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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED OCTOBER 31, 2002 OR
[X] 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 (IRS Employer Identification No.)
incorporation or organization)
111 Monument Circle, Suite 4800
Indianapolis, IN 46204
(Address of principal executive offices) (Zip Code)
(317) 237-4122
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($0.0001 par value)
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of the Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes ___ No X
As of January 22, 2003, the aggregate market value of the Company's common stock
held by non-affiliates of the registrant, based on the average bid and ask price
on such date, was approximately $3,317,000.
As of January 22, 2003, the registrant had 36,007,855 shares of common stock,
4,368,399 shares of Series C Preferred Stock and 88,330 shares of Series D
Preferred Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
INFORMATION REQUIRED IN PART II AND PART III HAS NOT BEEN INCORPORATED BY
REFERENCE.
PART I
ITEM 1. BUSINESS.
HISTORY AND DEVELOPMENT OF BUSINESS
A change in control and reorganization of the Registrant occurred on June 21,
2001. On that date, Timothy S. Durham was elected Chief Executive Officer and
Chairman of the Board of the Registrant and the Registrant acquired from
Obsidian Capital Partners, L.P. (the "Partnership"), Mr. Durham and certain
other shareholders all of the shares of the following companies: Pyramid Coach,
Inc., a Tennessee corporation ("Pyramid"); Champion Trailer, Inc., an Indiana
corporation ("Champion"); and U.S. Rubber Reclaiming, Inc., an Indiana
corporation ("U.S. Rubber"). On July 31, 2001, the Registrant acquired from the
Partnership and Mr. Durham substantially all of the assets of United
Acquisition, Inc., an Indiana corporation, which the Registrant now operates as
United Expressline, Inc. ("United"). All of the acquisitions were made in
exchange for shares of the Registrant's Series C Preferred Stock ("Series C
Preferred Stock") and were pursuant to an Acquisition Agreement and Plan of
Reorganization by and among the Registrant, Danzer Industries, Inc. ("Danzer
Industries"), Pyramid, Champion, United Acquisition, U.S. Rubber, the
Partnership, Timothy S. Durham and other related parties, dated as of June 21,
2001. Prior to the reorganization, the Registrant had engaged through its wholly
owned subsidiary, Danzer Industries, in the fabrication of metal parts and truck
bodies for the service and utility markets.
In October 2001, the Registrant's state of incorporation was changed from New
York to Delaware and the Registrant's name was changed from Danzer Corporation
to Obsidian Enterprises, Inc. The Registrant was originally incorporated in New
York in 1987 under the name Affiliated National, Inc. and subsequently changed
its name to Global Environmental Corp. and then to Danzer Corporation.
As used in this report, the term "Company" refers to Obsidian Enterprises, Inc.
together with its consolidated subsidiaries.
DESCRIPTION OF THE BUSINESS
OVERVIEW
The Company is a holding company headquartered in Indianapolis, Indiana with a
strategic goal of maximizing profitability of its acquired entities, acquiring
manufacturing companies of similar size and continuing to grow the Company. The
Company currently conducts business through five subsidiaries: U.S. Rubber, a
butyl-rubber reclaiming operation; Pyramid a provider of short and long-term
luxury coach leases for corporations and the entertainment industry; Obsidian
Leasing Co., Inc. ("Obsidian Leasing"), the owner of certain of the coaches
operated by Pyramid; United, a manufacturer of steel-framed cargo, racing and
specialty trailers; and Danzer Industries, a manufacturer of service and utility
truck bodies and accessories and cargo trailers. Champion, a manufacturer of
customized racecar transporters, specialty exhibit trailers and mobile
hospitality units formerly owned by the Company has been sold subsequent to the
close of the fiscal year.
The Company operates in three industry segments comprised of butyl-rubber
processing; trailer and related transportation equipment manufacturing; and
leasing of transportation. All sales are in the Western Hemisphere, primarily in
the United States. For quantitative segment information see Note 14 to the
Consolidated Financial Statements.
BUTYL RUBBER PROCESSING
The Company's butyl rubber processing facilities are located in two adjacent
plants in Vicksburg, Mississippi. The Company is the sole manufacturer of
reclaimed butyl rubber in the domestic tire, tape and tube business in the
Western Hemisphere. The Company collects various used and scrap butyl rubber
products, primarily inner tubes from tires, which are then reprocessed into
reclaimed butyl rubber sheets. Customers mix the product with virgin butyl
rubber and use the product predominately as the inner liner of tubeless tires,
and also as inner tubes for tires and for tapes and mastics for pipelines.
Reclaimed butyl rubber used in combination with virgin butyl rubber has
properties that facilitate some manufacturing processes. However, the primary
reason manufacturers use reclaimed butyl rubber is the cost savings offered
compared to virgin butyl rubber.
The Company distributes its reclaimed butyl rubber products through an internal
sales force.
The Company is the sole supplier of reclaimed butyl rubber to most of the tire
industry in the United States and has tire manufacturer customers in Canada and
Brazil.
There are three other enterprises engaged in reclaiming butyl rubber worldwide:
o The Gujarat Company in India;
o Han Cook in Korea; and
o Vrederstein N.V. in the Netherlands.
Due to the cost of transporting reclaimed butyl rubber, these enterprises are
not major competitors with the Company in the Western Hemisphere. The primary
competitive factor is price.
Two enterprises manufacture virgin butyl rubber for sale in the United States:
o Exxon Corporation; and
o Bayer AG.
Both these enterprises are much larger than the Company, well capitalized and
have larger sales staffs. The prices charged by these enterprises places an
upper limit on the prices that may be set for reclaimed butyl rubber.
The Company obtains its supply of scrap inner tubes from approximately 1000
scrap merchants worldwide. The Company's ability to produce reclaimed butyl
rubber is potentially restrained by the limited supply of scrap butyl rubber
products. Since the introduction of tubeless tires for automobiles in the 1970s,
the number of scrap inner tubes from sources in the United States has declined
substantially. In the United States, inner tubes are now primarily limited to
the agricultural and large truck tire market. In 2001, the Company began to
experiment with reclaiming scrap butyl rubber pads from the manufacturers of
other butyl rubber products. This scrap is created as a result of the
manufacturing process for molded butyl rubber products and is available at
approximately 60% of the cost of scrap inner tubes. The Company's work to date
suggests that pad scrap may be a partial substitute for inner tubes as raw
material for the Company's reclaimed butyl rubber product.
Although the Company has had a long-term relationship with its primary
customers, it does not have long-term contracts with them. Two of its reclaimed
butyl rubber customers account for a substantial portion of the sales of this
segment. Michelin and Kelley Springfield accounted for the sales of 43% and 24%
of the sales of this segment in 2002. The loss of either of these customers
would materially and adversely affect the Company. The Company's reclaimed butyl
rubber products are generally ordered by customers monthly and shipped promptly
after the order. Accounts are generally paid on 30 to 60 day terms.
TRAILER AND RELATED TRANSPORTATION EQUIPMENT MANUFACTURING
The Company manufactures service truck bodies at its facility in Hagerstown,
Maryland where the Company produces truck bodies for sale under the Morrison
trademark as well as bodies built to order for other original equipment truck
manufacturers. The finished bodies are shipped to the customer for installation
on truck body chassis. The Company markets truck bodies through an internal
sales force. It sells its private label products directly to its private label
customers and markets its proprietary "Morrison" products through a network of
approximately 300 dealers who, in turn, sell to municipalities, utility
companies, cable companies, phone companies and contractors.
Most truck body customers are in the East and Southeast United States. Slightly
less than one half of the Company's truck body revenue is accounted for by sales
to one installer. Although the Company's relationship with this manufacturer has
been long term it does not have a supply contract and is not the sole supplier
of truck bodies to that enterprise. In 2002, the manufacturer filed for
reorganization under Chapter 11 of the United States bankruptcy code and
continues to operate. The loss of the Company's relationship with the truck
manufacturer could have a material adverse effect on the Company.
There are a significant number of companies engaged in the manufacture of
service truck bodies in the United States. While many of these companies are
relatively small and do not possess the Company's technical capacity, a number
of its competitors are much larger and possess equal or greater technical and
financial resources. Four such competitors are: Knapheide Manufacturing Co.,
Omaha Standard, Inc., Reading Body Works, Inc., and Stahl, a Scott Fetzer Co.,
which is a wholly owned subsidiary of Berkshire Hathaway, Inc. The Company
competes with others for truck body sales through price and service, with price
being the most important factor, and offers truck bodies made to the
individually specified requirements of its customers.
In order to fully utilize the manufacturing capacity available at its facility
in Hagerstown and meet demand for cargo trailers, the Company initiated cargo
trailer production in this facility during 2002.
The Company manufactures specialty racing, cargo and ATV trailers at a facility
owned by the Company in Bristol, Indiana and at another facility owned by the
Company in White Pigeon, Michigan. In addition, as a means of increasing
capacity to meet demands, the Company also began leasing a facility in Elkhart,
Indiana. The business is somewhat seasonal with fewer orders during the months
from November through January. The trailers are marketed under the names "United
Expressline," "United Trailers," "Southwest Expressline," and "Southwest
Trailers." While the Company markets some trailers under these brands at prices
up to $75,000.00, the average price for these trailers is approximately
$3,900.00.
The Company sells "United Trailers," "United Expressline," "Southwest Trailers,"
and "Southwest Expressline" product lines through two dealer networks comprised
of an aggregate of approximately 300 dealers in the United States and Canada,
most of whom are located in the Midwest United States. The Company's sales
activities are conducted through an internal sales force. While the Company has
formal agreements with a few of the dealers, most of the dealership arrangements
are informal and are nonexclusive.
The trailers are built to order to dealer specifications. The terms of sale for
the "United Trailers," "United Expressline," "Southwest Trailers," and
"Southwest Expressline" products are FOB the plant with payment generally due
upon the dealer taking delivery of the trailer. A few dealers have 30- or 60-day
terms.
There are a significant number of companies engaged in the manufacture of
specialty racing, cargo and ATV carriers in the United States. While many of
these companies are relatively small and do not possess the Company's technical
capability, a number of its competitors are much larger and possess equal or
greater technical and financial resources. Four such competitors are: Haulmark
Industries, Pace American, U.S. Cargo and Wells Cargo. The Company competes with
others for specialty racing, cargo and ATV trailer sales through price, quality
and availability, with price an important factor.
The Company purchases its raw materials for the trailer and related
transportation equipment segment from numerous suppliers and has not had any
difficulty in obtaining components or raw materials.
The Company generally warrants its product to be free from defects in material
and workmanship and performance under normal use and service for a period of
twelve months after shipment. The obligation of the Company is generally limited
to the repair or replacement of the defective product.
At October 31, 2002, the backlog of the trailer and related transportation
segment was approximately $2,634 composed of approximately $300 for truck bodies
and $2,334 for specialty racing, cargo and ATV trailers. The October 31, 2002
backlog is expected to be filled within the 2003 fiscal year.
COACH LEASING
The Company leases high-end luxury entertainment coaches from its facility
located in Joelton, Tennessee. The leases are for both short-term (weekly or
monthly) and long-term periods. The leases are generally on a net basis, with
the customer responsible for fuel and drivers and other personnel.
At October 31, 2002, the Company had 32 coaches in its fleet under management.
In addition, the Company subleases coaches from other coach owners on a
short-term basis, from time to time.
Prior to the Reorganization all of the coaches under management by Pyramid were
owned by DW Leasing, LLC ("DW Leasing"), a company controlled by Mr. Durham.
During 2002 and as contemplated by the Reorganization, twenty-seven of these
coaches were transferred to the Company's subsidiary, Obsidian Leasing, and the
remainder continued to be owned by DW Leasing and managed by the Company.
The Company leases the coaches through an internal sales force. The coaches are
leased primarily to the country, rock-n-roll, pop and traveling Broadway show
entertainment industries. The coaches are also leased to various corporations.
During the year ended October 31, 2002, the Company leased coaches to a number
of touring groups in connection with their tours including Ozzie Osbourne, Brad
Paisley and the Broadway Show "Stomp." The Company's corporate customers include
the Golf Channel.
There are several other companies that lease luxury coaches. Some of the larger
competitors include Entertainer Coaches of America, Florida Coach, Senators
Coach and Hemphill Brothers. The Company believes that amenities are an
important factor in leasing coaches to its target market and equips its coaches
with a full complement of amenities. The Company competes with other luxury
coach providers based on a combination of quality, amenities, availability and
price.
GOVERNMENT REGULATION
The Company is subject to regulation by federal, state, and local agencies that
have jurisdiction over areas such as environmental and fire hazard control
issues and regulate the work place to insure safe working conditions for the
Company's employees. The trailers and truck bodies manufactured by the Company
must meet standards set by state and federal transportation authorities and the
coaches leased by the Company must comply with those standards and regulations.
These regulatory bodies could take actions that would have a material adverse
affect upon the Company's ability to do business. The business of the Company
does not subject it to any special regulatory authority.
EMPLOYEES
As of October 31, 2002, the Company had 417 employees. The Company has a labor
contract through January 2004 with United Brotherhood of Carpenters and Joiners
of America for the approximately 40 production workers at its truck body
manufacturing facility in Hagerstown, Maryland. None of the employees at the
other facilities of the Company is represented by a labor union. The Company
believes its employee relations are satisfactory.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company does not rely on any patents, registered trademarks, or special
licenses to give it a competitive advantage. The "Morrison," "Danzer,"
"Pyramid," "United Trailer," "United Expressline," "Southwest Trailer," and
"Southwest Expressline" brand names have brand recognition in the relevant
market.
RESEARCH AND DEVELOPMENT
The Company did not incur, during any of its last three fiscal years, and does
not contemplate incurring, any material research and development expenses.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report on Form 10-K contains
forward-looking statements that involve risks and uncertainties that could cause
actual results to differ materially. Factors that might cause or contribute to
such differences include, but are not limited to, those discussed in the section
entitled "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations." Readers should carefully review the risks described
in this and other documents that the Company files from time to time with the
Securities and Exchange Commission, including the quarterly reports on Form 10-Q
to be filed by the Company in 2002. Readers are cautioned not to place undue
reliance on the forward-looking statements, which speak only to the date of this
Annual Report on Form 10-K. The Company undertakes no obligation to publicly
release any revisions to the forward-looking statements or reflect events or
circumstances after the date of this document.
ITEM 2. PROPERTIES
The following describes the Company's properties:
Identification Location Ownership/Description Segment
- ------------------------------- ---------------------------- -------------------------------- ------------------------
- ------------------------------- ---------------------------- -------------------------------- ------------------------
Headquarters 111 Monument Circle, Suite 3,700 square feet leased N/A
4800, Indianapolis, IN commercial office space
46204
Butyl Rubber Processing Vicksburg, Mississippi Two adjacent plants Butyl Rubber
Plants aggregating 87,000 square Processing
feet, each owned by the
Company and encumbered by a
mortgage to PNC Bank
Truck Body Plant Hagerstown, Maryland 75,000 square foot plant owned Trailer and related
by the Company and encumbered transportation
by a mortgage to Bank of equipment
America Commercial Finance manufacturing
United Expressline Plant Bristol, Indiana Several buildings aggregating Trailer and related
49,000 square feet owned by transportation
the Company and encumbered by equipment
a mortgage to First Indiana manufacturing
Bank NA
United Expressline Plant Elkhart, Indiana 35,000 square foot plant Trailer and related
leased by the Company transportation
equipment
manufacturing
Southwest Expressline Plant
White Pigeon,
Michigan 47,000
square foot plant
owned Trailer and
related by the
Company and
encumbered
transportation by a
mortgage to First
Indiana equipment
manufacturing Bank
NA
Pyramid Coach Office Joelton, Tennessee 12,000 square feet of office Coach Leasing
space and other facilities
leased by the Company
Champion Facility Lewisville, Texas 30,000 square foot plant Discontinued operations
leased by the Company
The Company believes that its property, plant and equipment are well maintained
and adequate for its requirements. The Company also believes that all of its
assets are adequately covered by insurance.
ITEM 3. LEGAL PROCEEDINGS
All dollar amounts in Item 3 are in thousands (except for share and per share
information).
On April 29, 2002, Markpoint Equity Fund J.V. ("Markpoint"), a Texas joint
venture of which The Markpoint Company serves as Managing Partner, filed an
action in the Texas District Court, Dallas County, seeking payment of $1,250
owed by Champion, a subsidiary subsequently divested, under the subordinated
credit facility described in Note 9 to the Consolidated Financial Statements. On
January 27, 2003, the Company reached an agreement to settle this liability for
a cash payment of $675 and issuance to Markpoint of 32,143 shares of the
Company's Series D preferred stock. In addition, the agreement provides
Markpoint the option to require the Company to repurchase these shares at a
price of $21 per share. The repurchase option is available to Markpoint as
follows: 16,072 shares during the period May 1, 2003 to June 1, 2003 and 16,071
shares during the period November 1, 2003 to December 1, 2003. The repurchase
options expire if not exercised during the specified periods. The Company's
repurchase obligation is guaranteed by Mr. Durham.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's Annual Meeting of Stockholders was held on September 27,
2002.
(b) The following individuals were elected to the Company's Board of Directors
to hold office until the next annual meeting of stockholders or until their
successors have been duly elected and qualified:
Against or Broker
Nominee For Withhold Abstain Non-Votes
--- ---------- ------- ---------
Timothy S. Durham 105,816,120 0 3,247 0
Terry G. Whitesell 105,816,220 0 3,147 0
Jeffrey W. Osler 105,815,790 0 3,577 0
Goodhue W. Smith, III 105,816,220 0 3,147 0
John A. Schmit 105,816,120 0 3,147 0
D. Scott McKain 105,816,220 0 3,147 0
Daniel S. Laikin 105,816,220 0 3,147 0
(c) In addition to the election of Directors described in (b) above, the
following matters were voted upon:
Broker
For Against Abstain Non-Votes
Ratify the appointment of 105,773,522 680 45,165 0
McGladrey & Pullen, LLP
as the independent auditors
for fiscal year ending
October 31, 2002.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is currently traded on the Over-the-Counter
Electronic Bulletin Board and on October 17, 2001, the symbol was changed from
"DNZR" to "OBSD." The following table sets forth the high and low bid quotations
for the common stock for the fiscal quarters indicated.
FISCAL 2002 FISCAL 2001
High Low High Low
1st Quarter $0.25 $0.12 $0.30 $0.09
2nd Quarter $0.36 $0.12 $0.20 $0.0063
3rd Quarter $0.27 $0.11 $0.30 $0.14
4th Quarter $0.27 $0.10 $0.41 $0.08
The above quotations reflect inter-dealer prices, and may not include retail
mark-up, mark down or commissions and may not necessarily represent actual
transactions. At October 31, 2002, there were approximately 900 holders of
record of the Company's common stock. Most of the shares of common stock are
held in street name for an unknown number of beneficial owners. To date the
Company has not paid a cash dividend on its common stock. The payment and amount
of any future cash dividends would be restricted by the Company's lenders and
will necessarily depend upon conditions such as the Company's earnings,
financial condition, working capital requirements and other factors.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth certain selected consolidated financial
information concerning the Company. This information is not covered by the
independent auditor's report. For further information, see the accompanying
Consolidated Financial Statements of Obsidian Enterprises, Inc. and subsidiaries
for the year ended October 31, 2002, ten-month period ended October 31, 2001 and
the year ended December 31, 2000 and the information set forth in Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and in Item 8, "Financial Statements and Supplementary Data" below.
The information for the year ended December 31, 2000 is for that of U.S. Rubber
Reclaiming only, the accounting acquirer in the reverse merger further described
in Items 7 and 8.
OPERATING DATA:
(Amounts in thousands, except per share data)
Year Ended Ten Months Ended
October 31, October 31, Year Ended December 31,
---------------------------------------
2002 2001 2000 1999 1998
--------------------------------------------------------------------------
Net sales $ 57,274 $ 24,689 $ 12,583 $ 11,439 $ 12,575
Income from operations 449 981 184 413 107
Discontinued operations, net of tax (1,040) (3,376) -- -- --
Cumulative effect of change in accounting
principle (2,015) -- -- -- --
Net income (loss) (6,330) (4,395) 48 216 74
Basic and diluted earnings (loss) per
share:
From continuing operations (.02) (.02) -- .01 --
Discontinued operations (.01) (.05) -- -- --
Cumulative effect of change in
accounting principle (.02) -- -- -- --
Net income (loss) per share (.05) (.07) -- .01 --
BALANCE SHEET DATA:
December 31,
October 31, October 31, -------------------------------------
2002 2001 2000 1999 1998
---------------------------------------------------------------------
Working capital (deficit) $ 1,591 $ (2,528) $ 864 $ 1,896 $ 2,864
Total assets 45,923 48,850 9,633 11,633 11,914
Long-term debt, including current portion and
mandatory redeemable preferred stock 36,464 35,382 3,846 5,914 6,365
Stockholders' equity (deficit) (689) 1,331 4,939 4,890 4,674
No dividends have been declared or paid in any period presented.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
All dollar amounts in this Item 7 are in thousands (except for share and per
share information).
