the
operating entity whether the goodwill is allocated (at United). Historical
operating results, current product demand and estimated future results indicate
the results of operations at United should be adequate to continue to realize
this amount. However, future results may not meet expectations due to economic
or other factors, and failure to meet expectations may result in the goodwill
not being fully realizable and accordingly result in impairment charges which
could be material to the Company's operating results.
The initial cost of coaches acquired is depreciated over a straight-line basis
over 15 years to a salvage value of 38% of original cost. Subsequent
enhancements and refurbishments of coaches are depreciated over five years using
the straight-line method. The age of coaches in our fleet range from less than
one year to ten years, with an average age of approximately four years. Actual
value of coaches after 15 years is dependent on several factors including the
level of maintenance and the market conditions at the time of disposal. We have
not disposed of a material number of coaches, and our estimate of depreciation
is based on information other than actual disposal experience. Accordingly, we
continue to evaluate our estimates with respect to the actual depreciation of
such vehicles based on market conditions and our experience in disposals when
they occur. Should future factors indicate the current depreciation policy is
not adequate, we will adjust the depreciation rates, and such adjustments may
have an adverse impact on our results of operations.
In conjunction with financing of the acquisition of United, the Company issued
386,206 shares of Series C preferred stock to Huntington Capital Investment
Corporation ("Huntington"). The note purchase agreement includes a provision
that gives Huntington the option to require the Company to repurchase these
shares at 90% of market value upon the earlier of: a) fifth anniversary of
issuance of such shares, b) default under the subordinated debt agreement, c)
other factors related to a sale of substantially all assets of the Company as
defined in the agreement. Increases in the value of the Company's stock will
result in a corresponding increase to this repurchase requirement. Accordingly,
a substantial increase in stock price at the repurchase date may have an adverse
impact on the Company's liquidity. At January 31, 2004, the Company had violated
certain financial covenants defined in the subordinated debt agreement with
Huntington. The Company received a waiver of these violations as of January 31,
2004.
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 January 31, 2004, 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.
We have been taking steps to improve our financial infrastructure to account for
complex transactions on a consolidated basis since the reorganization which
occurred in 2001. Our auditors identified our limited financial infrastructure
and the failure to physically inventory our United Expressline operations on
quarterly basis as a material weaknesses in internal control in connection with
the audit of our financial statements for the period ending October 31, 2003.
Effective November 1, 2003, the Company implemented an enterprise wide,
integrated accounting system that replaced the separate accounting systems
previously maintained by the several subsidiaries and since that date has
implemented an enhanced segregation of duties of various accounting personnel.
The Company now performs a physical inventory of our United Expressline
operations on a quarterly basis and has enhanced our financial infrastructure.
Management will continue to evaluate whether additional steps are needed to
improve our financial infrastructure. There have been no other significant
changes in the Company's internal controls or in other factors that could
significantly affect internal controls subsequent to the date of the January 31,
2004 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
At the Company's Annual Meeting of Stockholders held on December 3, 2003, the
stockholders approved amendments to the Certificates of the Designations,
Preferences, Rights and Limitations of Series C Preferred Stock and the
Certificate of the Designations, Preferences, Rights and Limitations of Series D
Preferred Stock. Each of these amendments added a new subsection to provide for
the proportionate increase or decrease in the number of shares of Series C
Preferred and Series D Preferred, respectively, to reflect an increase or
decrease in the shares of outstanding Common Stock. At the Annual Meeting, the
stockholders also approved amendments to the Company's Certificate of
Incorporation to implement a 50-to-1 reverse stock split and a reduction of the
Company's authorized shares of Common Stock from 40,000,000 to 10,000,000.
Holders of fractional shares subsequent to the reverse stock split received cash
payments for their fractional shares.
As disclosed in the Company's Annual Report on Form 10-K for the fiscal year
ended October 31, 2003, which disclosure is incorporated herein by reference, in
January 2003, the Company agreed to a modification of terms with the debenture
holders to provide for less stringent covenants. In exchange for this
modification, the Company issued warrants to the debenture holders to purchase
up to 16,000 shares of the Company's common stock at an exercise price of $.20
per share. These warrants expire January 24, 2006. The sales and issuances of
the warrants were made in reliance upon the exemption from the registration
provisions of the Securities Act of 1933, as amended, set forth in Section 4(2)
thereof as transactions by an issuer not involving any public offering and other
applicable exemptions. Copies of the warrant agreements were attached as
exhibits to the Form 10-K.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on December 3, 2003, at
which the stockholders voted on the following matters as indicated. The number
of votes are prior to the Company's reverse stock split that took effect
February 16, 2004.