INTRODUCTION
Obsidian Enterprises, Inc. ("Company"), on June 21, 2001, closed a series of
transactions pursuant to the Acquisition and Plan of Reorganization
("Reorganization") by and among the Company, Danzer Industries, Inc., a wholly
owned subsidiary, and Obsidian Capital Partners, LP ("Partners"), Timothy S.
Durham, and other individual owners of Partners controlled entities. At that
time, the Company acquired: all of the outstanding capital stock of Pyramid
Coach, Inc., in exchange for 810,099 shares of Company Series C Preferred Stock
("Series C Preferred"); all of the outstanding capital stock of Champion
Trailer, Inc., for 135,712 shares of Company Preferred, and all of the
outstanding capital stock of U.S. Rubber Reclaiming, Inc., for 1,025,151 shares
of Series C Preferred. On July 31, 2001, the Company acquired all of the
outstanding capital stock of United Expressline, Inc. from Partners for
2,593,099 shares of Series C Preferred.
After these transactions, the Company had the following subsidiaries:
o U.S. Rubber Reclaiming, Inc. ("U.S. Rubber"), engaged in reclaiming scrap
butyl reclaim for resale to manufacturers of rubber products, located in
Vicksburg, Mississippi.
o Danzer Industries, Inc. ("Danzer Industries") then principally engaged in
the design, manufacture and sale of truck bodies, located in Hagerstown,
Maryland. During 2002 Danzer Industries has expanded its activities to
include the manufacture of cargo trailers.
o Pyramid Coach, Inc. ("Pyramid") engaged in the leasing of coaches, designed
and fitted for use for travel by country, rock bands and other business
enterprises, primarily on weekly to monthly leases, located in Nashville,
Tennessee.
o Champion Trailer, Inc. ("Champion"), which manufactured and sold transport
trailers to be used primarily in the auto racing industry, located in
Lewistown, Texas. In 2002, the Company agreed to sell Champion to an entity
owned by Messrs. Durham and Whitesell (Officers of the Company) and closed
the sale in January 2003. Therefore, Champion is accounted for as a
discontinued operation.
o United Expressline, Inc. ("United") manufactures and sells general use
cargo trailers and specialty trailers used for special purposes and in the
racing industry, located in Bristol, Indiana; Elkhart, Indiana; and White
Pigeon, Michigan.
During fiscal year 2002, management focused on the process of operational
integration of the subsidiaries. This included the identification and
implementation of individual subsidiary manufacturing and administrative
efficiencies as well as marketing and cross-selling opportunities. In addition,
management concentrated on ensuring adequate capital was available to operate
and that liquidity issues did not detract from the operating entities.
While each of the subsidiaries markets its products or services independently,
management has taken advantage of cross-selling opportunities for each of the
subsidiaries, as well as manufacturing and other operational efficiencies that
can be achieved between the subsidiaries. For example, Danzer Industries, which
prior to fiscal year 2002, had not manufactured cargo trailers produced cargo
trailers at the rate of two per day at October 31, 2002, with a goal of
producing eight per day by the end of fiscal year 2003.
RESULTS OF OPERATIONS
The following table details the Company's results of operations as a percentage
of sales:
Year Ended Ten Months Ended Year Ended
October 31, October 31, December 31,
2002 2001 2000
---------------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of sales 83.5 78.8 90.5
Selling, general and administrative expenses 15.0 17.2 8.0
Loss on asset impairment 1.3 -- --
Loss from discontinued operations 1.8 13.7 --
Interest expense 6.2 9.4 3.5
Interest income -- -- (2.8)
- ----------------------------------------------------------------------------------------------------------------------------------
The Company operates in three industry segments, comprised of trailer and
related transportation equipment manufacturing, butyl rubber reclaiming, and
coach leasing. Trailer and related transportation equipment manufacturing
includes the operations of United and Danzer Industries. Butyl rubber reclaiming
includes the operations of U.S. Rubber and coach leasing includes the operations
of Pyramid, DW Leasing, and Obsidian Leasing. The results of discontinued
operations relate to Champion Trailer, which the Company agreed to sell in 2002
to an entity owned by Messrs. Durham and Whitesell and closed the sale in
January 2003.
The following is a discussion of the major elements impacting the Company's
operating results by segment for the year ended October 31, 2002 and the
ten-month period ended October 31, 2001. The comments that follow should be read
in conjunction with the Company's consolidated financial statements and related
notes contained in this Form 10-K.
The results of operations of the Company for 2001 are not comparable to 2002
because the results of operations in 2001 include only ten months of operations,
which affects the comparability of the two periods.
In addition, the results of operations for the trailer manufacturing segment in
2001 do not include the operations of United and Danzer Industries for the
entire ten-month period. Under accounting principles generally accepted in the
United States of America, U.S. Rubber is treated as the acquirer in the June 21,
2001 Reorganization, and U.S. Rubber is treated as having acquired Champion and
Pyramid at the beginning of 2001. Thus, the results of operations for the
ten-month period ended October 31, 2001 include the operations of the following
subsidiaries from the date shown below through October 31, 2001:
Subsidiary Date
Danzer Industries June 21, 2001
Pyramid January 1, 2001
U.S. Rubber January 1, 2000
United July 31, 2001
Since Champion is accounted for as a discontinued operation, its results of
operations and cash flow have been removed from the Company's continuing
operations for all periods presented.
The following table shows net sales by product segment:
Year Ended Ten Months Ended Year Ended
October 31, October 31, December 31,
2002 2001 2000
---------------------------------------------------------------
Trailer manufacturing $ 40,775 $ 10,650 $ --
Butyl rubber reclaiming 10,125 9,874 12,583
Coach leasing 6,374 4,165 --
---------------------------------------------------------------
Total $ 57,274 $ 24,689 $ 12,583
===============================================================
TRAILER AND RELATED TRANSPORTATION EQUIPMENT MANUFACTURING
The following table shows sales, cost of sales and gross profit for this segment
for the periods indicated (in thousands):
Year Ended Ten Months Ended
October 31, October 31,
2002 2001
--------------------- --------------------
Net sales $ 40,775 $ 10,650
Cost of sales 35,077 8,955
--------------------- --------------------
Gross profit $ 5,698 $ 1,695
===================== ====================
Gross profit % 14.0% 15.9%
===================== ====================
YEAR ENDED OCTOBER 31, 2002 COMPARED TO THE TEN MONTHS ENDED OCTOBER 31, 2001
For the reasons noted above, operating results between these periods are not
comparable. During the year ended October 31, 2002, this segment has seen
increasing sales in cargo trailers due to additional demand driven by marketing
efforts and availability of the product. These increases have been partially
offset by a continued reduction in the demand for truck bodies.
The primary reason for truck body sales at levels below historic amounts is the
continued depressed condition of the telecommunications industry that
historically purchased a significant volume of this product line. Management
anticipates that the overall general economic conditions and the economic state
of the telecommunications industry will continue to adversely impact sales of
truck bodies through the first quarter of fiscal year 2003. In addition, future
sales may be adversely impacted by a Chapter 11 bankruptcy filing in 2002 by a
truck body customer, who accounted for approximately $1.7 million of sales in
this segment for the year ended October 31, 2002. Management has integrated the
production of cargo trailers into its truck body production facility as a means
to increase production capacity of the cargo trailer product and absorb excess
capacity at the truck body facility. As of October 31, 2002, the truck body
facility was producing two trailers per day with plans to produce up to eight
trailers per day by October 2003.
Gross profit for the year ended October 31, 2002 was impacted by the reduced
volume of truck bodies sold and only partially offset by reductions in personnel
at these facilities and increased volume in the cargo trailer product line.
BUTYL RUBBER RECLAIMING
The following table shows sales, cost of sales and gross profit for this segment
for the periods indicated (in thousands):
Year Ended October Ten Months Ended Year Ended December
31, October 31, 31,
2002 2001 2000
--------------------- -------------------- ------------------
Net Sales $ 10,125 $ 9,874 $ 12,583
Cost of Sales 9,407 8,884 11,390
--------------------- -------------------- ------------------
Gross Profit $ 718 $ 990 $ 1,193
===================== ==================== ==================
Gross Profit % 7.1% 10.0% 9.5%
===================== ==================== ==================
YEAR ENDED OCTOBER 31, 2002 COMPARED TO THE TEN MONTHS ENDED OCTOBER 31, 2001
For the reason noted above, operating results between fiscal year 2002 and
fiscal year 2001 are not comparable.
Net sales in this segment for the year ended October 31, 2002 as compared to the
ten-month period ended October 31, 2001 increased 2.5%. However, sales in this
segment were lower than anticipated for the year ended October 31, 2002 compared
to the year ended December 31, 2000 due to damage at a production facility in
May 2002 as a result of a fire at an adjacent property. The damage caused the
facility to be closed for approximately two months and resulted in the Company
being unable to fill all outstanding customer orders. This facility resumed
production during July 2002. During 2002, the Company recorded an insurance
recovery for business interruption of $325 as a reduction of general and
administrative costs. In addition to the effects of the fire, sales for 2002
were below historical levels due to the factors enumerated below.
Significant portions of sales in this segment are to tire manufacturing
companies. The tire manufacturers have continued to see lower volumes of tire
production during 2002. Accordingly, sales to these customers are below
historical levels, and current demand does not indicate a return to sales levels
from the year ended December 31, 2000 in the immediate future.
The lack of consistent sources of raw materials has also been a constraint on
generating additional sales volume. The primary material used in reclaiming is
scrap inner tubes. Since the introduction of the tubeless tire for automobiles
in the 1970s, sources of material have declined substantially. Management has
been testing other materials including butyl pad scrap as a replacement material
for the past several years with some success. In addition, alternative sources
of material, including overseas sources, are being pursued to provide a
consistent supply of material in the future. Until such time that consistent
sources of raw materials are available, sales growth in this segment will be
limited.
Gross profit percentage decreased from 10% for the ten months ended October 31,
2001 to 7.1% for the year ended October 31, 2002 as a result of constraints on
achieving operating efficiency including lack of consistent raw material supply
and the fire discussed above.
TEN MONTHS ENDED OCTOBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31, 2000
Operating results between fiscal year 2001 are not comparable as fiscal 2000 was
for a twelve-month period.
Net sales in this segment for the ten months ended October 31, 2001 as compared
to the year ended December 31, 2001 decreased 21.5% in the amount of $2,709. The
reduction in sales is due primarily to considering only a ten-month period for
fiscal year 2001 and to reduced sales to tire manufacturers and pipeline mastic
manufacturers. The Company had scheduled a complete renovation of its 12"
extruder (a key element of its manufacturing process) that began in June 2001.
During this time period, widespread tire recalls increased demand for the
Company's reclaimed butyl products. The 12" extruder was not fully operational
until late October 2001 after the increased demand had subsided. Tire customers
built up large inventories in anticipation of demand under the recalls, however,
the number of tires submitted by consumers to be replaced was lower than
anticipated and, as a result, tire manufacturers accumulated a large inventory
of tires. Tire manufacturers reduced production in response to the inventory
problem and this caused a substantial decrease in reclaimed butyl demand
starting in September 2001.
The decline in the price of crude oil in September and October 2001 caused a
decline in new oil exploration. As a result, the demand for pipeline mastic
wraps produced with reclaim butyl rubber supplied by the Company also fell
dramatically beginning in October 2001.
Gross profit percentage for the ten months ended October 31, 2001 was 10%
compared to 9.5% for the year ended December 31, 2000 as a result of the
improved operating efficiency. Gross profit for the year ended December 31, 2000
was slightly below historical levels as the result of an inventory obsolescence
charge recorded in December 2000.
COACH LEASING
The following table shows sales, cost of sales and gross profit for this segment
for the periods indicated (in thousands):
Year Ended Ten Months Ended
October 31, October 31,
2002 2001
--------------------- --------------------
Net Sales $ 6,374 $ 4,165
Cost of Sales 3,357 1,618
--------------------- --------------------
Gross Profit $ 3,017 $ 2,547
===================== ====================
Gross Profit % 47.3% 61.1%
===================== ====================
For the reason noted above, operating results between these periods are not
comparable.
YEAR ENDED OCTOBER 31, 2002 COMPARED TO THE TEN MONTHS ENDED OCTOBER 31, 2001
Sales for the year ended October 31, 2002 increased 53% in the amount of $2,209
over the ten-month period ended October 31, 2001. The increase in sales is
attributable to an additional two months in the period, an increase in the size
of the coach fleet, additional revenue from the increased use of employee coach
drivers versus independent contractors paid directly by the customer and due to
increased utilization of the fleet in 2002. Management believes the increased
utilization is a result of its marketing efforts to rock and roll, pop, touring
Broadway shows and corporate customers. These customers are in addition to the
traditional country and western performers who have historically been this
segment's primary customer base. This business is seasonal in nature and
historically is stronger in the spring, summer and fall months.
Gross profit for this segment was 47.3% for the year ended October 31, 2002
compared to 61.l% for the comparable ten-month period ended October 31, 2001.
The reduction is primarily attributable to two factors. First, during the
summer, additional coaches were leased from unrelated third parties to meet
current demand. The additional lease cost has been recorded as a component of
cost of sales and represents an increase of approximately 5% as a percentage of
sales. This segment had no lease cost for outside coaches in the comparable
period of 2001. Second, additional drivers have been added as employees during
2002 adding approximately 7% as a percentage of sales to the costs of direct
wages and benefits for the quarter. In the comparable period ended October 31,
2001, a larger percentage of coach drivers were independent contractors paid
directly by the customer. In addition, the two additional months of activity for
the year ended October 31, 2002 include the months of November and December
which are historically slower months, resulting in lower gross profits for this
segment.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES
For the reasons noted above, results between periods presented are not
comparable.
The Company's selling, general and administrative expenses are higher for the
year ended October 31, 2002 versus the ten-month period ended October 31, 2001
due to the trailer manufacturing operations added in 2002, as previously
discussed.
In addition, selling, general and administrative expenses are higher for the
year ended October 31, 2002 than would be expected on an ongoing basis. This is
due primarily to increased administrative costs that were necessary to continue
the process of creating better subsidiary reporting, the use of outside
professionals for services in assisting in post acquisition activities, the cost
to obtain prior year audits to meet regulatory filing requirements, and the cost
of providing accounting and related services to management, that will normally
be performed by Company personnel on a going forward basis. The additional costs
were partially offset by a business interruption claim related to the fire at
the butyl rubber reclaiming facility in the amount of $325. In addition, on
February 1, 2002, the Company changed its estimates with regard to depreciation
of coaches owned by DW Leasing and Obsidian Leasing by establishing a salvage
value of approximately 38%. The depreciable lives of the coaches of 15 years was
not changed. This change in estimate resulted in a reduction of selling, general
and administrative expenses in the year end October 31, 2002 of approximately
$200.
INTEREST EXPENSE
For the reasons noted above, results between periods presented are not
comparable.
While the interest expense increased over the prior period primarily as a result
of the transactions that occurred in June and July 2001, interest expense for
the year ended October 31, 2002 as a percentage of average debt borrowings of
$37,158 was 9.6%. Interest expense for the ten months ended October 31, 2001 as
a percentage of average debt borrowings of $24,964 was 9.3% (11.2% on an annual
basis). The decrease is primarily due to the reduction of the prime rate as well
as the refinancing debt and equity transactions discussed below in "Liquidity
and Capital Resources," "Refinancing Activities," and "Partners Equity
Transactions."
ASSET IMPAIRMENT
The Company adopted the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of fiscal 2002. The Company
completed its transitional impairment test in conjunction with the adoption of
Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other
Intangible Assets during the quarter ended July 31, 2002. The impairment test
indicated that a portion of the goodwill of Danzer Industries was impaired.
Accordingly, $2,015 has been recorded as a cumulative effect of change in
accounting principle.
During the fourth quarter of 2002, the Company evaluated the recoverability of
Danzer Industries' long-lived assets, including remaining goodwill, due to
Danzer Industries' significant operating loss in 2002 and the Chapter 11
bankruptcy filing of a significant customer. Danzer Industries determined the
estimated future undiscounted cash flows were below the carrying value of
certain long-lived assets. As a result, remaining goodwill was written off and a
charge of $720 as loss on asset impairment was recorded as an operating expense.
DISCONTINUED OPERATIONS
On October 30, 2002, the Company's Board of Directors agreed to sell
substantially all assets of Champion to an entity controlled by Messrs. Durham
and Whitesell in exchange for assumption of all liabilities of Champion,
excluding its subordinated debt. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 144, Accounting for Impairment of Long-Lived
Assets, the operating results of Champion have been classified as discontinued
operations. The losses from discontinued operations for the year ended October
31, 2002 and ten months ended October 31, 2001 of $1,040 and $3,376,
respectively, represent the losses of Champion during these periods, net of tax
benefit of $438 and $0, respectively. The loss in 2001 includes a charge for
asset impairment of $2,305. Champion was not included in the financial
statements for the year ended December 31, 2000. Sales of Champion in the year
ended October 31, 2002 were $2,884 as compared to $3,365 for the ten months
ended October 31, 2001. The decrease of $481 or 14.3% is attributable to lower
order volume during 2002.
To facilitate the sale of substantially all assets of Champion, on January 27,
2003, the Company agreed to a settlement with Markpoint of its outstanding
subordinated debt with Champion. In return for cancellation of the indebtedness
and release of a pending legal action against the Company and Champion, the
Company made a cash payment to Markpoint of $675 and issued to Markpoint 32,143
shares of the Company's Series D preferred stock. In addition, the agreement
provides Markpoint the option to require the Company to repurchase these shares
at a price of $21 per share. The repurchase option is available to Markpoint as
follows: 16,072 shares during the period May 1, 2003 to June 1, 2003 and 16,071
shares during the period November 1, 2003 to December 1, 2003. The repurchase
options expire if not exercised during the specified periods. The Company's
repurchase obligation is guaranteed by Mr. Durham.
INCOME TAX PROVISION
There was income tax benefit of $33 for the year ended October 31, 2002 due to
the utilization of previously reserved net operating loss (NOL) carryforwards
offset by taxable gains on debt forgiveness. The income tax benefit is created
primarily through NOL carryforwards recognized to the extent they are available
to offset the Company's net deferred tax liability.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY AND WORKING CAPITAL
Each of the subsidiaries of the Company have separate revolving credit
agreements and term loan borrowings through which the subsidiary finances its
operations together with cash generated from operations. The principal balances
of some of these loans reflect the fact that Partners, from whom four of the
five subsidiaries were purchased, entered into highly leveraged acquisitions of
Champion (subsequently divested), U.S. Rubber, Pyramid, and United.
This high level of debt created liquidity issues for the Company and the
stringent financial covenants that are common for this type of debt increase the
probability that the Company's subsidiaries may from time to time be in
technical default under these loans. These risks are mitigated, in part, for the
Company's United and U.S. Rubber subsidiaries by the right described below under
"Guarantees of Partners." They are also mitigated by the divestiture of
Champion, and the completed refinancing efforts with respect to U.S. Rubber and
the coach leasing segment.
The Company's working capital position (current assets over current liabilities)
was positive at October 31, 2002 by $1,591. At the end of fiscal year 2001, the
working capital position was $(2,528). The increase in working capital is
primarily attributable to the factors below.
The Company continues to address liquidity and working capital issues in a
number of ways. Management believes that the following steps started in early
2002 and currently underway will improve the Company's working capital,
strengthen its equity and place the Company in a position to successfully
enhance its liquidity. These steps include:
o The transactions described below under "Partners Equity Transactions" which
converted approximately $2,834 of long-term liabilities to equity. Of this
amount, $1,290 was converted to Series C Preferred Stock during the second
fiscal quarter of 2002. Additionally, $1,545 was converted to Series D
Preferred Stock in October 2002.
o The divestiture of Champion described below under "Champion Transactions"
which improved the Company's overall equity and working capital position.
o The transactions described below under "Refinancing Activities" which
reduced the Company's interest costs and decreased the proportion of debt
which has been classified as a current liability. The Company completed the
refinancing of the United line of credit and reduced the principal payments
on a term note. In addition, refinancing was completed at U.S. Rubber and
on several coaches in the coach leasing group.
As a result of the actions described above, Management believes that the Company
has financing agreements in place to provide adequate liquidity and working
capital for fiscal 2003. However, there can be no assurance that such working
capital and liquidity will in fact be adequate. Therefore, the Company may be
required to draw upon other liquidity sources. The Company has therefore secured
an increased financial commitment from Fair Holdings, Inc. ("Fair Holdings"), an
entity controlled by the Company's Chairman, to provide, as needed, additional
borrowings under a $5 million line of credit agreement, which expires on January
9, 2005. Currently, availability under the agreement is approximately $3.2
million.
FINANCIAL COVENANTS
The Company and certain of its subsidiaries did not meet certain requirements
and covenants in their debt agreements relating to maintenance of minimum ratios
and levels of earnings to funded debt and fixed charge coverage rate. The
lenders have waived or modified the covenants not in compliance as of October
31, 2002.
The Company has taken a number of actions which eliminated its defaults under
agreements with certain of its lenders:
o At October 31, 2002, U.S. Rubber had violated negative covenants with its
primary lender and received a waiver of the violation and an amendment of
the Credit Agreement.
o Pyramid was a guarantor of DW Leasing's debt to Regions Bank, Nashville,
Tennessee. DW Leasing and Pyramid had been in violation of the Funded Debt
to EBITDA ratio in the Regions Bank Credit Facility since the inception of
the loan. At the time of the Acquisition, Regions Bank granted a waiver of
this violation. The covenant had not been rewritten, and Regions Bank
waived the violation as of October 31, 2001. The Company refinanced the
Regions Bank debt with a related party on December 19, 2002.
o At October 31, 2002, the Company was in violation of negative covenants
with Renaissance US Growth & Income Trust PLC and BFSUS Special
Opportunities Trust PLC, the holders of debentures that completed the
financing of United. The Company received a waiver of the violations as of
October 31, 2002 and obtained modifications of terms with the debenture
holders to provide for less stringent covenants. In exchange for the waiver
and modifications, the Company issued warrants to the debenture holders to
purchase up to 16,000 shares of the Company's common stock at an exercise
price of $.20 per share.
o Danzer Industries was notified by letter dated May 28, 2002 that it was in
technical default of its revolving note and term note due to nonreceipt of
certain documentation and noncompliance with the debt service ratio. A
forbearance agreement was completed in October 2002. As part of the
forbearance agreement, the Company received a waiver through March 31,
2003, when the entire debt is due. As of October 31, 2002, $867 of
long-term debt related to these obligations has been reclassified as a
current liability due to the forbearance agreement. Management is currently
exploring options with regard to refinancing the outstanding debt of Danzer
Industries, including extension of the current agreement with Bank of
America. Should refinancing or an extension of the current agreement not be
obtained by the expiration date of the forbearance agreement, the debt will
be repaid through current sources of availability including borrowings
under the Company's line of credit with Fair Holdings.
o Champion has remained in default of its subordinated debt agreement in the
amount of $1,250, and the subordinated lender sued to obtain payment. On
January 27, 2003, the Company settled this liability in exchange for a cash
payment of $675 and issuance of 32,143 shares of the Company's Series D
Preferred Stock. The settlement also provides for a repurchase obligation
of these shares on the part of the Company at a price of $21 per share
within a specified period ending December 1, 2003. Accordingly, $1,013 has
been classified as a current liability. Champion was sold to a company
owned by Messrs. Durham and Whitesell on January 30, 2003.
o At October 31, 2002, United had violated financial covenants with First
Indiana Bank and Huntington Capital Investment Company. United has received
waivers of these violations through November 1, 2003 from First Indiana and
a modification of covenants with Huntington Capital Investment Corporation.
o Various subsidiary companies were in violation of requirements to provide
year-end financial statements to various lenders within 90 days of the
close of the 2002 year end. Management has received extensions of time from
the lenders.
FUNDS AVAILABILITY
CASH AVAILABILITY
On a consolidated basis, at October 31, 2002, the Company had approximately $920
of cash and cash equivalents. Danzer Industries, U.S. Rubber, United, and
Obsidian Enterprises each have revolving credit lines available for working
capital at each individual entity. Borrowings under the credit facilities are
available to the lesser of the maximum amount or the borrowing base as defined
in the credit agreement. At October 31, 2002, additional current availability
under these credit lines and maximum availability if supported by their
individual borrowing base are:
Company Current Availability Maximum Availability
Danzer Industries $ 0 $ 0(1)
U.S. Rubber 701 2,472
United 607 662
Obsidian Enterprises 3,202(2) 3,202(2)
(1) Additional borrowings only at the bank's discretion under the forbearance
agreement
(2) Includes additional availability of $2,000 from an increase in the line
subsequent to year end
The Company generated net cash flow of $322 from continuing operations during
the year ended October 31, 2002. Cash provided by operations during the year is
primarily due to increases in accounts payable and customer deposits, offset by
increases in inventories.
REFINANCING ACTIVITIES
Management refinanced certain of the currently outstanding debt of the Company:
o U.S. Rubber refinanced its debt with a new lender on October 24, 2002 on
more favorable terms than the terms with the prior lender.
o On August 28, 2002, the Company obtained a renewal and increased maximum
borrowing limit of the revolving line of credit of United with First
Indiana Bank and an additional one year of amortization of its previous
2-year term debt.
o The Company refinanced certain coaches transferred from DW Leasing to
Obsidian Leasing with DC Investments, LLC ("DC Investments"), an entity
owned 50% by the Company's Chairman, and its various existing lenders. Two
senior lenders representing approximately 80% of Obsidian Leasing Company's
debt have refinanced their respective loans which included a substantial
reduction in the interest rates and a longer amortization of the debt. The
debt was refinanced by the existing lenders for 80% of the current amount
outstanding. The remaining 20% was financed through a note payable to Fair
Holdings. In addition to the above refinancing, on December 17, 2002,
Obsidian Leasing sold four coaches to DC Investments Leasing, LLC ("DC
Investments Leasing"), a newly created entity owned 50% by the Company's
Chairman, in exchange for DC Investments Leasing's satisfaction of the debt
outstanding on such coaches. DC Investments Leasing paid this debt through
a refinancing at terms that included a reduction in interest rates. In
addition, DC Investments Leasing also acquired five additional coaches that
were previously to be purchased by the Company thereby eliminating the
Company's existing purchase commitment for such coaches. DC Investments
Leasing also entered into a management agreement with Pyramid under which
all nine coaches described above will be leased by Pyramid.
PARTNERS EQUITY TRANSACTIONS
Partners, the major shareholder of the Company, was required under the Plan of
Reorganization to fund through the purchase of additional preferred stock
certain ongoing administrative expenses of the Company to complete the Plan of
Reorganization, complete all required current and prior year audits to meet the
regulatory filing requirements, and ensure all annual and quarterly SEC filings
are completed to enable the registration of the preferred stock issued to
Partners. Such amounts expended through October 31, 2002 approximated $1,275.
Pursuant to the agreement with Partners, the Company converted these amounts to
equity in exchange for issuance to Partners of convertible preferred stock in
October 2002. Additional expenses of $270 in excess of amounts Partners was
obligated to pay were funded by Fair Holdings, Inc. and subsequently converted
to Series D Preferred Stock. The total liability of $1,545 converted to equity
was incurred as follows: $364 capitalized in the reverse merger transaction;
$376 as expenses incurred in 2001; and $805 as expenses incurred in 2002.
In 2002, Partners converted $1,290 of notes payable and accrued interest from
Partners to the Company to 402,906 shares of Series C Preferred Stock of the
Company.
GUARANTEES OF PARTNERS
The Company has an agreement with Partners that gives the Company the right to
mandate a capital contribution from the Partners if the lenders to U.S. Rubber
or United were to declare a default. In either of those events, the Company has
the right to enforce a capital contribution agreement with Partners up to $1,620
on U.S. Rubber and $1,000 on United to fund the respective subsidiary's
shortfall. These payments, if any, would be applied directly to reduce the
respective subsidiary's debt obligations to the lender.
CHAMPION TRANSACTIONS
In 2002, the Board of Directors authorized the Chairman of the Board of the
Company to explore various options to divest Champion Trailer or, at a minimum,
restructure this operation of the business. As a result, DC Investments
negotiated the purchase of the loans of Bank One to Champion.
In 2002, Champion was also indebted to Markpoint under a subordinated credit
facility in the amount of $1,250 and was in violation of certain covenants
related to the loan. Subsequent to DC Investments purchasing the Bank One debt
in a nonrecourse assignment, Markpoint filed a lawsuit in Texas state court
seeking payment in full for their subordinated debt from Champion or the Company
under a guarantee agreement.
On January 27, 2003, Markpoint settled their lawsuit in exchange for a cash
payment of $675 and the issuance to Markpoint of 32,143 shares of the Company's
Series D preferred stock. In addition, the agreement provides Markpoint the
option to require the Company to repurchase these shares at a price of $21 per
share. The repurchase option is available to Markpoint as follows: 16,072 shares
during the period May 1, 2003 to June 1, 2003 and 16,071 shares during the
period November 1, 2003 to December 1, 2003. The repurchase options expire if
not exercised during the specified periods. The Company's repurchase obligation
is guaranteed by Mr. Durham. Subsequent to the settlement, the Company's Board
of Directors authorized the sale of Champion, which was completed January 30,
2003.
CASH FLOWS (EBITDA)
A summary of our contractual cash obligations for the fiscal years ending 2003
through 2006 and 2007 and thereafter at October 31, 2002 is as follows:
2007 and
Contractual Obligations Total 2003 2004 2005 2006 Thereafter
- --------------------------------------- ------------ ------------- ------------ ------------ ------------ ------------
Long-term debt, with covenant
violations and classified as current $ 1,863 $ 1,863 $ -- $ -- $ -- $ --
Long-term debt, and all debt service
interest payments 45,831 7,099 6,882 15,395 8,467 7,988
Operating leases 1,397 450 353 274 189 131
Mandatory redeemable preferred stock 1,400 -- -- -- 1,400 --
------------ ------------- ------------ ------------ ------------ ------------
Total contractual cash obligations $ 50,491 $ 9,412 $ 7,235 $ 15,669 $ 10,056 $ 8,119
============ ============= ============ ============ ============ ============
Cash flow and liquidity are discussed further below, and the footnotes to our
financial statements discuss cash flow, liquidity and the current classification
of debt due to loan covenant violations.
We also have a commercial commitment as described below:
Other Commercial Commitment Total Amount Committed Outstanding at October 31, Date of Expiration
2002
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Line of credit, bank $ 1,000 $ 875 March 31, 2003
Line of credit, bank 3,750 3,088 February 1, 2004
Line of credit, bank 4,000 1,528 October 1, 2005
Line of credit, related party 5,000* 1,798 January 1, 2005
*Credit line with Fair Holdings increased from $3,000 to $5,000 subsequent to
year end.
The Company's net cash provided by continuing operations for the year ended
October 31, 2002 was $322. This is comprised of a loss from continuing
operations of $4,852, offset by noncash depreciation and amortization and loss
on asset impairment of $3,288 and goodwill impairment loss of $2,015, increases
in inventories of $1,752 and deferred taxes of $40 and decreases in accounts
receivable of $264 and other assets of $336, and increases in accounts payable
of $545, and customer deposits of $473, and decreases in accrued expenses of
$339. In addition, the Company had noncash losses on debt refinancing, sale of
equipment and accretion of interest of $181, $41, and $162, respectively.
Net cash flow provided from financing activities for the year ended October 31,
2002 was $618. This is comprised of borrowings of long-term debt and net
borrowings of short-term debt of $3,583 and borrowings from related parties of
$628, offset by principal repayments of long-term debt of $3,258. The Company
also paid debt issuance costs of $248 and distributions to members of DW Leasing
of $107, offset by the exercise of warrant of $20.
Cash flow was used in investing activities for the year ended October 31, 2002
of $587. This is comprised of purchases of property and equipment of $909 and
proceeds from the sale of property and equipment of $322.
The total increase (decrease) in cash is summarized as follows:
Year Ended Ten Months Ended Year Ended
October 31, October 31, December 31,
2002 2001 2000
------------------- ------------------ ------------------
Net cash provided by continuing operations $ 322 $ 1,763 $ 762
Net cash provided by (used in) investing activities (588) (17,772) 1,156
Net cash provided by (used in) financing activities 618 16,321 (2,186)
Net cash flow provided by discontinued operations 39 -- --
------------------- ------------------ ------------------
Increase (decrease) in cash and cash equivalents $ 391 $ 312 $ (268)
=================== ================== ==================
EBITDA is a measure of the Company's ability to generate cash flow and should be
considered in addition to, but not as a substitute for, other measures of
financial performance reported in accordance with accounting principles
generally accepted in the United States of America.
EBITDA by business segment and reconciliation to net income or loss under
accounting principles generally accepted in the United States of America by
segment for the applicable periods is as follows:
Year Ended October 31, 2002
--------------------------------------------------------------------------
Income
Income Tax (Loss) from
Interest Expense Depreciation Continuing
Trailer and related transportation EBITDA Expense (Benefit) & Amortization Operations
equipment manufacturing $ 735 $ 1,400 $ 404 $ 1,425* $ (2,494)
Coach leasing 1,830 1,468 (59) 779 (358)
Butyl rubber reclaiming 967 684 (152) 1,084 (649)
Corporate -- -- (226) -- 226
------------- ------------ ------------ ------------------- --------------
Total Company $ 3,532 $ 3,552 $ (33) $ 3,288 $ (3,275)
============= ============ ============ =================== ==============
* includes impairment charge of $720
Ten Months Ended October 31, 2001
--------------------------------------------------------------------------
Income
Income (Loss)
Tax from
Interest Expense Depreciation Continuing
EBITDA Expense (Benefit) & Amortization Operations
------------- ------------ ------------ ------------------- --------------
Trailer and related transportation
equipment manufacturing $ 638 $ 369 $ 98 $ 365 $ (194)
Coach leasing 1,481 1,266 -- 785 (570)
Butyl rubber reclaiming 857 677 (135) 905 (590)
Corporate -- -- (335) -- 335
------------- ------------ ------------ ------------------- --------------
Total Company $ 2,976 $ 2,312 $ (372) $ 2,055 $ (1,019)
============= ============ ============ =================== ==============
Year Ended December 31, 2000
--------------------------------------------------------------------------
Income
Income from
Interest Tax Depreciation Continuing
EBITDA Expense Expense & Amortization Operations
------------- ------------ ------------ ------------------- --------------
Butyl rubber reclaiming $ 1,094 $ 442 $ 50 $ 554 $ 48
============= ============ ============ =================== ==============
The Company allocates selling, general and administrative expenses to the
respective subsidiaries primarily based on a percentage of sales. Amounts
allocated by segment are as follows:
Year Ended Ten Months Ended
October 31, October 31,
2002 2001
----------------------------------------
Trailer manufacturing $ 934 $ 245
Coach leasing 146 96
Butyl rubber reclaiming 232 275
----------------------------------------
Total $ 1,312 $ 616
========================================
EBITDA by segment, exclusive of the allocation of the above selling, general and
administrative expenses, is as follows:
Year Ended Ten Months Ended
October 31, October 31,
2002 2001
----------------------------------------
Trailer manufacturing $ 1,669 $ 883
Coach leasing 1,976 1,577
Butyl rubber reclaiming 1,199 1,132
----------------------------------------
Total $ 4,844 $ 3,592
========================================
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are summarized in the footnotes to our
financial statements. Some of the most critical policies are also discussed
below.
As a matter of policy, we review our major assets for impairment. Our major
operating assets are accounts receivable, inventory, intangible assets and
property and equipment. We have not historically experienced significant bad
debts expense, although the filing of Chapter 11 bankruptcy during 2002 of a
customer resulted in a bad debt charge of $379. However, we believe our reserve
for doubtful accounts of $495 should be adequate for any exposure to loss in our
October 31, 2002 accounts receivable. We have also established reserves for
slow-moving and obsolete inventories and believe the reserve of $466 is
adequate. We depreciate our property and equipment and amortize intangible
assets (except for goodwill) over their estimated useful lives. We have
identified items that are impaired, and during the quarter ended July 31, 2002,
the Company completed its transitional impairment test in conjunction with the
adoption of SFAS 142. The impairment test indicated that certain goodwill
related to the trailer manufacturing segment was impaired. Accordingly $2,015
has been recorded as a cumulative effect of change in accounting principle.
During the fourth quarter, an additional review for asset impairment was
conducted because of changes in circumstances that indicated potential
impairment. Continuing operating losses at Danzer Industries and the filing of
Chapter 11 bankruptcy by Danzer Industries' largest customer in the fourth
quarter resulted in an additional impairment review. As a result, an additional
$720 of goodwill was determined to be impaired at the trailer manufacturing
segment.
The realization of the remaining goodwill of $6,434 is primarily dependent on
the future operations of the operating entity where the goodwill is allocated
(primarily United). Historical operating results, current product demand and
estimated future results indicate the results of operations at United should be
adequate to continue to realize this amount. However, future results may not
meet expectations due to economic or other factors, and failure to meet
expectations may result in the goodwill not being fully realizable.
In conjunction with financing of the acquisition of United, the Company issued
386,206 shares of Series C preferred stock to Huntington Capital Investment
Corporation ("Huntington"). The note purchase agreement includes a provision
that gives Huntington the option to require the Company to repurchase these
shares at 90% of market value upon the earlier of: a) fifth anniversary of
issuance of such shares, b) default under the subordinated debt agreement, c)
other factors related to a sale of substantially all assets of the Company as
defined in the agreement. Increases in the value of the Company's stock will
result in a corresponding increase to this repurchase requirement. Accordingly,
a substantial increase in stock price at the repurchase date may have an adverse
impact on the Company's liquidity. At October 31, 2002, the Company had violated
certain financial covenants defined in the subordinated debt agreement with
Huntington. The Company received a waiver of these violations as of October 31,
2002 and a modification to the covenants.
CONTINGENCIES
The Company is party to ordinary litigation incidental to its business. No
current pending litigation is expected to have a material adverse effect on
results of operations, financial condition or cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to interest rate changes on its
debt. The disclosures in Item 7 above are incorporated herein by reference.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Obsidian Enterprises, Inc.
Indianapolis, Indiana
We have audited the accompanying consolidated balance sheets of Obsidian
Enterprises, Inc. and Subsidiaries as of October 31, 2002 and 2001, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for the year ended October 31, 2002, and the ten months ended
October 31, 2001, and the year ended December 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Obsidian
Enterprises, Inc. and Subsidiaries as of October 31, 2002 and 2001, and the
results of their operations and their cash flows for the year ended October 31,
2002, the ten months ended October 31, 2001, and the year ended December 31,
2000 in conformity with accounting principles generally accepted in the United
States of America.
Our audit of the consolidated financial statements of Obsidian Enterprises, Inc.
and Subsidiaries included Schedule II, contained herein, for the year ended
October 31, 2002, the ten months ended October 31, 2001, and the year ended
December 21, 2000. In our opinion, such schedule presents fairly the information
required to be set forth therein, in conformity with accounting principles
generally accepted in the United States of America.
As described in Note 3 to the financial statements, the 2001 financial
statements have been restated for an error in the application of accounting
principles.