(1) ELECTION OF DIRECTORS
On Proposal 1 for the election of seven directors, the following persons
received the number of votes set opposite their respective names (all Preferred
Stock was voted on an as-converted basis):
Names Number of Votes Votes Withheld
- ----- --------------- --------------
Timothy S. Durham 137,152,905 0
Daniel S. Laikin 137,152,905 0
D. Scott McKain 137,152,905 0
Jeffrey W. Osler 137,152,905 0
John A. Schmidt 137,152,905 0
Goodhue W. Smith, III 137,152,905 0
Terry G. Whitesell 137,152,905 0
(2) AMENDMENT OF CERTIFICATE OF DESIGNATION FOR SERIES C PREFERRED STOCK
On Proposal 2 for the amendment of the Certificate of Designation for the
Company's Series C Preferred Stock, the following number of votes were cast
"For" and "Against" such Proposal.
BROKER
Class of Shares FOR AGAINST NON-VOTE
--------------- --- ------- --------
Common Shares (including
Series C and Series D Stock on
an as-converted basis) 128,731,255 288,514 8,100,267
Series C Preferred Stock 87,367,980 0 0
(3) AMENDMENT OF CERTIFICATE OF DESIGNATION FOR SERIES D PREFERRED STOCK
On Proposal 3 for the amendment of the Certificate of Designation for the
Company's Series D Preferred Stock, the following number of votes were cast
"For" and "Against" such Proposal.
BROKER
Class of Shares FOR AGAINST NON-VOTE
--------------- --- ------- --------
Common Shares (including
Series C and Series D Stock on
an as-converted basis) 128,731,130 288,804 8,100,042
Series D Preferred Stock 20,770,225 0 0
(4) AMENDMENT TO CERTIFICATE OF INCORPORATION TO EFFECT REVERSE STOCK SPLIT
On Proposal 4 for the amendment to the Company's Certificate of Incorporation to
effect a 50 to 1 reverse stock split, the following number of votes were cast
"For" and "Against" such proposal.
BROKER
Class of Shares FOR AGAINST NON-VOTE
--------------- --- ------- --------
Common Shares (including
Series C and Series D Stock on
an as-converted basis) 136,855,044 336,832 0
Series C Preferred Stock 87,367,980 0 0
Series D Preferred Stock 20,770,225 0 0
(5) AMENDMENT TO CERTIFICATE OF INCORPORATION TO DECREASE AUTHORIZED SHARES
On Proposal 5 for the amendment to the Company's Certificate of Incorporation to
reduce the number of authorized shares of capital stock to 15,000,000, the
following number of votes were cast "For" and "Against" such Proposal.
BROKER
Class of Shares FOR AGAINST NON-VOTE
--------------- --- ------- --------
Common Shares (including
Series C and Series D Stock on
an as-converted basis) 137,044,883 146,301 0
Series C Preferred Stock 87,367,980 0 0
Series D Preferred Stock 20,770,225 0 0
(6) RATIFICATION OF INDEPENDENT AUDITORS-MCGLADREY & PULLEN, LLP
On Proposal 6 for the ratification of the Company's independent auditors, the
following number of votes were cast "For" and "Against" such Proposal (all
Preferred Stock was voted on an as-converted basis).
FOR: 137,131,461 AGAINST: 61,188 BROKER NON-VOTE: 0
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.
March 16, 2004 By: /s/ Timothy S. Durham
- -------------- --------------------------------------------------------
Date Timothy S. Durham, Chairman and Chief Executive
Officer
March 16, 2004 By: /s/ Rick D. Snow
- -------------- --------------------------------------------------------
Date Rick D. Snow, Executive Vice President/Chief
Financial Officer
EXHIBIT INDEX
Exhibit No. Description
10.1 Fourth Amendment to Promissory Note (Line of Credit), Incorporated by reference
dated March 10, 2004, between Obsidian Enterprises, to Exhibit 10.76 to
Inc. and Fair Holdings, Inc. Amendment No. 2 to the
Registration Statement on
Form S-4 filed by the
Registrant on March 11,
2004.
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. Section
1350 by Timothy S. Durham, Chief Executive Officer. Attached
32.2 Statement Regarding Certification Pursuant to 18 U.S.C. Section
1350 by Rick D. Snow, Chief Financial Officer. Attached