/s/ McGladrey & Pullen, LLP
McGladrey & Pullen, LLP
Elkhart, Indiana
February 10, 2003
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
October 31, October 31,
2002 2001
----------------------------------
Assets
Current assets:
Cash and cash equivalents $ 920 $ 529
Marketable securities 137 223
Accounts receivable, net of allowance for doubtful accounts
of $495 for 2002 and $80 for 2001 (Note 9) 3,307 3,571
Accounts receivable, related parties (Note 16) 206 217
Inventories, net (Notes 7 and 9) 7,315 5,563
Prepaid expenses and other assets 384 514
Deferred income tax assets (Note 15) 665 673
----------------------------------
Total current assets 12,934 11,290
Property, plant and equipment, net (Notes 8 and 9) 23,048 23,384
Other assets:
Intangible assets (Notes 4 and 6):
Goodwill not subject to amortization 6,434 5,829
Goodwill, less accumulated amortization of $76 -- 3,381
Noncompete agreements, less accumulated amortization
of $222 for 2002 and $44 for 2001 664 842
Trade name and customer relations, less accumulated
amortization of $208 for 2002 and $125 for 2001 719 802
Deferred debt costs, less accumulated amortization
of $97 in 2002 and $44 in 2001 470 369
Other 116 579
Assets of subsidiary held for sale (Note 5) 1,538 2,374
----------------------------------
$ 45,923 $ 48,850
==================================
The accompanying notes are an integral part of
the consolidated financial statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
October 31, October 31,
2002 2001
----------------------------------
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Current portion of long-term debt (Note 9) $ 5,667 $ 7,871
Accounts payable, trade 3,450 3,126
Accounts payable, related parties (Note 16) 668 925
Accrued compensation 810 560
Accrued expenses 514 1,040
Customer deposits 234 296
----------------------------------
Total current liabilities 11,343 13,818
Long-term debt, net of current portion (Note 9) 23,879 26,076
Long-term debt, related parties (Note 9 and 16) 5,518 --
Deferred income tax liabilities (Note 15) 1,624 1,672
Accounts payable, related parties (Note 16) -- 2,170
Liabilities of subsidiary held for sale (Note 5) 2,848 2,348
Commitments and contingencies (Note 17)
Mandatory redeemable preferred stock (Note 12):
Class of Series C Preferred Stock: 386,206 shares outstanding 1,400 1,435
Stockholders' equity (deficit) (Note 13):
Common stock, par value $.0001 per share; 40,000,000 shares authorized;
36,007,855 shares outstanding 3 3
Preferred stock, 5,000,000 shares authorized; Class of Series C Preferred
Stock, par value $.001, 4,600,000
authorized, 4,368,399 shares issued and outstanding in 2002 and
3,739,169 shares issued and outstanding in 2001; 200,000 shares of
undesignated Preferred Stock authorized 5 4
Preferred stock, 200,000 shares authorized; Class of Series D
convertible preferred stock, par value $.001, 88,330 shares issued and
outstanding in 2002; 0 shares issued and outstanding in 2001 -- --
Additional paid-in capital 10,184 5,682
Accumulated other comprehensive income (loss) (49) 37
Retained earnings (accumulated deficit) (10,832) (4,395)
----------------------------------
Total stockholders' equity (deficit) (689) 1,331
----------------------------------
$ 45,923 $ 48,850
==================================
The accompanying notes are an integral partof
the consolidated financial statements
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share and share data)
Year Ended Ten Months Ended Year Ended
October 31, October 31, December 31,
2002 2001 2000
--------------------------------------------------------
Net sales $ 57,274 $ 24,689 $ 12,583
Cost of sales 47,841 19,457 11,390
--------------------------------------------------------
GROSS PROFIT 9,433 5,232 1,193
Selling, general and administrative expenses (8,589) (4,251) (1,009)
Loss on asset impairment (Note 4) (720) -- --
Insurance settlement 325 -- --
--------------------------------------------------------
Income from operations 449 981 184
Other income (expense):
Interest expense (Note 9) (3,552) (2,312) (442)
Interest income 12 -- 356
Other expense (217) (60) --
--------------------------------------------------------
Income (loss) before income taxes, discontinued
operations, and cumulative effect of change in accounting
principle (3,308) (1,391) 98
Income tax (expense) benefit (Note 15) 33 372 (50)
--------------------------------------------------------
Income (loss) from continuing operations before
discontinued operations and cumulative effect of change
in accounting principle (3,275) (1,019) 48
Loss from discontinued operations, net of tax (Note 5) (1,040) (3,376) --
--------------------------------------------------------
Income (loss) before cumulative effect of change in
accounting principle (4,315) (4,395) 48
Cumulative effect of change in accounting principle, net
of tax (Note 4) (2,015) -- -
--------------------------------------------------------
Net income (loss) $ (6,330) $ (4,395) $ 48
========================================================
Basic and diluted earnings (loss) per share attributable to common shareholders
(Note 2):
From continuing operations $ (.02) $ (.02) $ --
Discontinued operations, net of tax (.01) (.05) --
Cumulative effect of accounting change, net of tax (.02) -- --
--------------------------------------------------------
Net income (loss) per share $ (.05) $ (.07) $ --
========================================================
Weighted average common and common equivalent shares
outstanding, basic and diluted: 117,499,946 63,367,140 39,419,240
========================================================
The accompanying notes are an integral part of the
consolidated financial statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(dollars in thousands)
Series C Series D Accumulated Retained
Convertible Convertible Other Earnings
Comprehensive Common Stock Preferred Stock Preferred Stock Additional Compre- (Accum-
Income ------------------------------------------------- Paid-in hensive ulated
(Loss) Shares Amount Shares Amount Shares Amount Capital Income Deficit) Total
-------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $ -- 17,588,348 $ 1 -- $ -- -- $-- $ -- $ -- $ 4,890 $ 4,891
Issuance of stock under
incentive plan and Parent
note conversion -- 1,747,946 -- -- -- -- -- -- -- -- --
2000 net income -- -- -- -- -- -- -- -- -- 48 48
------------------------------------------------------------------------------------------------
Balance at December 31, 2000 -- 17,760,015 1 -- -- -- -- -- -- 4,938 4,939
Conversion of debt
to common stock -- 1,750,000 -- -- -- -- -- 355 -- -- 355
To record the effect
of the reverse merger
June 21, 2001(Note 6) -- -- 1 1,970,962 2 -- -- 3,760 (103) (4,938) (1,278)
Conversion of Series
C Preferred Stock to
common stock -- 16,497,840 1 (824,892) (1) -- -- -- -- -- --
Issuance of 2,593,099
shares of Series C Preferred
Stock associated with
the acquisition of United
and capital contribution (Note 6) -- -- -- 2,593,099 3 -- -- 1,497 -- -- 1,500
Unrealized gain on
available-for-sale
marketable securities 140 -- -- -- -- -- -- -- 140 -- 140
Fair value adjustment on
redeemable preferred stock -- -- -- -- -- -- -- 70 -- -- 70
2001 net loss (4,395) -- -- -- -- -- -- -- -- (4,395) (4,395)
------------------------------------------------------------------------------------------------
Total comprehensive loss $(4,255)
========
Balance at October 31, 2001 36,007,855 3 3,739,169 4 -- -- 5,682 37 (4,395) 1,331
Issuance of 30,000 shares
of Series C Preferred
Stock associated with U.S.
Rubber, net of tax $ -- -- -- 30,000 -- -- -- 1,017 -- -- 1,016
Issuance of 589,230 shares
of Series C Preferred
Stock associated with Fair
Holdings and Obsidian
Capital Partners, LP -- -- -- 589,230 1 -- -- 1,885 -- -- 1,886
Issuance of 88,330 shares
of Series D Preferred
Stock associated with Fair
Holdings and Obsidian
Capital Partners, LP -- -- -- -- -- 88,330 -- 1,545 -- -- 1,545
Exercise of stock warrants
in exchange for 10,000
shares of Series C Preferred
Stock -- -- -- 10,000 -- -- -- 20 -- -- 20
Distributions to members
of DW Leasing -- -- -- -- -- -- -- -- -- (107) (107)
Unrealized loss on
available-for-sale
marketable securities (86) -- -- -- -- -- -- -- (86) -- (86)
Fair value adjustment on
redeemable preferred stock -- -- -- -- -- -- -- 35 -- -- 35
2002 net loss (6,330) -- -- -- -- -- -- -- -- (6,330) (6,330)
------------------------------------------------------------------------------------------------
Total comprehensive loss $(6,416)
========
Balance at October 31, 2002 36,007,855 $ 3 4,368,399 $ 5 88,330 $-- $10,184 $(49)$(10,832) $ (689)
======================================================================================
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ten Months Year
Ended Ended Ended
October 31, October 31, December 31,
2002 2001 2000
---------------------------------------------
Cash flow from operating activities from continuing operations:
Income (loss) from continuing operations $ (4,852) $ (1,019) $ 48
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by operating
activities:
Cumulative effect of change in accounting principle 2,015 -- --
Loss on asset impairment 720 -- --
Depreciation and amortization 2,568 2,055 554
Loss on debt refinancing 181 -- --
Loss (gain) on sale of equipment 41 (4) --
Loss on sale of marketable securities -- 81 --
Accretion of interest 162 35 --
Deferred income taxes (40) (408) 216
Changes in operating assets and liabilities net of
effect of acquisitions:
Accounts receivable, net 264 767 (414)
Inventories, net (1,752) (630) 641
Other assets 336 71 (284)
Accounts payable, trade 545 810 --
Accrued expenses (339) 321 1
Customer deposits 473 (316) --
---------------------------------------------
Net cash provided by operating activities from continuing operations 322 1,763 762
---------------------------------------------
Cash flows from investing activities from continuing operations:
Capital expenditures (910) (1,185) (1,052)
Proceeds from sale of equipment 322 1,321 --
Acquisition-related closing costs -- (146) --
Purchase of marketable equity securities -- (213) --
Cash received in reverse merger and other acquisitions -- 26 --
Cash payments in connection with the purchase of
U.S. Rubber, net of cash acquired -- (5,730) --
Cash payments in connection with the purchase of assets
of United, net of cash acquired -- (12,040) --
Proceeds from sale of marketable equity securities -- 195 --
Repayment of affiliated company payable -- -- 2,208
---------------------------------------------
Net cash provided by (used in) investing activities from continuing
operations (588) (17,772) 1,156
---------------------------------------------
The accompanying notes are in integral part of
the consolidated financial statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Ten Months
Year Ended Ended Year Ended
October 31, October 31, December 31,
2002 2001 2000
---------------------------------------------
Cash flows from financing activities from continuing operations:
Advances from (repayments to) related parties 628 (238) --
Net borrowings on lines of credit 1,265 5,226 --
Borrowings on long-term debt 2,318 11,220 --
Principal repayments on long-term debt, including related parties (3,258) (2,255) (2,186)
Debt issuance costs (248) (105) --
Distributions to members of DW Leasing (107) -- --
Exercise of warrant 20 -- --
Proceeds from capital contributions and
sale of common stock -- 2,473 --
---------------------------------------------
Net cash provided by (used in) financing activities from continuing
operations 618 16,321 (2,186)
Net cash flow provided by discontinued operations 39 -- --
---------------------------------------------
Increase (decrease) in cash and cash equivalents 391 312 (268)
Cash and cash equivalents, beginning of year 529 217 485
---------------------------------------------
Cash and cash equivalents, end of year $ 920 $ 529 $ 217
=============================================
Interest paid $ 3,415 $ 2,241 $ 485
=============================================
Interest received $ -- $ -- $ 356
=============================================
Taxes paid $ 22 $ 44 $ 8
=============================================
Noncash:
Refinancing of debt, including related-party amounts $ 12,122 $ -- $ --
Conversion of contributed amounts to equity $ 5,104 $ 355 $ --
Equipment purchased with debt $ 1,220 $ 1,059 $ 95
Fair value changes of mandatory redeemable preferred stock $ 35 $ 70 $ --
Purchase price adjustment and conversion of
accounts payable to debt $ 225 $ -- $ --
Seller note on acquisition of United $ -- $ 1,500 $ --
Seller note on acquisition of U.S. Rubber $ -- $ 2,573 $ --
The accompanying notes are an integral part of
the consolidated financial statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
1. DESCRIPTION OF BUSINESS AND CHANGE OF NAME
Obsidian Enterprises, Inc. (the "Company"), formerly named Danzer Corporation
("Danzer") and previously Global Environmental Corp., was incorporated on
October 6, 1987. Effective August 1, 1988, the Company acquired all of the
issued and outstanding common shares of Global Environmental Holdings, Inc.
("Global Holdings"). On October 7, 1999, the Company changed its name from
Global Environmental Corp. to Danzer Corporation.
Danzer was reorganized through an Acquisition and Plan of Reorganization with
U.S. Rubber Reclaiming, Inc. and Related Entities ("U.S. Rubber Companies"),
which was consummated on June 21, 2001. In addition, Danzer changed its name to
Obsidian Enterprises, Inc. However, the operating company, Danzer Industries,
Inc., retained its name. The operating company will continue to be referred to
as Danzer Industries, Inc. The Acquisition and Plan of Reorganization of Danzer
with U.S. Rubber Companies (see Note 6, the "Acquisition and Plan of
Reorganization") was accounted for as a reverse acquisition as the shareholders
of the U.S. Rubber Companies owned a majority of the outstanding stock of Danzer
subsequent to the Acquisition and Plan of Reorganization. For accounting
purposes, U.S. Rubber Reclaiming, Inc. is deemed to have acquired Danzer.
Accordingly, the fiscal 2000 financial information presented herein represents
only the financial results of U.S. Rubber Reclaiming, Inc.
Pursuant to the Plan of Acquisition and Reorganization described further in Note
6, United Expressline, Inc. was acquired July 31, 2001.
The resulting entities, considered accounting subsidiaries of U.S. Rubber
Reclaiming, Inc. (the accounting acquirer) and legal subsidiaries of Obsidian
Enterprises, Inc. (formerly Danzer) after the Acquisition and Plan of
Reorganization, are as follows:
U.S. Rubber Reclaiming, Inc. ("U.S. Rubber", the accounting acquirer), which is
engaged in reclaiming scrap butyl rubber into butyl reclaim for resale to
manufacturers of rubber products.
Obsidian Enterprises, Inc. (formerly Danzer, the legal acquirer), a holding
company.
Danzer Industries, Inc. ("Danzer Industries"), which is principally engaged in
the design, manufacture and sale of truck bodies and cargo trailers.
Pyramid Coach, Inc. ("Pyramid"), which is engaged in the leasing of coaches,
designed and fitted out for use for travel by country, rock bands and other
business enterprises, primarily on weekly to monthly leases. The financial
statements of Pyramid are presented on a combined basis. The combined financial
statements of Pyramid also include the assets, liabilities, equity and results
of operations of DW Leasing, LLC ("DW Leasing") and Obsidian Leasing Co., Inc.
("Obsidian Leasing"). DW Leasing is controlled by individuals which are also
controlling shareholders of Obsidian Enterprises, Inc. and, accordingly,
Pyramid. All coaches owned by DW Leasing are operated by Pyramid. Obsidian
Leasing is also a wholly owned subsidiary of the Company. As part of the Plan of
Reorganization, certain assets and liabilities of DW Leasing were to be
transferred to Obsidian Leasing; however, the transfers could not be completed
without lender approvals. On November 1, 2001, the Company completed the
tax-free exchange contemplated by the Acquisition Agreement whereby all but
seven coaches and the liabilities thereon were transferred to Obsidian Leasing.
All intercompany transactions are eliminated in combination of this entity.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
1. DESCRIPTION OF BUSINESS AND CHANGE OF NAME, CONTINUED
Champion Trailer, Inc. ("Champion"), which manufactures and sells transport
trailers to be used primarily in the auto racing industry. Effective October
2002, the Company's Board of Directors agreed to a plan to dispose of Champion
as further described in Note 5. The sale of Champion was completed January 30,
2003. Accordingly, the operations of Champion are classified as discontinued
operations in the accompanying financial statements.
United Expressline, Inc. ("United") manufactures and sells general use cargo
trailers and specialty trailers used in the racing industry and for other
special purposes.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION:
The accompanying 2002 consolidated financial statements present the accounts of
Obsidian Enterprises, Inc. and its wholly owned subsidiaries described in Note 1
for the fiscal year ended October 31, 2002. The entities are collectively
referred to herein as the "Company." All significant intercompany transactions
and balances have been eliminated in consolidation. The accompanying 2001
financial statements include the operations of U.S. Rubber, Champion, Pyramid
and its related entity (DW Leasing) for the ten-month period ended October 31,
2001. January 1, 2001 was the beginning of the calendar year of the accounting
acquirer U.S. Rubber. U.S. Rubber changed its fiscal year end to adopt Danzer's
(legal acquirer and previous registrant) year end. The 2001 financial statements
also include the operating results of Obsidian Enterprises, Inc. (formerly
Danzer Corporation) and Danzer Industries, its wholly owned subsidiary, from
June 21, 2001 (date of acquisition) through October 31, 2001. In addition, they
include the results of United from July 31, 2001 (date of acquisition) through
October 31, 2001. See Note 6 for further discussion.
BASIS OF PRESENTATION:
During 2002, the Company has undertaken various actions to improve its
operations and liquidity. Such actions as described below include the sale of
Champion, conversion of debt to equity and refinancing of certain of its debt
agreements as described in Note 9. Management believes that the Company has
financing agreements in place to provide adequate liquidity and working capital
throughout fiscal 2003. However, there can be no assurance that such working
capital and liquidity will in fact be adequate. Therefore, the Company may be
required to draw upon other liquidity sources. The Company has therefore secured
an increased financial commitment from Fair Holdings, Inc. ("Fair Holdings"), an
entity controlled by the Company's Chairman, to provide, as needed, additional
borrowings under a $5 million line of credit agreement, which expires January 9,
2005. Currently, availability under the agreement is approximately $3.2 million.
The Company incurred a net loss in 2002 of $6,330, which included an asset
impairment charge of $720, cumulative effect of change in accounting principle
of $2,015 and a loss from discontinued operations of $1,040. Several of the
Company's subsidiaries were acquired in highly leveraged transactions and this
factor combined with the loss has contributed to its failure to meet certain
financial covenants required by the lenders. As a result of these covenant
violations, $1,863 of long-term debt has been reclassified as a current
liability as of October 31, 2002.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
In view of these matters realization of assets and satisfaction of liabilities
in the ordinary course of business is dependent on the Company's ability to
generate sufficient cash flow to satisfy its obligations on a timely basis,
maintain compliance with its financing agreements and continue to receive
financing support from Fair Holdings, Inc. ("Fair Holdings") an entity
controlled by the Company's Chairman, to provide liquidity if needed.
Management, as a part of its plan towards resolving these issues and generating
positive cash flow and earnings, has taken the actions as described below during
and subsequent to the year ended October 31, 2002. Although management believes
these actions will improve operations and liquidity, there can be no assurance
that such actions will sufficiently improve operations or liquidity.
o On March 7, 2002, the Company completed a series of transactions with the
subordinated lender at U.S. Rubber resulting in an increase in equity and a
decrease in liabilities of $1,017. The subordinated lender received 30,000
shares of Series C Preferred Stock in this transaction.
o On March 20, 2002, DC Investments LLC ("DC Investments"), an entity
controlled by the Company's Chairman, acquired all outstanding debt due to
the senior lender of Champion in the amount of $602 in a nonrecourse
assignment. Under the terms of the Company's agreement with DC Investments,
this amount has been reclassified as a long-term liability.
o On April 30, 2002, the Company converted $1,290 of debt and accrued
interest due to Obsidian Capital Partners, LP ("Partners"), majority owner
of the Company, to equity in exchange for 402,906 shares of Series C
Preferred Stock.
o On April 30, 2002, the Company converted $596 of debt and accrued interest
due to Fair Holdings to equity in exchange for 186,324 shares of Series C
Preferred Stock.
o On August 28, 2002, the Company completed refinancing of the Line of Credit
facility and a term loan at United. The amount of maximum borrowings on the
line of credit facility was increased and the maturity date extended to
February 1, 2004. In addition, the maturity date of the term note was
extended to July 1, 2004 and monthly principal payments were reduced by
approximately 50%.
o On October 24, 2002, the Company refinanced the outstanding bank debt at
U.S. Rubber with a new lender at terms more favorable than the previous
lender.
o During 2002, the Board of Directors authorized the Chairman of the Board to
explore various options regarding the operations at Champion. Options
included divestiture, restructuring of operations or closing the facility.
It was determined in the best interests of the Company to sell Champion. On
January 30, 2003, the Company completed the sale of substantially all
assets of Champion to an entity owned by Messrs. Durham and Whitesell,
Chairman and President of the Company, respectively.
o During the months of September through December 2002, the Company
refinanced certain coaches of Obsidian Leasing with existing lenders and DC
Investments at terms more favorable than the previous terms.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
o On October 24, 2002, the Company converted $1,275 of debt to Partners in
exchange for 72,899 shares of Series D Convertible Preferred Stock.
o On October 24, 2002, the Company converted $270 of debt to Fair Holdings in
exchange for 15,431 shares of Series D Convertible Preferred Stock.
o On January 2, 2003, the Company obtained an increase in its available line
of credit with Fair Holdings to $5,000 from $3,000.
o During January 2003, United and U.S. Rubber obtained modifications to
provide less stringent requirements on certain financial covenants with
their respective lenders.
The above factors combined with additional actions by management at the
operating subsidiaries have contributed to a reduction in the Company's working
capital deficit from $2,528 at October 31, 2001 to a positive $1,591 at October
31, 2002.
REVENUE RECOGNITION:
Sales are recorded when title passes to the customer (FOB shipping point) or
when services are performed in accordance with agreements with customers. The
Company accumulates costs of trailers in work-in-process inventory until
completion. The Company recognizes repair revenue when services are provided to
the customer. Shipping and handling charges billed to the customers are included
in net sales. Shipping and handling costs incurred by the Company are included
in cost of sales.
For operating leases, income is recognized on a straight-line basis over the
lease term. Recognition of income is suspended when management determines that
collection of future income is not probable (generally after 90 days past due).
Recognition is resumed if the receivable becomes contractually current and the
collection of amounts is again considered probable. Operating lease equipment is
carried at cost less accumulated depreciation and is depreciated to estimated
residual value using the straight-line method over the lease term or projected
economic life of the asset.
FAIR VALUE OF FINANCIAL INVESTMENTS:
The carrying amounts of cash and cash equivalents, receivables, accounts
payable, and accrued liabilities approximate fair value because of the short
maturity of these instruments. The carrying amounts of long-term receivables
approximates fair value as the effective rates for these instruments are
comparable to market rates at year end. The carrying amount of investments
approximates fair market value. The carrying amount of debt approximates fair
value, as a result of the current interest rates paid on the Company's
borrowings being at market. The carrying value of mandatory redeemable preferred
stock approximates market value determined based on the thirty-day average
closing price of the Company's common stock.
MARKETABLE SECURITIES:
The Company classifies its marketable securities as available for sale. The
securities consist of equity securities, which are stated at fair value, with
net unrealized gains or losses on the securities recorded as accumulated other
comprehensive income (loss) in stockholders' equity (deficit). Realized gains
and losses are included in earnings and are derived using the specific
identification method for determining the cost of the securities.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
PROPERTY, PLANT AND EQUIPMENT:
Building, equipment, furniture and fixtures are recorded at historical cost with
depreciation taken using primarily the straight-line method over their estimated
useful lives. Life ranges for property and equipment are as follows:
Buildings and improvements 30 - 39 years
Plant machinery and equipment 5 - 7 years
Furniture and fixtures 5 - 7 years
Coach fleet and vehicles 5 - 15 years
Effective February 1, 2002, the Company changed its estimate with regard to
depreciation of coaches owned by Obsidian Leasing and DW Leasing by establishing
a salvage value for the coaches of approximately 38% of original cost. The
depreciable lives of the coaches of fifteen years was not changed. This change
in estimate resulted in a reduced depreciation expense during the year ended
October 31, 2002 of approximately $200.
CONCENTRATION OF CREDIT RISK:
The Company maintains cash balances at a bank, which at various times throughout
the year exceeded the Federal Deposit Insurance Corporation (FDIC) limit.
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of trade receivables. The Company's customers
are not concentrated in any one specific geographic region. The credit risk
associated with trade receivables within the various industries may be affected
by changes in economic or other conditions and may, accordingly, impact the
Company's overall credit risk. The Company reviews a customer's credit history
before extending credit. Allowances for doubtful accounts are established based
on specific customer risk, historical trends and other information. Also see
major customers described below.
Certain of Danzer Industries' employees, which represent 10% of total employees,
are currently represented by the United Brotherhood of Carpenters and Joiners of
America, Local Union No. 340, whose contract is in effect to January 2004. The
contract contains provisions that affect compensation to be paid to employees
included in the union.
GOODWILL, INTANGIBLE ASSETS AND DEFERRED COSTS:
Goodwill, net was $6,434 and $9,210 at October 31, 2002 and 2001, respectively.
Accumulated amortization amounted to $76 at October 31, 2001. In accordance with
Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other
Intangible Assets, goodwill associated with acquisitions consummated after June
30, 2001 in the amount of $5,829 was not being amortized in the 2001 financial
statements. All other goodwill was being amortized on a straight-line basis over
15 years through October 31, 2001. Effective November 1, 2001, the Company
adopted SFAS No. 142 and completed transitional impairment testing during the
third quarter. This transitional test resulted in an impairment charge of $2,015
that has been recorded as a change in accounting principle as discussed in Note
4.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Other intangible assets, net were $1,383 and $1,644 at October 31, 2002 and
2001, respectively. These amounts include trade names, customer relations and
backlogs and other items, which are being amortized on a straight-line basis
over lives ranging from three months to 15 years. At October 31, 2002 and 2001,
accumulated amortization amounted to $430 and $169, respectively.
Deferred debt issuance costs are amortized over the term of the related debt,
primarily four to five years.
Amortization of goodwill and other intangible assets described above for the
year ended October 31, 2002 and the ten months ended October 31, 2001 was $440
and $303, respectively. Accumulated amortization on goodwill in the amount of
$76 was written off in 2002 with the impairment discussed in Note 4.
INCOME TAXES:
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes, as required. Under SFAS No. 109, deferred tax
assets and liabilities are recorded for any temporary differences between the
financial statement and tax bases of assets and liabilities, using the enacted
tax rates and laws expected to be in effect when the taxes are actually paid or
received. (See Note 15.)
USE OF ESTIMATES:
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect reported amounts of
assets, liabilities, revenues and expenses and the related disclosures of
contingent assets and liabilities. Significant items subject to such estimates
and assumptions include valuation allowances for accounts receivable,
inventories and deferred tax assets, the fair values of assets and liabilities
when allocating the purchase price of acquisitions, and the carrying value of
property and equipment and goodwill. Actual results may differ from those
estimates.
CASH EQUIVALENTS:
For purposes of the statement of cash flows presentation, cash equivalents are
unrestricted, highly liquid short-term cash investments with an original
maturity of three months or less.
IMPAIRMENT OF LONG-LIVED ASSETS, INCLUDING INTANGIBLES:
The Company evaluates the carrying value of long-lived assets whenever
significant events or changes in circumstances indicate the carrying value of
these assets may be impaired. The Company evaluates potential impairment of
long-lived assets by comparing the carrying value of the assets to the expected
future cash flows resulting from the use of the assets. In addition, the Company
adopted SFAS No. 142 effective November 1, 2001 and completed transitional
impairment testing that resulted in an impairment charge of $2,015, which is
recorded as a cumulative effect of change in accounting principle. In addition,
the Company completed additional impairment testing in the fourth quarter, as
further discussed in Note 4, resulting in an impairment charge of $720.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
MAJOR CUSTOMERS:
The following is a list of the Company's customers that represent 10% or more of
consolidated net sales:
Year Ended Ten Months Ended Year Ended
October 31, October 31, December 31,
2002 2001 2000
------------------------------------------------------------------
Butyl rubber sales:
Customer (1) -- 13% 34%
Customer (2) -- 8% 22%
There were no sales to individual customers in 2002 that accounted for more than
10% of consolidated net sales.
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.
In arriving at the weighted average number of common shares outstanding for
basic income (loss) per share, 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, have been reflected as equivalent common shares based on their
conversion rates of 20 to 1 and 175 to 1, respectively. Therefore, for the year
ended October 31, 2002 and the ten-month period ended October 31, 2001, the
Series C Preferred Stock has been reflected on a weighted average basis
outstanding as common stock equivalent shares of 81,194,826 and 39,782,638,
respectively. The Series D Preferred Stock has been reflected on a weighted
average basis outstanding as common stock equivalent shares of 297,264 for the
year ended October 31, 2002. There were no Series D Preferred Stock shares
issued or outstanding during the ten-month period ended October 31, 2001. The
weighted average common shares outstanding for the year ended December 31, 2000
reflect the 1,970,962 shares of Series C Preferred Stock issued to the former
stockholders of the companies acquired in the reverse merger, as if such shares
had been converted into their equivalent number of common shares of 39,419,240.
Furthermore, because no other common equivalents were issued to the former
stockholders of the acquired companies, the basic and diluted weighted average
common shares outstanding for 2000 are the same.
As described in Note 9, the Company has a note payable agreement which is
convertible by the holder to common stock totaling 5,000,000 shares at a
conversion rate of $0.10 per share. In addition, and as described in Note 13,
the Company has options outstanding to purchase a total of 800,000 shares of
common stock, at a weighted average exercise price of $0.09. However, because
the Company incurred a loss for the periods ended October 31, 2002 and 2001,
respectively, the inclusion of those potential common shares in the calculation
of diluted loss per share would have an antidilutive effect.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Basic and diluted earnings (loss) per share have been computed as follows:
Year Ended Ten Months Ended Year Ended
October 31, 2002 October 31, 2001 December 31, 2000
------------------ ------------------ -------------------
Income (loss) before discontinued operations and cumulative
effect of accounting change $ (3,275) $ (1,019) $ 48
Change in fair value of mandatory redeemable preferred stock 35 70 --
------------------ ------------------ -------------------
Income (loss) attributable to common shareholders before
discontinued operations and cumulative effect of accounting
change (3,240) (949) 48
Loss from discontinued operations, net of tax (1,040) (3,376) --
Cumulative effect of change in accounting principle (2,015) -- --
------------------ ------------------ -------------------
Net income (loss) attributable to common shareholders $ (6,295) $ (4,325) $ 48
================== ================== ===================
Weighted average common and common equivalent shares
outstanding, basic and diluted 117,499,946 63,367,140 39,419,240
================== ================== ===================
Earnings (loss) per share, basic and diluted, attributable to common
shareholders:
From continuing operations $ (.02) $ (.02) $ --
Discontinued operations (.01) (.05) --
Cumulative effect of accounting change (.02) -- --
------------------ ------------------ -------------------
Net income (loss) per share $ (.05) $ (.07) $ --
================== ================== ===================
INSURANCE RECOVERY:
On May 16, 2002, U.S. Rubber was damaged by a fire at an adjacent property. The
Company completed processing its claims with its insurance carrier for damaged
equipment and facilities and business interruption losses on August 16, 2002.
There was no material gain or loss on involuntary conversion as a result of this
fire. An insurance recovery related to the business interruption claim, net of
incurred and anticipated costs, in the amount of $325 has been recognized as
reduction of operating costs.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
COMPREHENSIVE INCOME:
SFAS No. 130, Reporting Comprehensive Income, establishes standards for
reporting and display of comprehensive income and its components in financial
statements. It requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. Comprehensive income consists of net earnings, the net
unrealized gains or losses on available-for-sale marketable securities and is
presented in the consolidated statement of stockholders' equity.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In June 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No.
142, Goodwill and Other Intangible Assets. SFAS No. 141 requires all business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method. In addition, companies are required to review goodwill and
intangible assets reported in connection with prior acquisitions, possibly
disaggregate and report separately previously identified intangible assets and
possibly reclassify certain intangible assets into goodwill. SFAS No. 142
establishes new guidelines for accounting for goodwill and other intangible
assets. In accordance with SFAS No. 142, goodwill associated with acquisitions
consummated after June 30, 2001 is not amortized. The Company implemented the
remaining provisions of SFAS No. 142 on November 1, 2001. Since adoption,
existing goodwill is no longer amortized but instead will be assessed for
impairment at least annually. The adoption of this pronouncement resulted in
$5,829 of goodwill not being amortized and the elimination of approximately $225
of amortization annually on another $3,381 of goodwill previously being
amortized. The adoption of SFAS No. 142 also resulted in an impairment charge of
$2,015 recorded as cumulative effect of change in accounting principle as
further described in Note 4.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 addresses accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. This statement is effective for fiscal years beginning
after June 15, 2002. The Company is currently assessing the impact of this new
standard.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of
Long-Lived Assets," which requires a single accounting model to be used for
long-lived assets to be sold and broadens the presentation of discontinued
operations to include a "component of an entity" (rather than a segment of a
business). A component of an entity comprises operations and cash flows that can
be clearly distinguished, operationally and for financial reporting purposes,
from the rest of the entity. A component of an entity that is classified as held
for sale, or has been disposed of, is presented as a discontinued operation if
the operations and cash flows of the component will be (or have been) eliminated
from the ongoing operations of the entity and the entity will not have any
significant continuing involvement in the operations of the component.
The Company adopted SFAS No. 144 effective October 31, 2002. Consequently, the
operating results of Champion, which were held for sale at October 31, 2002, are
included as discontinued operations. Assets and liabilities of Champion are
included in "Assets of subsidiaries held for sale" and "Liabilities of
subsidiaries held for sale," respectively, at October 31, 2002 and 2001, as
discussed in Note 5.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
SFAS No. 145, among other technical corrections, rescinds SFAS No's. 4 and 64
which required gains and losses from the early extinguishment of debt be
classified as extraordinary items in the statement of operations. This statement
is effective for fiscal years beginning after May 15, 2002 although early
application is encouraged. The Company adopted SFAS No. 145 effective August 1,
2002. Accordingly, losses on early extinguishment of debt in the amount of $181
have been included in other expense in 2002.
In June 2002, the FASB issued Statement 146, Accounting for Costs Associated
with Exit or Disposal Activities. This Statement requires the recognition of a
liability for a cost associated with an exit or disposal activity when the
liability is incurred versus the date the Company commits to an exit plan. In
addition, this Statement states the liability should be initially measured at
fair value. The Statement is effective for exit or disposal activities that are
initiated after December 31, 2002. The Company does not believe that the
adoption of this pronouncement will have a material effect on its financial
statements.
In January 2003, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure. This statement provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this Statement
also amends the disclosure requirements of SFAS No. 123 to require more
prominent and frequent disclosures in the financials statements about the
effects of stock-based compensation. The transitional guidance and annual
disclosure provisions of this Statement is effective for the October 31, 2003
financial statements. The interim reporting disclosure requirements will be
effective for the Company's January 31, 2003 10-Q. Because the Company continues
to account for employee stock-based compensation under APB opinion No. 25, the
transitional guidance of SFAS No. 148 has no effect on the financial statements
at this time.
3. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
In December 2002, the Company became aware of an error related to the accounting
for the redeemable preferred stock issued in connection with subordinated debt
pertaining to the United acquisition on July 31, 2002. The Company is restating
its previously issued financial statements for the ten months ended October 31,
2001 for this error.
Below is a comparison of previously reported and restated balances included in
the Consolidated Balance Sheet and Statement of Operations as of and for the ten
months ended October 31, 2001. The amounts included as previously reported
exclude the effect of classification of Champion in discontinued operations.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
3. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS, CONTINUED
Previously Change As Restated
Reported
------------------- ------------------ ------------------
Income Statement:
Interest expense $ 2,277 $ 35 $ 2,312
Loss from continuing operations (984) (35) (1,019)
Net loss (4,360) (35) (4,395)
Earnings (loss) per share from continuing
operations (.02) -- (.02)
Net loss per share (.07) -- (.07)
Balance Sheet:
Net deferred tax assets 538 14 552
Deferred tax valuation reserve (1,537) (14) (1,551)
Long-term debt 27,546 (1,470) 26,076
Mandatory redeemable preferred stock -- 1,435 1,435
Additional paid-in capital 5,612 70 5,682
Retained earnings (deficit) (4,360) (35) (4,395)
The restated balances arise from the allocation of the proceeds to Series C
Preferred Stock issued in conjunction with the related debt. The change in
interest expense is related to accretion of interest resulting from the
allocation of the mandatory redeemable preferred stock. The change in additional
paid-in capital is the result of fair value changes on the redeemable preferred
stock, as further described in Note 12.
4. CHANGE IN ACCOUNTING PRINCIPLES, GOODWILL AND INTANGIBLE ASSETS, AND
IMPAIRMENT OF LONG-LIVED ASSETS
As discussed in Note 2, the Company adopted the new rules on accounting for
goodwill and other intangible assets beginning in the first quarter of fiscal
2002. Accordingly, effective with the November 1, 2001 adoption of SFAS No. 142,
goodwill is no longer amortized but is instead subject to an annual impairment
test. The Company completed its transitional impairment test in conjunction with
the adoption of SFAS No. 142 during the quarter ended July 31, 2002. The
impairment test indicated that a portion of the goodwill related to the trailer
manufacturing segment was impaired. Accordingly, $2,015 has been recorded as a
cumulative effect of change in accounting principle. This charge was reflected
in the first quarter pursuant to the implementation guidelines.
The Company reviews the recoverability of the carrying value of long-lived
assets, primarily property, plant and equipment and related goodwill and other
intangible assets, for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be fully recoverable.
Impairment losses are recognized when the fair value is less than the asset's
carrying value. When indicators of impairment are present, the carrying values
of the assets are evaluated in relation to the operating performance and future
undiscounted cash flows of the underlying business. The net book value of the
underlying assets is adjusted to fair value if the sum of expected future
undiscounted cash flows is less than book value. Fair values are based on quoted
market prices and assumptions concerning the amount and timing of estimated
future cash flows and assumed discount rates, reflecting varying degrees of
perceived risk.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
4. CHANGE IN ACCOUNTING PRINCIPLES, GOODWILL AND INTANGIBLE ASSETS, AND
IMPAIRMENT OF LONG-LIVED ASSETS, CONTINUED
During October 2002, the Company also evaluated the recoverability of the
long-lived assets, including the remaining goodwill associated with Danzer.
Deteriorating performance, including reduced sales and the bankruptcy of a major
customer, brought the recoverability of those assets into question. The
evaluation resulted in an additional goodwill impairment charge of $720.
During October 2001, the Company completed an evaluation of the recoverability
of the assets (primarily goodwill) of Champion. Certain events occurred during
the period ended October 31, 2001 which caused the full recoverability of those
assets to be brought into question. Deterioration of the performance of
Champion, including lower overall sales demand and difficulties in achieving
manufacturing efficiencies, resulted in the investment in Champion becoming
impaired. Accordingly, during fiscal 2001, Champion recorded charges of $2,305
related to the impairment of goodwill. This charge was based on the estimated
fair value of the long-lived assets of Champion. Operations of Champion have
been classified as discontinued operations as further described in Note 5.
The changes in the carrying amounts of goodwill related to continuing operations
are as follows:
Trailer Holding
Manufacturing Company Total
--------------------- ---------------- ------------------
Balance as of January 1, 2001 $ -- $ -- $ --
Goodwill arising from 2001 acquisitions 8,636 650 9,286
2001 amortization (76) -- (76)
--------------------- ---------------- ------------------
Balance, October 31, 2001 8,560 650 9,210
Purchase price adjustment (41) -- (41)
Impairment charges (720) -- (720)
Cumulative effect of change in
accounting principle (2,015) -- (2,015)
--------------------- ---------------- ------------------
Balance, October 31, 2002 $ 5,784 $ 650 $ 6,434
===================== ================ ==================
Had SFAS No. 142 been effective at the beginning of 2001, the nonamortization
provisions would have reduced the net loss for the ten months ended October 31,
2001 by $76, resulting in an adjusted net loss of $4,319 and no change in
earnings per share.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
5. DISCONTINUED OPERATIONS
On October 30, 2002, the Company's Board of Directors agreed to sell the assets
of Champion to an entity controlled by Messrs. Durham and Whitesell (Officers of
the Company) for the assumption of all liabilities of Champion excluding its
subordinated debt. The decision to divest Champion was based on the entity's
inability to achieve profitable operations in the foreseeable future without
substantial cash infusion. The Company also agreed in principal to settle the
outstanding subordinated debt of Champion in exchange for a cash payment of $675
and issuance to the debt holder of 32,143 shares of the Company's Series D
Preferred Stock. In addition, the agreement provides Markpoint the option to
require the Company to repurchase these shares at a price of $21 per share. The
repurchase option is available to Markpoint as follows: 16,072 shares during the
period May 1, 2003 to June 1, 2003 and 16,071 shares during the period November
1, 2003 to December 1, 2003. The repurchase options expire if not exercised
during the specified periods. The Company's repurchase obligation is guaranteed
by Mr. Durham. The sale of Champion was completed on January 30, 2003. Champion
is accounted for as a discontinued operation and therefore the results of
operations and cash flows have been removed from the Company's continuing
operations for all periods presented. In addition, assets and liabilities of
Champion are included in the consolidated balance sheet as of October 31, 2002
and 2001 as "Assets of subsidiary held for sale" and "Liabilities of subsidiary
held for sale," respectively.
A summary of the Company's discontinued operations for the year ended October
31, 2002 and ten months ended October 31, 2001 follows. There were no
discontinued operations for the year ended December 31, 2000.
Year Ended Ten Months Ended
October 31, 2002 October 31, 2001
------------------- ------------------
Net sales $ 2,882 $ 3,365
Operating expenses 4,066 4,148
Impairment loss -- 2,305
Interest 290 288
Net loss (1,040) (3,376)
A summary of assets and liabilities of subsidiary held for sale at October 31,
2002 and 2001 are as follows:
October 31, 2002 October 31, 2001
------------------- ------------------
Assets of subsidiary held for sale:
Inventories $ 551 $ 1,131
Other current assets 177 261
Property and equipment, net 715 848
Other 95 134
------------------- ------------------
$ 1,538 $ 2,374
=================== ==================
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
5. DISCONTINUED OPERATIONS, CONTINUED
Liabilities of subsidiary held for sale
Accounts payable and accrued expenses $ 709 $ 603
Customer deposits 313 383
Long-term debt -- 1,362
Long-term debt, related parties 1,826 --
------------------- ------------------
$ 2,848 $ 2,348
=================== ==================
6. ACQUISITIONS AND PLAN OF REORGANIZATION
As previously discussed in Notes 1 and 2, on June 21, 2001, a change of control
of the Registrant occurred through an Acquisition Agreement and Plan of
Reorganization by and among Danzer, Danzer Industries, Inc., a wholly owned
subsidiary of Danzer, and Partners, Timothy S. Durham (the newly elected
Chairman of the Board of Danzer), and other individual owners of Pyramid and
Champion. On the Acquisition Date, Danzer acquired: all of the outstanding
capital stock of Pyramid in exchange for 810,099 shares of Danzer Series C
Preferred Stock ("Danzer Preferred"); all of the outstanding capital stock of
Champion for 135,712 shares of Danzer Preferred and all of the outstanding
capital stock of U.S. Rubber for 1,025,151 shares of Danzer Preferred. On July
31, 2001, Danzer acquired all of the outstanding capital stock of United
Acquisition, Inc. ("UAI"), the holding company formed to acquire assets of
United, from Partners for 2,593,099 shares of Danzer Preferred.
After the series of transactions were completed on July 31, 2001, Partners owned
75.42% of the total voting, convertible capital stock (Preferred) of Danzer. The
preacquisiton Danzer shareholders and their successors owned the remaining
capital stock representing 24.58% of the total voting capital stock (Common).
Since the U.S. Rubber Companies are so much larger than Danzer, and the existing
U.S. Rubber shareholders obtained a majority interest in the stock of Danzer,
they have been treated, for accounting purposes, as the acquirer in the
Reorganization (reverse merger). In addition, on July 31, 2001, Partners,
through UAI, acquired substantially all of the assets of United, an
Indiana-based manufacturer of enclosed cargo and specialty trailers, for
approximately $15,358. The purchase price and purchase accounting has been
allocated to the assets and liabilities of United based on their fair values.
Partners exchanged 100% of its shares of UAI for shares of Series C Preferred
Stock of Danzer. As a result, UAI became a wholly owned subsidiary of Danzer and
will operate under the name of "United Expressline, Inc."
ACQUISITION OF DANZER AND SUBSIDIARY:
The purchase price and purchase accounting was allocated to the assets and
liabilities of Danzer based on their fair values. The purchase price was based
on the value of Danzer's equity determined by a third-party appraisal company of
$3,257 plus acquisition costs of $964.
An independent third-party appraisal company conducted a valuation of Danzer's
stock. The valuation allocation to tangible assets included $2,300 and $1,536 of
net liabilities assumed. The excess of the purchase price over the fair value of
the identifiable tangible and intangible net assets of $3,457 was allocated to
goodwill. Of this amount, $650 was allocated to Danzer and $2,807 allocated to
Danzer Industries, its subsidiary.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
6. ACQUISITIONS AND PLAN OF REORGANIZATION, CONTINUED
ACQUISITION OF UNITED EXPRESSLINE, INC.:
An independent third-party appraisal company conducted a valuation of United's
intangible assets. These intangibles include existing brand name, noncompete,
and the customer base. The valuation of intangibles included $822 for brand
name, $886 for noncompete, and $105 for the customer base. The excess of the
purchase price of $15,358 over the fair value of the identifiable tangible and
intangible net assets of $5,821 has been allocated to goodwill. The value
assigned to tangible assets totaled $7,563.
The following schedule is a description of acquisition costs of Danzer and
United Expressline, Inc. and the respective purchase price allocations:
Danzer United
---------------------------------------
Purchase price:
Preferred stock $ 3,257 $ --
Cash to seller -- 11,050
Seller note -- 1,500
Liabilities assumed -- 1,670
Acquisition costs, including amounts to related
parties (see Note 16) 964 1,138
---------------------------------------
Total purchase price $ 4,221 $ 15,358
=======================================
Purchase price allocation:
Current assets, including accounts receivable
and inventory, net of current liabilities
assumed $ 329 $ 5,559
Land, property and equipment 2,300 2,004
Goodwill 3,457 5,829
Intangible assets -- 1,813
Other assets 65 153
Less debt assumed (1,930) --
---------------------------------------
Total purchase price allocation $ 4,221 $ 15,358
=======================================
PRO FORMA INFORMATION:
The unaudited condensed consolidated results of operations on a pro forma basis
as if the reorganization had occurred as of the beginning of the periods
projected are as follows:
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
6. ACQUISITIONS AND PLAN OF REORGANIZATION, CONTINUED
The unaudited condensed consolidated results of operations shown below are
presented on a pro forma basis and represent the results of Danzer, Danzer
Industries, U.S. Rubber, Pyramid, DW Leasing and Obsidian Leasing on a combined
basis. Champion has been excluded from the amounts below, as it is currently
shown as discontinued operations. In addition, United is treated as if the
business combinations of these entities occurred at the beginning of the periods
presented. The schedule below includes all depreciation, amortization and
nonrecurring charges for all entities for the periods shown.
Ten Months Ended Year Ended
October 31, December 31,
2001 2000
----------------------------------------
Net sales $ 49,830 $ 61,320
Income (loss) from continuing
operations $ (491) $ 150
Income (loss) from continuing
operations per share - basic and
diluted $ (.01) $ .00
The pro forma financial information is presented for informational purposes only
and is not indicative of the operating results that would have occurred had the
Reorganization been consummated as of the above dates, nor are they necessarily
indicative of future operating results.
7. INVENTORIES
Inventories are stated at the lower-of-cost (first-in, first-out method) or
market and are comprised of the following components:
October 31, October 31,
2002 2001
------------------ -------------------
Raw materials $ 3,655 $ 3,470
Work-in-process 709 604
Finished goods 3,417 2,322
Valuation reserve (466) (833)
------------------ -------------------
Total $ 7,315 $ 5,563
================== ===================
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
7. INVENTORIES, CONTINUED
The Company provides valuation reserves for inventory considered obsolete or not
currently available for use in production. Inventory reserves at U.S. Rubber are
related to excess scrap butyl rubber not currently available for use without
further processing; therefore, it has minimal value. Changes in the valuation
reserve are as follows:
U.S. Rubber United Total
------------------ ------------------ ------------------
Balance at January 1, 2001 $ (1,338) $ -- $ (1,338)
Provision for losses (60) (13) (73)
Use of reserved inventory 578 -- 578
------------------ ------------------ ------------------
Balance at October 31, 2001 (820) (13) (833)
Provision for losses (50) -- (50)
Use of reserved inventory 404 13 417
------------------ ------------------ ------------------
Balance at October 31, 2002 $ (466) $ -- $ (466)
================== ================== ==================
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized by major classification as follows:
October 31, October 31,
2002 2001
------------------ -------------------
Land and improvements $ 488 $ 488
Buildings and improvements 3,520 3,557
Plant machinery and equipment 9,767 8,016
Furniture and fixtures 334 247
Coach fleet and vehicles 13,312 13,407
------------------ -------------------
Total 27,421 25,715
Less accumulated depreciation (4,373) (2,331)
------------------ -------------------
Net property, plant and equipment $ 23,048 $ 23,384
================== ===================
Depreciation expense of property, plant and equipment for the year ended October
31, 2002, the ten months ended October 31, 2001, and the year ended December 31,
2000 included in continuing operations was $2,128, $1,752, and $548,
respectively.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
9. FINANCING ARRANGEMENTS
The Company has the following outstanding debt as of October 31, 2002 and 2001:
Debt Amount
-------------------------------------
October 31, October 31,
2002 2001
------------------ ------------------
U.S. Rubber
Line of credit to a bank, bearing interest at prime (4.75% at October 31, 2002),
borrowings not to exceed the greater of $4,000 or the borrowing base (85% of
eligible accounts receivable and 42% of eligible inventories), interest payable
monthly, balance due October 2005, collateralized by
substantially all assets of U.S. Rubber* $ 1,528 $ --
Note payable to a bank, interest payable monthly at prime plus .50% (5.25% at
October 31, 2002), monthly principal payments of $48, due October 2005,
collateralized by substantially all assets of U.S. Rubber.* 4,000 --
Note payable to DC Investments, LLC, interest payable monthly at 15%, balloon
payment due March 2007, subordinate to bank debt. 700 --
Other 76 88
Line of credit -- 1,732
Notes payable to a bank -- 2,861
Notes payable to former owner (SerVaas, Inc.) -- 2,480
------------------ ------------------
Subtotal U.S. Rubber 6,304 7,161
------------------ ------------------
*U.S. Rubber was in technical default of a loan covenant with its primary lender
at October 31, 2002. The Company has obtained a waiver of the violation from its
lender and a modification to the covenant requirements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
9. FINANCING ARRANGEMENTS, CONTINUED
Debt Amount
-------------------------------------
October 31, October 31,
2002 2001
------------------ ------------------
Champion
Note payable to The Markpoint Company, interest payable monthly at 13.50%,
commencing June 1, 2000, balloon payment of outstanding principal balance due
May 2005, collateralized by substantially all assets of Champion and
subordinate to notes payable to DC Investments LLC * $ 1,250 $ 1,250
Notes payable to DC Investments, LLC, interest payable monthly at rates
ranging from 5.25% to 5.50%, balloon payments due January 2004 and June 2005 1,794 --
Other 32 15
Line of credit, to bank -- 200
Notes payable to a bank -- 1,147
------------------ ------------------
Subtotal Champion 3,076 2,612
------------------ ------------------
*Champion was in technical default of all its debt with The Markpoint Company in
2002. The Company has reached agreement with The Markpoint Company to settle the
debt as further discussed in Note 17. As a result of this agreement, $1,013 of
the debt due The Markpoint Company has been classified as current.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
9. FINANCING ARRANGEMENTS, CONTINUED
Debt Amount
-------------------------------------
October 31, October 31,
2002 2001
------------------ ------------------
Pyramid, DW Leasing and Obsidian Leasing
Various installment loans, repayable in monthly installments totaling $135
including interest ranging from the three-month LIBOR rate plus .12% (1.82% at
October 31, 2002) to 13.1% through November 2007 and applicable balloon
payments thereafter through December 2007, less unamortized discount ($387 at
October 31, 2002) first lien on assets financed (finance acquisition and asset
purchases). A portion of the borrowings guaranteed by the members of
DW Leasing. $ 10,170 $ 12,929
Former shareholders of Pyramid and related companies installment loans,
repayable in monthly installments of interest at 9% through December 2002 with
a balloon payment in January 2003, collateralized by Security Agreements for
Pyramid, DW Leasing and the members of DW Leasing (finance
acquisition), refinanced subsequent to year end. 928 928
Note payable to Fair Holdings, Inc., repayable in monthly installments of
interest ranging from 10% to 14% through October 2012 and applicable balloon
payments through November 2012. 2,138 --
Other 37 31
------------------ ------------------
Subtotal Pyramid, DW Leasing, and Obsidian Leasing 13,273 13,888
------------------ ------------------
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
9. FINANCING ARRANGEMENTS, CONTINUED
Debt Amount
-------------------------------------
October 31, October 31,
2002 2001
------------------ ------------------
Danzer Industries
Line of credit to a bank, maximum borrowing equal to $1,000, with a base of 80%
of eligible accounts receivable; plus 50% of raw material, work-in-process and
finished goods inventory. Interest payable monthly at the LIBOR Daily Floating
Rate plus 3.2% (4.94% at October 31, 2002), due March 2002, collateralized by
substantially all assets of Danzer Industries
and guaranteed by Obsidian Enterprises, Inc.* $ 875 $ 75
Note payable to a bank, requires monthly principal installments of $6 plus
interest at the LIBOR Daily Floating Rate plus 3.2% (4.94% at October 31,
2002), due August 15, 2006. Collateralized by substantially all assets of
Danzer Industries and guaranteed by Obsidian Enterprises, Inc.* 917 983
Term loans payable to US Amada, Ltd. Monthly payments currently aggregating $13
including interest at 10%, loans due January 2003, collateralized by
equipment financed 157 285
Equipment loans payable--monthly payments currently aggregating $2 including
interest of 9.50% to 11.30% through November 2006. Collateralized by
equipment financed. 88 53
Other 27 10
------------------ ------------------
Subtotal Danzer Industries 2,064 1,406
------------------ ------------------
*In 2002, Danzer Industries was in technical default of certain loan covenants,
as well as being in excess of borrowing base amounts in its credit agreement
related to the line of credit and $1,000 note payable. Danzer and the bank have
entered into a forbearance agreement which requires payment of these amounts by
March 31, 2003. Accordingly, all related debt has been classified as current.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
9. FINANCING ARRANGEMENTS, CONTINUED
Debt Amount
-------------------------------------
October 31, October 31,
2002 2001
------------------ ------------------
United
Line of credit to a bank, maximum borrowing equal to $3,750, with a base of 80%
of eligible accounts receivable plus 50% of raw material, work-in-process and
finished goods inventory. Interest payable monthly at prime plus .75% (5.50% at
October 31, 2002), due February 1, 2004. Collateralized by substantially all
assets of United and guaranteed by
Obsidian Enterprises, Inc.* $ 3,088 $ 3,111
Notes payable to a bank, requires monthly principal installments of $48 plus
interest ranging from prime plus 1% (5.75% at October 31, 2002) to prime plus
2% (6.75 at October 31, 2002), due through July 2006, collateralized by
substantially all assets of United and guaranteed by Obsidian Enterprises,
Inc.* 2,054 2,989
Subordinated note payable to Huntington Capital Investment Company, interest
payable quarterly at 14% per annum, balloon payment of outstanding principal
balance due July 26, 2006, less unamortized discount ($1,309 and $1,470 at
October 31, 2002 and 2001, respectively). Unsecured and subordinate to line
of credit and notes payable above.* 2,191 2,030
Note payable to former shareholder, interest payable monthly at 9% per annum,
balloon payment of outstanding principal balance due July 27, 2006. Unsecured
and subordinate to line of credit, notes payable and Huntington
debt above.* 1,500 1,500
Note payable to Renaissance (formerly parent Danzer Corporation), interest
payable monthly at 8% per annum, with monthly principal payments beginning July
2004 at a rate of $10 for each $1,000 of outstanding principal, due July 2008.
Convertible at the option of the holder to common stock of Obsidian Enterprises
at a conversion price of $.10 per share. The loan agreement also restricts
dividend payments without the prior consent of the
lender.* 500 500
Note payable to a former shareholder, requires monthly principal installments
of $16 including interest at 9%, due March 2003* 77 --
Other 83 112
------------------ ------------------
Subtotal United 9,493 10,242
------------------ ------------------
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
9. FINANCING ARRANGEMENTS, CONTINUED
Debt Amount
-------------------------------------
October 31, October 31,
2002 2001
------------------ ------------------
United, continued
*United was in technical default of certain loan covenants with its senior and
subordinated lender at October 2002. United has obtained waivers of the
violations from the lenders and modifications of various covenants with these
lenders.
Obsidian Enterprises, Inc.
Line of credit to Fair Holdings, maximum borrowing equal to $5,000, interest
payable monthly at 10%, due January 2005 1,798 --
Note payable to Fair Holdings, interest payable monthly at 15%, balloon
payment due March 2007 774 --
Note payable to Fair Holdings, interest payable monthly at 5.25%, due October
2005 108 --
------------------ ------------------
Subtotal Obsidian Enterprises, Inc. 2,680 --
------------------ ------------------
Total all companies 36,890 35,309
Less liabilities of subsidiary held for sale (1,826) (1,362)
Less related-party amounts presented separately (5,518) --
Less current portion (5,667) (7,871)
------------------ ------------------
$ 23,879 $ 26,076
================== ==================
Following are the maturities of long-term debt for each of the next five years
and thereafter:
2003 $ 5,329***
2004 5,588
2005 11,977
2006 6,581
2007 2,050
Thereafter 3,539
-------------------
$ 35,064
===================
***The current portion of long-term debt includes $1,863 of amounts in default
and classified as current.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
9. FINANCING ARRANGEMENTS, CONTINUED
Various subsidiary companies were in violation of requirements to provide
year-end financial statements to various lenders within 90 days of the close of
the 2002 year end. Management received an extension of time from the lenders.
At October 31, 2002, the Company was in violation of negative covenants with
Renaissance US Growth & Income Trust PLC and BFSUS Special Opportunities Trust
PLC, the holders of debentures that completed the financing of United. The
Company received a waiver of the violations as of October 31, 2002 and obtained
modifications of terms with the debenture holders to provide for less stringent
covenants. In exchange for the waiver and modifications, the Company issued
warrants to the debenture holders to purchase up to 16,000 shares of the
Company's common stock at an exercise price of $.20 per share.
The Company has an agreement with Partners that gives the Company the right to
mandate a capital contribution from Partners if the lenders to U.S. Rubber
and/or United were to declare a default. In that event, the Company has the
right to enforce a capital contribution agreement with Partners up to $1,620 on
U.S. Rubber and $1,000 on United to fund the respective subsidiary's shortfall.
Those payments, if any, would be applied directly to reduce the respective
subsidiary's debt obligations to the lender.
The following details significant changes in debt during the year ended October
31, 2002:
U.S. RUBBER:
During February 2002, U.S. Rubber entered into a "Second Amendment to Credit
Agreement" with its then primary lender. The terms of the amendment required
scheduled debt service payments under substantially the same terms through
November 1, 2002 when all debt outstanding with the primary lender was to become
due. The agreement also modified the terms of an operating lease with the lender
requiring payment in full of the remaining lease obligation as of November 1,
2002.
During October 2002, this debt was refinanced with a new lender. In addition,
the equipment that related to the operating lease was repurchased and the
equipment, the unamortized loss related to the 2001 transaction, as discussed in
Note 10, and its related debt has been recorded at October 31, 2002.
On March 7, 2002, the Company completed a series of transactions with U.S.
Rubber, SerVaas, Inc. ("SerVaas"), the former owner of U.S. Rubber, and DC
Investments, LLC ("DC Investments"), an entity controlled by the Company's
Chairman, whereby certain existing debt of U.S. Rubber was acquired from
SerVaas. DC Investments acquired the SerVaas interest in the debt agreement with
a remaining balance of $730, plus accrued interest of $123, for $700. U.S.
Rubber then acquired this agreement in exchange for a new note payable to DC
Investments with a face amount of $700. The note requires monthly interest
payments at 15% per annum with the principal payable March 2007. The note is
subordinate to debt outstanding with the senior lender of U.S. Rubber.
The Company also acquired the SerVaas interest in the U.S. Rubber $1,750
subordinated note payable, plus accrued interest of $255, in exchange for $700
and 30,000 shares of Series C Preferred Stock. The cash portion of the
transaction was from the proceeds of a note payable in the amount of $700 issued
to DC Investments. The note requires monthly interest payments at 15% per annum
with the principal payable March 2007.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
9. FINANCING ARRANGEMENTS, CONTINUED
No gain or loss was recognized in the SerVaas transactions because of the
involvement of related parties. The transaction resulted in an increase in
equity of the Company of $1,016, consisting of a $1,463 reduction of
liabilities, offset by a tax impact of $447.
CHAMPION:
After October 31, 2001, Champion was in violation of its Senior Credit facility
with Bank One. Champion was working under a forbearance agreement through March
15, 2002. Champion paid down the Bank One debt by $570 to Champion as
consideration for such agreements. The Company made a capital contribution of
$570 from loan proceeds from DC Investments. On March 20, 2002, DC Investments
acquired the senior lender's loan to Champion in the amount of $602 in a
nonrecourse assignment of the debt.
PYRAMID, DW LEASING AND OBSIDIAN LEASING:
During October 2002, Obsidian Leasing refinanced debt in the amount of $4,666
with Old National Bank. The refinancing was completed through both the existing
lender at 80% of the then-outstanding balance and Fair Holdings. The new terms
with the existing lender include interest at rates ranging from LIBOR plus .12 %
to LIBOR plus 5.65% and a maturity of December 2004. The remaining 20% of the
then-outstanding term notes was paid by borrowings from Fair Holdings of
approximately $1,004. The transaction resulted in a discount on the new term
loans in the amount of $387 and a loss on refinancing of $182.
During October 2002, Obsidian Leasing also refinanced debt in the amount of
$2,836 with Edgar County Bank through borrowings from both Edgar County and Fair
Holdings. Terms of the new term note with Edgar County include an 80% payoff of
the then-outstanding term notes, interest at a rate of prime plus 2.75% and a
maturity of September 2007. The remaining 20% of the then-outstanding term notes
was paid by borrowings from Fair Holdings of approximately $584. The transaction
did not result in a gain or loss.
UNITED:
On August 28, 2002, the agreements for one of the notes payable and the
revolving line of credit were amended to extend the final maturities from July
1, 2003 to July 1, 2004 for the note payable and July 1, 2002 to February 1,
2004 for the revolving line of credit. In addition, the monthly principal
installments on the note payable were decreased by $36 to $36 and maximum
borrowings on the revolving line of credit were increased from $3,500 to $3,750.
10. LEASING ARRANGEMENTS
In October 2001, the Company entered into a sales-leaseback arrangement. Under
the arrangement, the Company sold equipment and leased it back for a period of
five years. The leaseback has been accounted for as an operating lease. The loss
of $218 realized in the transaction was deferred and was being amortized to
income in proportion to rental expense over the term of the lease. Proceeds from
the sale of $1,050 were used to reduce borrowings under the line of credit.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
10. LEASING ARRANGEMENTS, CONTINUED
During October 2002, in conjunction with the refinancing described in Note 9,
the Company repurchased the equipment. The unamortized loss of $175 as of
October 24, 2002 was included as part of the equipment purchase price
capitalized.
The Company has various operating lease commitments, principally related to
machinery and equipment, office equipment, and facilities. The approximate
future minimum annual rentals for the years under the terms of these leases,
which expire on various dates through the year ending October 31, 2008, are as
follows:
Year Ending October 31,
2003 $ 450
2004 353
2005 274
2006 189
2007 124
Thereafter 7
-------------------
$ 1,397
===================
Rental expense under operating leases for the year ended October 31, 2002, ten
months ended October 31, 2001 and year ended December 31, 2000, in thousands,
was $562, $514 and $130, respectively.
11. EMPLOYEE BENEFIT PLANS
The Company, through certain of its subsidiaries, has defined contribution
401(k) plans which permit voluntary contributions up to 20% of compensation and
which provide Company-matching contributions of up to 10% of employee
contributions not to exceed 6% of employee compensation. 401(k) plan expense for
the year ended October 31, 2002, the ten-month period ended October 31, 2001 and
the year ended December 31, 2000 was approximately $148, $35 and $25,
respectively.
12. MANDATORY REDEEMABLE PREFERRED STOCK
In conjunction with the United acquisition described in Note 6, the Company
issued 386,206 shares of Series C Preferred Stock to Huntington Capital
Investment Corporation ("Huntington"), the senior subordinated lender of United.
The note purchase agreement included a provision giving Huntington the option to
require the Company to repurchase the Series C Preferred Stock. Under the terms
of the agreement, Huntington has the option of requiring the Company to
repurchase these shares at 90% of market value at the date of redemption upon
the earlier of: a) fifth anniversary of issuance of such shares, b) default
under the subordinated debt agreement, c) other factors related to a sale of
substantially all assets of the Company as defined in the agreement. At October
31, 2002, the Company had violated certain financial covenants defined in the
subordinated debt agreement with Huntington. The Company received a waiver of
these violations as of October 31, 2002 and a modification to the covenants.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
12. MANDATORY REDEEMABLE PREFERRED STOCK, CONTINUED
A portion of the note purchase agreement proceeds of $3,500 was allocated to the
stock issued based on the thirty day average closing value of the Company's
common stock prior to the transaction. As the redemption value is variable, the
Company recognizes changes in the estimated fair value each quarter. Changes in
fair value are adjusted through additional paid in capital. At October 31, 2002,
the estimated redemption requirement is $1,400 to be paid July 2006.
13. STOCKHOLDERS' EQUITY
PREFERRED STOCK:
The original capital structure of Danzer prior to the merger was comprised of
the following: 5,000,000 authorized shares of $.001 par value preferred stock;
10,500 shares authorized of the Class of 10% Cumulative Senior Preferred Stock
(Series A) with no shares issued or outstanding as 7,650 shares were retired;
(Series B) Cumulative Convertible Senior Preferred Stock with 16,000 shares
authorized and no shares issued or outstanding as 16,000 shares were retired. In
addition, the Company had 20,000,000 authorized shares of common stock with
17,760,015 shares outstanding at December 31, 2000.
In June 2001, Danzer issued an aggregate of 1,750,000 shares of Danzer
unregistered common stock in connection with the exchange of $355 of debt. On
June 21, 2001, Danzer amended its articles of incorporation to authorize up to
4,500,000 shares of Series C Preferred Stock. In conjunction with the merger and
acquisitions (described in Note 6) of June 21, the Company issued 1,970,962 of
Series C Preferred Stock. The shareholders of Pyramid and Champion then
converted 824,892 shares of preferred stock to 16,497,840 of common stock. In
addition, on July 5, 2001, the Company increased the authorized shares of common
stock by 20,000,000 to 40,000,000. On July 31, 2001, the Company issued
2,593,099 shares of additional Series C Preferred Stock related to the United
acquisition.
As a result of the reverse merger, U.S. Rubber became the accounting acquirer
and accordingly, under purchase accounting, became the Registrant. Therefore,
the 2000 financial statements became those of U.S. Rubber. However, under
purchase accounting for a reverse merger, the stockholders' equity section of
the Registrant (formerly Danzer Corporation) became the equity of the merged
entity. Accordingly, the statement of changes in stockholders' equity reflects
that purchase accounting.
On October 4, 2001, the Company changed its name from Danzer Corporation to
Obsidian Enterprises, Inc. In addition, 5,000,000 shares of Preferred Stock were
authorized with the domestication of Obsidian Enterprises, Inc. in Delaware. On
October 9, 2001, the Company filed designation of preferences, rights and
limitations of 4,600,000 shares of Series C Preferred Stock. This transaction
results in 400,000 shares of authorized but undesignated preferred stock and
cancellation of the Series A and B shares.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
13. STOCKHOLDER'S EQUITY, CONTINUED
The Series C Preferred Stock is convertible at the option of the holder at any
time, unless previously redeemed, into shares of common stock of the Company at
an initial conversion rate of 20 shares of common stock for each share of
convertible stock. However, the convertible preferred stock may not be converted
prior to the corporation filing a registration statement of such shares. Holders
of the convertible preferred stock have voting rights which entitle them to cast
on each matter submitted to a vote of the stockholders of the Company the number
of votes equal to the number of shares of common stock into which such shares of
Series C Preferred could be converted.
As previously discussed in Note 9, on March 7, 2002, the Company completed a
series of transactions with the subordinated lender at U.S. Rubber resulting in
an increase in equity and a decrease in liabilities of $1,016. The subordinated
lender received 30,000 shares of Series C Preferred Stock in this transaction.
On April 30, 2002, the Company converted $1,290 of debt and accrued interest
owed to Partners and $596 of debt and accrued interest owed to Fair to equity
through the issuance to Partners and Fair of 402,906 shares and 186,324 shares,
respectively, of Series C Preferred Stock which are convertible into an
aggregate of 11,784,600 shares of common stock of the Company.
In August 2002, warrants for 10,000 shares of Series C Convertible Stock were
exercised. The shares were issued in exchange for a cash payment of $20.
On October 24, 2002, the Company amended its Articles of Incorporation to
authorize 200,000 shares of Series D Preferred Stock. The Series D Preferred
Stock is convertible at the option of the holder at any time, unless previously
redeemed, into shares of common stock of the Company at an initial conversion
rate of 175 shares of common stock for each share of Series D Preferred Stock.
However, the stock may not be converted prior to the Company filing a
registration statement for such shares. Holders of the Series D Preferred Stock
have voting rights which entitle them to cast on each matter submitted to a vote
of the stockholders of the Company the number of votes equal to the number of
shares of common stock into which such shares of Series D Preferred could be
converted.
On October 24, 2002, 88,300 of the Series D Preferred Stock shares were sold in
the transactions described below which were exempt from Securities Act
registration under Section 4(2) of the Securities Act, relating to sales by an
issuer not involving a public offering.
On October 24, 2002, the Company converted $1,276 of debt to Partners in
exchange for 72,899 shares of Series D Preferred Stock. The conversion was the
result of Partners' requirement under the Plan of Reorganization to fund through
the purchase of additional preferred stock certain ongoing administrative
expenses of the Company to complete the Plan of Reorganization, complete all
required current and prior year audits to meet the regulatory filing
requirements, and ensure all annual and quarterly SEC filings are completed to
enable the registration of the preferred stock issued to Partners.
On October 24, 2002, the Company converted $270 of debt to Fair in exchange for
15,431 shares of Series D Preferred Stock. The conversion was the result of
Fair's agreement to cover similar expenses as Partners as described above in
excess of the amount Partners was obligated to pay.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
13. STOCKHOLDER'S EQUITY, CONTINUED
STOCK OPTIONS:
On May 7, 1990, Danzer's stockholders approved a stock option plan to issue both
"qualified" and "nonqualified" stock options. Under the plan, 800,000 options to
purchase shares of the Company's common stock may be issued at the discretion of
the Company's Board of Directors. The option price per share is determined by
the Company's Board of Directors, but in no case will the price be less than 85%
of the fair value of the common stock on the date of grant. Options under the
plan will have a term of not more than ten years with accelerated termination
upon the occurrence of certain events.
In April 1998, Danzer granted 600,000 stock options, exercisable at $.10 per
share, to its president. The options vest over two years and expire in April
2004. None of these options have been exercised as of October 31, 2002.
In September 1998, Danzer adopted a qualified incentive stock option plan under
Section 422 of the Internal Revenue Code. Options granted under the plan will be
granted at prices not less than fair value of the Company's stock at the date of
grant, have a term not more than ten years and have other restrictions as
determined by statute.
In September 1998, Danzer granted a total of 604,500 stock options, exercisable
at $.10 per share, to certain employees. The options expired November 2001. As a
result of voluntary termination, 75,000 options expired in 1999 and 192,000
options expired in 2000. The balance of 247,500 options outstanding expired
November 1, 2002.
On July 24, 2001, the Board adopted, and on October 5, 2001, the Company's
stockholders approved, the 2001 Long Term Incentive Plan (the "2001 Plan"). The
2001 Plan authorizes the granting to the Company's directors, key employees,
advisors and consultants of options intended to qualify as Incentive Options
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), options that do not so qualify ("Non-Statutory Options"),
restricted stock and Other Stock-Based Awards that are not Incentive Options or
Non-Statutory Options. The awards are payable in Common Stock and are based on
the formula which measures performance of the company. There was no performance
award expense in 2002 or 2001. No options under this plan were granted to any
employees. Options are exercisable for up to 10 years from the date of grant.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. Accordingly, no compensation expense
has been recognized for the stock option plans. Had compensation expense for the
Company's stock option plans been determined based on the fair value at the
grant date for awards consistent with the provisions of SFAS No. 123, the
Company's net income (loss) for the year ended October 31, 2002, ten months
ended October 31, 2001, and the year ended December 31, 2000 would have been
$(6,330), $(4,395), and $3, respectively. Basic and diluted net income (loss)
per share as reported would not have changed in any period presented had such
compensation expense been recorded.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
13. STOCKHOLDER'S EQUITY, CONTINUED
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 2000 (no options were granted during the year
ended October 31, 2002 and the ten months ended October 31, 2001), respectively:
risk-free interest rates of 6.4 and 5.5 percent; dividend yield of 0 percent in
both years; expected lives of 5 years; and volatility of 978 and 170 percent.
The estimated weighted average fair value of options granted during 2000 and
1999 were $0.10 and $0.05 per share, respectively.
Following is a summary of transactions of granted shares under option for the
year ended October 31, 2002, the ten months ended October 31, 2001, and year
ended December 31, 2000:
2002 2001 2000
----------------------------- ---------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------------- -------------- -------------- ------------- -------------- -------------
Outstanding, beginning of year 1,047,500 .09 1,137,500 .09 1,029,500 .09
Issued during the year -- -- -- -- 450,000 .10
Canceled or expired during the
year (247,500) .10 (90,000) .10 (192,000) .09
Exercised during the year -- -- -- -- (150,000) .10
-------------- -------------- -------------- ------------- -------------- -------------
Outstanding, end of year 800,000 .09 1,047,500 .09 1,137,500 .09
============== ============== ============== ============= ============== =============
Eligible, end of year for
exercise 800,000* .09 1,047,500 .09 1,137,500 .09
============== ============== ============== ============= ============== =============
A further summary about fixed options outstanding at October 31, 2002 is as
follows:
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Outstanding Life Price Exercisable Price
---------------- ---------------- ------------- ---------------- -------------
Exercise price of $.10 600,000* 1.5 yr. .10 600,000 .10
Exercise price of $.05 200,000 1.2 yr.** .05 200,000 .05
* In accordance with the Plan of Reorganization and Merger and the related
"Letter agreements," the above options cannot be exercised until the
Company amends its articles of incorporation to authorize shares of
approximately 120,000,000 and has registered such shares.
** Includes extension of expiration date from December 31, 2002 to December
31, 2003 approved by the Company's Board of Directors on December 13, 2002.
13. STOCKHOLDER'S EQUITY, CONTINUED
STOCK WARRANTS:
Danzer issued warrants to purchase common stock to several parties. The
following table summarizes the outstanding warrants for the year ended October
31, 2002 and the ten-month period ended October 31, 2001:
Outstanding Outstanding
Warrants Issued Warrants Warrants
October 31, During the Exercised October 31,
2001 Year Exercise Price in Period 2002
--------------- ------------ ----------------- ------------ ---------------
Common Stock:
Renaissance US Growth & Income Trust PLC -- 8,000 $.20 -- 8,000
BFSUS Special Opportunities Trust PLC -- 8,000 $.20 -- 8,000
Series C Preferred Stock:
Duncan-Smith Co., 10,000 shares, expired
August 31, 2002 10,000 -- $2.00 (10,000) --
Markpoint financing agreement expiring May
2008 associated with Champion** Zero** -- $.01 -- Zero**
** The number of warrants available under the agreement with Markpoint is
based on twenty-five percent of the fair market value of Champion to be
determined based on a formula including a multiple of EBITDA. No warrants
are currently available under this agreement based on the operating results
and stockholder's deficit of Champion. As discussed in Notes 5 and 17, the
Company has agreed to a settlement with Markpoint. Accordingly, these
warrants have been terminated.
In January 2003, the Company agreed to a modification of terms with the
debenture holders to provide for less stringent covenants. In exchange for this
modification, the Company issued warrants to each of the debenture holders to
purchase up to 8,000 shares of the Company's common stock at an exercise price
of $.20 per share. These warrants expire January 24, 2006. The issuance of the
warrants had no material impact on earnings.
CONVERTIBLE DEBT:
As described in Note 9, the Company has a note payable agreement which is
convertible by the holder to common stock totaling 5,000,000 shares at a
conversion rate of $0.10 per share.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
14. BUSINESS SEGMENT DATA AND GEOGRAPHIC DATA
The Company operates in three industry segments comprised of trailer and related
transportation equipment manufacturing; coach leasing; and butyl rubber
reclaiming. All sales are in North and South America primarily in the United
States, Canada and Brazil. Selected information by segment follows (in
thousands):
Year Ended October 31, 2002
------------------------------------------------------------------------------
Trailer Butyl Rubber
Manufacturing Coach Leasing Reclaiming Total
------------------------------------------------------------------------------
Sales:
Domestic $ 38,911 $ 6,374 $ 9,336 $ 54,621
Foreign 1,864 -- 789 2,653
------------------------------------------------------------------------------
Total $ 40,775 $ 6,374 $ 10,125 $ 57,274
Cost of goods sold $ 35,077 $ 3,357 $ 9,407 $ 47,841
Loss before taxes $ (2,089) $ (417) $ (802) $ (3,308)
Identifiable assets $ 20,155 $ 11,760 $ 11,391 $ 43,306*
Depreciation and amortization expense $ 705 $ 779 $ 1,084 $ 2,568
*Identifiable assets, as stated above $ 43,306
Assets of subsidiary held for sale 1,538
Corporate-level goodwill 650
Other corporate-level assets 429
--------------------
Total assets $ 45,923
====================
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
14. BUSINESS SEGMENT DATA AND GEOGRAPHIC DATA, CONTINUED
Ten Months Ended October 31, 2001
------------------------------------------------------------------------------
Trailer Butyl Rubber
Manufacturing Coach Leasing Reclaiming Total
------------------------------------------------------------------------------
Sales:
Domestic $ 10,100 $ 4,165 $ 9,253 $ 23,518
Foreign 550 -- 621 1,171
------------------------------------------------------------------------------
Total $ 10,650 $ 4,165 $ 9,874 $ 24,689
Cost of goods sold $ 8,955 $ 1,618 $ 8,884 $ 19,457
Loss before taxes $ (96) $ (570) $ (725) $ (1,391)
Identifiable assets $ 22,941 $ 13,330 $ 10,205 $ 46,476*
Depreciation and amortization expense $ 365 $ 785 $ 905 $ 2,055
*Identifiable assets, as stated above $ 46,476
Assets of subsidiary held for sale 2,374
--------------------
Total assets $ 48,850
====================
For the calendar year ended December 31, 2000, the Company operated in only one
segment (butyl rubber reclaiming), which was the segment of the accounting
acquirer U.S. Rubber. U.S. Rubber had foreign sales of $943 for 2000.
Obsidian Enterprises, Inc. (legal parent) allocates selling, general and
administrative expenses to the respective companies primarily based on a
percentage of sales. For the year and ten months ended October 31, 2002 and
2001, respectively, allocated corporate expenses by segment were as follows:
Year Ended Ten Months Ended
October 31, 2002 October 31, 2001
------------------- ------------------
Trailer manufacturing $ 934 $ 245
Coach leasing 146 96
Butyl rubber reclaiming 232 275
------------------- ------------------
$ 1,312 $ 616
=================== ==================
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
15. INCOME TAXES
The Company files a consolidated federal tax return. The parent and each
subsidiary record their share of the consolidated federal tax expense on a
separate-return basis. Any additional income tax expense on recovery realized as
a result of filing a consolidated tax return is recorded in consolidation. The
Company and each subsidiary file separate state income tax returns. The Company
accounts for income taxes in compliance with SFAS No. 109, Accounting for Income
Taxes. Under SFAS No. 109, deferred tax assets and liabilities are recorded for
any temporary differences between the financial statement and tax bases of
assets and liabilities, using the enacted tax rates and laws expected to be in
effect when the taxes are actually paid or recovered.
The provision for (expenses) benefit for income taxes consists of the following:
2002 2001 2000
------------------------------------------------
Current:
Federal $ -- $ -- $ 152
State (15) (36) 14
------------------------------------------------
(15) (36) 166
------------------------------------------------
Deferred:
Federal 41 350 (187)
State 7 58 (29)
------------------------------------------------
48 408 (216)
------------------------------------------------
Total $ 33 $ 372 $ (50)
================================================
A reconciliation of income tax benefit (expense) from continuing operations at
U.S. statutory rates to actual income tax benefit (expense) is as follows:
2002 2001 2000
------------------------------------------------
Benefit (tax) at statutory rate (34%) $ 1,125 $ 1,609 $ (33)
Effect of nontaxable combined entity (18) (166) --
State income tax (15) (36) (5)
Goodwill amortization -- (26) --
Non-deductible goodwill (245) -- --
Valuation reserve applied to equity (1,267)* -- --
(Increase) decrease in valuation reserve 380 (1,038) --
Other 73 29 (12)
------------------------------------------------
$ 33 $ 372 $ (50)
================================================
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
15. INCOME TAXES, CONTINUED
*On November 1, 2001, 27 coaches owned by DW Leasing were transferred to
Obsidian Leasing in a tax-free exchange, as further described in Note 1. DW
Leasing recorded a charge to equity as a deemed distribution of $1,590 on the
date of the transaction, representing the deferred tax liability associated with
the coaches transferred. A reduction of deferred tax valuation reserve of
$(1,267) was also recorded in the consolidated financial statements as an
increase in equity, as the addition of the above deferred tax liability resulted
in the Company's ability to realize additional deferred tax assets on a
consolidated basis.
Deferred income taxes represent the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and for income tax purposes. Significant components of the Company's
deferred tax assets and liabilities are as follows:
2002 2001 2000
------------------------------------------------
Deferred tax assets (liabilities):
Accounts receivable $ 199 $ 32 $ --
Inventories 307 472 517
Accrued expenses 158 117 15
Intangibles 1,004 791 --
Operating loss carryforwards 2,961 1,474 --
Property and equipment (4,497) (2,267) (171)
Other 80 (81) --
------------------------------------------------
212 538 361
Less valuation reserves (1,171) (1,537) --
------------------------------------------------
Deferred tax assets (liabilities), net $ (959) $ (999) $ 361
================================================
Included in the accompanying balance sheet under the following:
2002 2001 2000
------------------------------------------------
Deferred tax assets $ 665 $ 673 $ 532
Deferred tax liabilities (1,624) (1,672) (171)
------------------------------------------------
$ (959) $ (999) $ 361
================================================
The amount of federal tax net operating loss carryforwards available at October
31, 2002 was $8,100. Certain of these loss carryforwards were generated by
certain subsidiaries prior to the reverse merger transaction in June 2001 and
have expiration dates through the year 2021. The use of preacquisition operating
losses is subject to limitations imposed by the Internal Revenue Code.
Utilization of these loss carryforwards is impacted by such limitations.
Accordingly, the deferred tax assets related to premerger operating losses have
been reserved with a valuation allowance to the extent they are not offset by
deferred liabilities.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
15. INCOME TAXES, CONTINUED
Federal tax net operating loss carryforwards and expiration dates as of October
31, 2002 are as follows:
Premerger Expiration Dates Postmerger Expiration Dates
---------------- ----------------------- ---------------- ------------------
$ 3,105 2008 through 2021 $ 4,995 2021 through 2022
================ ================
Cash payments of income taxes for the year ended October 31, 2002, ten months
ended October 31, 2001 and for the year 2000 were $22, $44 and $8, respectively.
16. RELATED PARTIES
The Company makes advances, receives loans and conducts other business
transactions with affiliates resulting in the following amounts for the periods
ended:
October 31, October 31,
2002 2001
------------------ ------------------
Balance sheets:
Current assets:
Accounts receivable, Obsidian Capital Partners $ 181 $ --
Accounts receivable, Obsidian Capital Company 13 217
Accounts receivable, other affiliated entities 12 --
Long-term portion:
Investment banking fees, purchase accounting* -- 1,960
------------------ ------------------
Total assets $ 206 $ 2,177
================== ==================
Current liabilities:
Accounts payable, Obsidian Capital Company $ 279 $ 625
Accounts payable, stockholders 338 300
Accounts payable, DC Investments and Fair Holdings 42 --
Accounts payable, other affiliated entities 9 --
Long-term portion:
Accounts payable, Obsidian Capital Partners -- 2,170
Notes payable, DC Investments 700 --
Notes payable, Fair Holdings 3,020 --
Line of credit, Fair Holdings 1,798 --
------------------ ------------------
Total liabilities $ 6,186 $ 3,095
================== ==================
Statements of Operations:
Interest expense, DC Investments and Fair Holdings $ 322 $ --
Interest expense, Obsidian Capital Partners 58 --
Rent expense, Obsidian Capital Company 56 15
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
16. RELATED PARTIES, CONTINUED
Related-party amounts classified as current reflect those portions of the total
receivable or payable that were currently due in accordance with the terms, or
were collected or paid subsequent to year end. Amounts classified as long term
represent amounts not currently due or amounts that were converted to equity
subsequent to year end as discussed in Note 18.
On February 13, 2002, DC Investments, LLC, a related party 50% owned by Mr.
Durham (Chairman of the Company), purchased accounts receivable from DW Leasing,
recorded by DW Leasing as deposits on trailers, in the amount of $1,051. DW
Leasing used the proceeds from the purchase of the accounts receivable to pay
off the accounts payable due Obsidian Capital Company in the amount of $624 and
the amount due shareholders and other related parties in the approximate amount
of $300.
The Company was obligated to the stockholders and certain employees (that were
formerly stockholders of subsidiary companies) under note payable agreements
acquired as part of the acquisitions. In addition, the Company has entered into
note payable agreements with other affiliated entities. The details of these
notes payable are included in Note 9.
*Subsidiaries of the Company paid Obsidian Capital Company, an entity controlled
by Mr. Durham (Chairman of the Company), investment banking fees associated with
the acquisitions and related financing on the Danzer and U.S. Rubber merger and
the United acquisition. Amounts paid by U.S. Rubber, United, and Danzer in 2001
were $760, $600, and $600, respectively.
17. COMMITMENTS AND CONTINGENCIES
On April 29, 2002, Markpoint Equity Fund J.V. ("Markpoint"), a Texas joint
venture for which The Markpoint Company serves as Managing Venturer, filed an
action in the Texas District Court, Dallas County seeking payment of $1,250 owed
by Champion under the subordinated credit facility described in Note 9. On
January 27, 2003, the Company reached an agreement to settle this liability for
a cash payment in the amount of $675 and the issuance to Markpoint of 32,143
shares of the Company's Series D Preferred Stock. In addition, the agreement
provides Markpoint the option to require the Company to repurchase these shares
at a price of $21 per share. The repurchase option is available to Markpoint as
follows: 16,072 shares during the period May 1, 2003 to June 1, 2003 and 16,071
shares during the period November 1, 2003 to December 1, 2003. The repurchase
options expire if not exercised during the specified periods. The Company's
repurchase obligation is guaranteed by Mr. Durham. The sale of Champion was
completed on January 30, 2003.
It is customary practice for companies in the cargo trailer industry to enter
into repurchase agreements with lending institutions which have provided
wholesale floor-plan financing to dealers. A portion of the wholesale sales of
United are made pursuant to these agreements, which generally provide for
purchase of United's products from the lending institutions for the balance due
them in the event of repossession upon a dealer's default. The contingent
liability is spread over many dealers and financial institutions and is reduced
by the resale value of the products, which are required to be repurchased.
Expenses incurred in connection with these agreements have been immaterial. The
maximum potential repurchase commitment at October 31, 2002 was approximately
$2,000.
In the normal course of business, the Company is liable for contract completion
and product performance. In the opinion of management, such obligations will not
significantly affect the Company's financial position or results of operations.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
18. SUBSEQUENT EVENTS
On October 30, 2002, the Company's Board of Directors agreed to sell the assets
of Champion to an entity controlled by Messrs. Durham and Whitesell for the
assumption of all liabilities of Champion. The sale of Champion was completed on
January 30, 2003.
Subsequent to year end, United amended its credit agreement to provide
additional working capital during the winter months. The amendment included a
"temporary overline" line of credit with maximum borrowings not to exceed the
lesser of $650 or the remainder of the borrowing base less the outstanding
principal amount of the revolving line of credit. Interest is payable monthly at
a rate of prime plus 3/4%. The temporary overline line of credit matures on
March 31, 2003.
During January 2003, Obsidian Leasing refinanced debt in the amount of $928 to
former shareholders of Pyramid and related companies. Terms of the new note with
Fair Holdings include monthly interest payments of 13% of the outstanding
principal amount and a balloon principal payment in January 2006. Accordingly,
this debt has been classified as long term at October 31, 2002.
On December 17, 2002, Obsidian Leasing sold four coaches to DC Investments
Leasing, LLC ("DC Investments Leasing"), a newly created entity owned 50% by Mr.
Durham (Chairman of the Company) in exchange for DC Investments Leasing's
satisfaction of the debt outstanding on such coaches. In addition, DC
Investments Leasing also acquired five additional coaches that were previously
to be purchased by the Company thereby eliminating the Company's existing
purchase commitment for such coaches. DC Investments Leasing also entered into a
management agreement with Pyramid under which all nine coaches described above
will be leased by Pyramid.
On January 2, 2003, Obsidian Enterprises, Inc.'s line of credit with Fair
Holdings was amended. Maximum borrowings were increased from $3,000 to $5,000.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(dollars in thousands, except per share amounts)
YEAR ENDED OCTOBER 31, 2002
First Qtr. Ended Second Qtr. Ended Third Qtr. Ended Fourth Qtr.
1/31/02 4/30/02 7/31/02 Ended 10/31/02
------------------ ------------------- ------------------ ------------------
Net sales $ 11,466 $ 15,598 $ 15,239 $ 14,971
Gross profit 1,518 2,625 2,839 2,653
Income (loss) from continuing
operations*** (1,207) (570) 471 (1,531)**
Income (loss) from continuing
operations per basic common and common
equivalent share*** (.01) (.00) .00 (.01)
TEN MONTHS ENDED OCTOBER 31, 2001
First Qtr.* Second Qtr. Ended Third Qtr. Ended Fourth Qtr.
Ended 1/31/01 4/30/01 7/31/01 Ended 10/31/01
------------------ ------------------- ------------------ ------------------
Net sales $ 3,626 $ 4,014 $ 4,685 $ 14,474
Gross profit 408 911 1,260 2,764
Loss from continuing operations*** (218) (408) (196) (541)
Loss from continuing operations per
common and common equivalent share*** (.01) (.01) .00 (.01)
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
YEAR ENDED DECEMBER 31, 2000
First Qtr. Ended Second Qtr. Ended Third Qtr. Ended Fourth Qtr.
3/31/00 6/30/00 9/30/00 Ended 12/31/00
------------------ ------------------- ------------------ ------------------
Net sales $ 3,059 $ 3,024 $ 3,233 $ 3,267
Gross profit (loss) 301 372 373 147
Net income (loss) 86 (118) 146 (66)
Net income (loss) per common and common
equivalent share -- -- -- --
* The first quarter for U.S. Rubber includes the first and second month
(November and December) of 2000.
** The fourth quarter includes the charge for the impairment of goodwill of
$720 for October 31, 2002.
*** Income (loss) from continuing operations for the quarter ended October 31,
2001 and for the quarters ended January 31, 2003, April 30, 2003, and July
31, 2003 have been restated due to factors discussed in Note 3. Changes in
the income (loss) in each of these quarters ranged from $33 to $42. This
restatement had no impact on earnings per share.
SCHEDULE II--VALUATION AND QUALIFYING OF ACCOUNTS
Year Ended October 31, 2002
(in thousands)
Column C--Additions
-----------------------------------
Column A--Description Column (1)--Charged to (2)--Charged to
B--Balance at Column D- Column E-
Beginning of Costs and Other Deductions- Balance at
Period Expenses Accounts--Describe Describe End of Period
- ----------------------------- ---------------- ----------------- ----------------- ----------------- -----------------
Allowance for doubtful
accounts $ 80 $ 415 $ -- $ -- $ 495
================ ================= ================= ================= =================
Inventory valuation
allowances $ 833 $ 50 $ -- $ 417* $ 466
================ ================= ================= ================= =================
Deferred tax valuation
reserve $ 1,551 $ -- $ -- $ 380*** $ 1,171
================ ================= ================= ================= =================
Ten Months Ended October 31, 2001
(in thousands)
Column C--Additions
---------------------------------
Column A--Description Column B--Balance (1)--Charged (2)--Charged to Column D- Column E-
at Beginning of to Costs and Other Deductions Balance at
Period Expenses Accounts--Describe Describe End of Period
- ----------------------------- ------------------ --------------- ----------------- ----------------- -----------------
Allowance for doubtful
accounts $ -- $ 80 $ -- $ -- $ 80
================== =============== ================= ================= =================
Inventory valuation
allowances $ 1,338 $ 73 $ -- $ 578* $ 833
================== =============== ================= ================= =================
Deferred tax valuation
reserve $ -- $ 1,038 $ 513** $ -- $ 1,551
================== =============== ================= ================= =================
*Use of inventory previously reserved.
**Valuation reserve of acquired companies recorded in purchase accounting.
***Realization of operating losses against deferred tax liabilities.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
As previously reported in a Current Report Form 8-K filed on November 13, 2001,
the Audit Committee of the Company's Board of Directors decided on November 7,
2001, to dismiss Linton, Shafer & Company, P.A. ("Linton Shafer") as the
Company's independent auditors. The audit reports of Linton Shafer on the
consolidated financial statements of the Company as of and for the years ended
October 31, 2000 and 1999 did not contain any adverse opinion or disclaimer of
opinion, nor were they qualified or modified as to uncertainty, audit scope or
accounting principles. During the fiscal years ended October 31, 2000 and 1999
and the period following October 31, 2000, there were no disagreements between
the Company and Linton Shafer on any matter regarding accounting principles or
practices, financial statement disclosure, or auditing scope or procedure. A
letter from Linton Shafer confirming the statements set forth in this Item 9 was
attached as Exhibit 16 to the Current Report on Form 8-K filed on November 13,
2001.
On November 7, 2001, the Board of Directors engaged McGladrey & Pullen, LLP
("McGladrey") as the Company's new independent auditors. During the fiscal years
ended October 31, 2000 and 1999 and during the period following October 31,
2000, the Company did not consult McGladrey regarding either (i) the application
of accounting principles to a specified transaction, either completed or
proposed, or the type of audit opinion that might be rendered on the Company's
financial statements, and neither a written report was provided to the Company
nor oral advice provided that McGladrey concluded was an important factor
considered by the Company in reaching a decision as to an accounting, auditing
or financial reporting issue; or (ii) any matter that was either the subject of
a disagreement or a reportable event.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information with respect to all Directors of the
Company, including their ages, present principal occupations, other business
experience during the last five years, membership on committees of the Board and
directorships in other publicly held companies.
Name Age Position Director Since
Timothy S. Durham 40 Chief Executive Officer and Chairman of the Board 2001
Terry G. Whitesell 63 President, Chief Operating Officer and Director 2001
Jeffrey W. Osler 34 Executive Vice President, Secretary, Treasurer and 2001
Director
Goodhue W. Smith, III+ 51 Director 1997
John A. Schmit*+ 33 Director 2001
D. Scott McKain* 47 Vice Chairman and Director 2001
Daniel S. Laikin+ 40 Director 2001
- ---------
*Members of the Compensation Committee
+Members of the Audit Committee
Mr. Durham has served as the Chief Executive Officer and Chairman of the Board
and as a director of the Company since June 2001. He has served as a Managing
Member and Chief Executive Officer of Obsidian Capital Company LLC, which is the
general partner of Obsidian Capital Partners LP, since April 2000. Beginning in
1998, Mr. Durham founded and maintained a controlling interest in several
investment funds, including Durham Capital Corporation, Durham Hitchcock
Whitesell and Company LLC, and Durham Whitesell & Associates LLC. From 1991 to
1998, Mr. Durham served in various capacities at Carpenter Industries, Inc.,
including as Vice Chairman, President and Chief Executive Officer. Mr. Durham
also serves as a director of National Lampoon, Inc. Mr. Durham is Mr. Osler's
brother-in-law.
Mr. Whitesell has served as the President and Chief Operating Officer and as a
director of the Company since June 2001. Prior to that time he co-founded
several entities with Mr. Durham, including Obsidian Capital Company, LLC,
Durham Hitchcock Whitesell and Company LLC and Durham Whitesell & Associates
LLC. Mr. Whitesell also is a Managing Member of Obsidian Capital Company LLC.
From April 1992 until September 1998, Mr. Whitesell served as Executive Vice
President of Carpenter Industries, Inc.
Mr. Osler has served as the Executive Vice President, Secretary and Treasurer
and as a director of the Company since June 2001. He also is a Managing Member
of Obsidian Capital Company LLC. and has served as Senior Vice President at
Durham Whitesell & Associates LLC and Durham Capital Corporation since September
1998. Prior to that time, Mr. Osler served as the General Manager of Hilton Head
National Golf Club. Mr. Osler is Mr. Durham's brother-in-law.
Mr. Smith has been a director of the Company since 1997. Mr. Smith founded
Duncan-Smith Investments, Co., an investment banking firm in San Antonio, Texas,
in 1978 and since that time has served as its Secretary and Treasurer. Mr. Smith
also is a director of Citizens National Bank of Milam County, and Ray Ellison
Mortgage Acceptance Co.
John A. Schmit has been a director since July 2001. Mr. Schmit joined
Renaissance Capital Group, Inc. in 1997 and is a Vice President--Investments.
Prior to joining Renaissance Capital Group, Mr. Schmit practiced law with the
law firm of Gibson, Ochsner & Adkins in Amarillo, Texas from September 1992 to
September 1994. Between August 1994 and May 1996, Mr. Schmit attended Georgetown
University where he earned his L.L.M. in International and Comparative Law.
Mr. McKain has been a director of the Company since September 2001. He has
served as the Chairman of McKain Performance Group since 1981. Mr. McKain also
has been the Vice Chairman of Durham Capital Corporation since 1999. From 1983
to 1998, Mr. McKain was a broadcast journalist and television commentator. Mr.
McKain has also authored several books and is a keynote speaker who presents
high content workshops across the nation.
Mr. Laikin has served as a director of the Company since September 2001. Mr.
Laikin is Chief Operating Officer and a director of National Lampoon, Inc., the
owner of the "National Lampoon" trademark and engaged in the entertainment
business. He has been a Managing Member of Fourleaf Management LLC, a management
company of an investment fund that invests in technology related entities, since
1999. Mr. Laikin served as the Chairman of the Board of Biltmore Homes from 1993
to 1998.
EXECUTIVE OFFICERS
The Company's executive officers are appointed by the Board of Directors and
hold office at the pleasure of the Board until successors are appointed and have
qualified. Compliance with Section 16(a) of the Securities Exchange Act of 1934
requires the Company's directors, executive officers, and persons who own more
than ten percent of the Company's Common Stock ("10% Shareholders") to file
reports of ownership and reports of changes in ownership of the Company's Common
Stock with the Securities Exchange Commission ("SEC"). Officers, Directors and
Shareholders are required by SEC regulation to furnish the Company with copies
of all forms they file under Section 16 (a). Based solely on its review of the
copies of such forms received by it with respect to its fiscal year ended
October 31, 2002, and written representations from certain reporting persons
that no other reports were required to those persons, the Company believes that
its officers, directors and 10% Shareholders have complied with all Section
16(a) requirements.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information concerning the compensation
paid or accrued by the Company for services rendered during the Company's past
three fiscal years ended October 31, 2001 by the CEO and executive officers.
Long Term
Annual Compensation Compensation Awards
- ------------------------- --------------------------------------------------- -------------------- -----------------
Name and Securities All Other
Underlying
Principal Position Year Salary Bonus Options/SARs Compensation
------------------ ---- ------ ----- ------------ ------------
Timothy S. Durham, 2002 $75,000 $0 $0 $0
Chief Executive 2001 $27,404 $0 $0 $0
Officer(1) 2000 N/A N/A N/A N/A
- ------------------------- ---------- ------------------- -------------------- -------------------- -----------------
M. E. Williams, 2002 N/A N/A $0 $0
Chief Executive 2001 $110,000 $12,824 $0 $0
Officer(2) 2000 $107,609 $9,375 $0 $3,125
- ------------------------- ---------- ------------------- -------------------- -------------------- -----------------
(1) Mr. Durham was elected Chief Executive Officer and Chairman of the Board on
June 21, 2001.
(2) Mr. Williams resigned as Chief Executive Officer on June 21, 2001.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
No grants were made during fiscal 2002 pursuant to the Company's 1999 Stock
Option Plan or the Company's 2002 Long Term Incentive Plan.
On December 13, 2002, the Company's Board of Directors approved the extension of
options to acquire 200,000 shares of common stock from December 31, 2002 to
December 31, 2003.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
The following table sets forth information for 2002 with respect to Option/SAR
exercises by the executive officers named in the Summary Compensation Table and
the value of unexercised options and SARs as of October 31, 2002.
Shares Acquired on Value Realized ($) Number of Value of Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs at
Exercise (#) Fiscal Year-End (#) Fiscal Year-End ($)
- ----------------------------- --------------------- ---------------------- --------------------- ---------------------
Name Exercisable/ Exercisable/
Unexercisable Unexercisable
- ----------------------------- --------------------- ---------------------- --------------------- ---------------------
- ----------------------------- --------------------- ---------------------- --------------------- ---------------------
M. E. Williams -0- -0- 725,000/0 $78,750/01
- ----------------------------- --------------------- ---------------------- --------------------- ---------------------
COMPENSATION OF DIRECTORS
Directors who are not employees of the Company are entitled to a board meeting
attendance fee of $750 plus reimbursement of expenses.
EMPLOYMENT AND CHANGE OF CONTROL AGREEMENTS
The Company currently does not have any employment agreements with any of the
Company's executive officers.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to beneficial ownership
of common stock as of January 22, 2003, by (i) all persons known to the Company
to be the beneficial owner of five percent or more of the common stock, (ii)
each director of the Company, (iii) the chief executive officer and each of the
Company's other most highly compensated executive officers whose total annual
compensation for 2002 based on salary and bonus earned during 2002 exceeded
$100,000 (the "named executive officers"); (iv) the current executive officers;
and (v) all Company directors and executive officers as a group. This table does
not include shares of common stock that may be purchased pursuant to options not
exercisable within 60 days of the record date. All persons listed have sole
voting and investment power with respect to their shares unless otherwise
indicated.
Common Stock Series C Preferred Stock Series D Preferred Stock
------------ ------------------------ ------------------------
Number of Percentage of Number of Percentage of Number of Percentage of
Shares Shares Shares Shares Shares Shares
Name and Address of Beneficially Beneficially Beneficially Beneficially Beneficially Beneficially
-
Beneficial Owner Owned Owned Owned Owned Owned Owned
---------------- ----- ----- ----- ----- ----- -----
Executive Officers and
Directors:
Timothy S. Durham (1) 103,755,219 79.6% 3,942.193 90.2% 88,330 100.0%
D. Scott McKain 810,100 2.2% -- -- -- --
Jeffrey W. Osler (2) 87,874,705 71.6% 3,755,869 86.0% 72,899 82.5%
John A. Schmit (3) 5,000,000 13.9% -- -- -- --
Goodhue W. Smith, III (4) 298,334 * 5,000 * -- --
Terry G. Whitesell (5) 94,787,685 76.5% 3,755,869 86.0% 72,899 82.5%
All current officers and
directors as a group 117,576,693 90.2% 3,947,193 90.4% 88,330 100.0%
Other 5% Owners:
Fair Holdings, Inc.(6) 6,426,905 15.1% 186,324 4.3% 15,431 17.5%
Huntington Capital -
Investment Company (7) - -- 386,206 8.8% -- --
Obsidian Capital Partners,
L.P. (8) 87,874,705 70.9% 3,755,869 86.0% 72,899 82.5%
Richard W. Snyder 1,946,667 5.4% -- -- -- --
The number of shares of common stock above also includes the preferred stock
converted to common equivalents.
- ---------
*less than one percent
(1) Includes 7,338,103 shares of common stock directly owned by Mr. Durham;
2,088,366 shares held by Diamond Investments, LLC, for which Mr. Durham
serves as Managing Member and for which shares Mr. Durham may be deemed to
share voting and dispositive power; 3,755,869 shares of Series C preferred
stock and 72,899 shares of Series D preferred stock over which Mr. Durham
shares voting and dispositive power and that may be deemed to be
beneficially owned by Mr. Durham due to his position as a managing member
of Obsidian Capital Company, LLC, which is the general partner of Obsidian
Capital Partners, LP, which directly owns such shares; 186,324 shares of
Series C preferred stock and 15,431 shares of Series D preferred stock over
which Mr. Durham shares voting and dispositive power and that may be deemed
to be beneficially owned by Mr. Durham due to his position as an executive
officer and shareholder of Fair Holdings, Inc. which directly owns such
shares; and 27,140 shares of common stock over which Mr. Durham shares
voting and dispositive power and that may be deemed to be beneficially
owned by Mr. Durham due to his position as a managing member of Durham
Whitesell and Associates, LLC, which directly owns such shares. The address
of Mr. Durham is 111 Monument Circle, Suite 4800, Indianapolis, Indiana
46204.
(2) Includes 827,200 shares of common stock directly owned by Mr. Osler; and
3,755,869 shares of Series C preferred stock and 72,899 shares of Series D
preferred stock over which Mr. Osler shares voting and dispositive power
and that may be deemed to be beneficially owned by Mr. Osler due to his
position as a managing member of Obsidian Capital Company, LLC, which is
the general partner of Obsidian Capital Partners, LP, which directly owns
such shares. The address of Mr. Osler is 111 Monument Circle, Suite 4800,
Indianapolis, Indiana 46204.
(3) Represents shares that may be acquired pursuant to convertible debentures
issued by the Registrant on July 19, 2001, to Renaissance US Growth
Investment Trust PLC ("RUSGIT") and BFSUS Special Opportunities Trust PLC
("BFS"). Mr. Schmit is Vice President of Renaissance Capital Group, Inc.,
the investment manager of RUSGIT and BFS. Mr. Schmit disclaims beneficial
ownership as to the shares beneficially owned by RUSGIT and BFS. The
address of Mr. Schmit is 8080 North Central Expressway, Suite 210, Dallas,
Texas 75206.
(4) Includes 81,667 shares of common stock and 5,000 shares of Series C
Preferred Stock directly owned by Mr. Smith. The address of Mr. Smith is
711 Navarro, San Antonio, Texas 78205.
(5) Includes 6,885,840 shares of common stock directly owned by Mr. Whitesell;
3,755,869 shares of Series C preferred stock and 72,899 shares of Series D
preferred stock over which Mr. Whitesell shares voting and dispositive
power and that may be deemed to be beneficially owned by Mr. Whitesell due
to his position as a managing member of Obsidian Capital Company, LLC,
which is the general partner of Obsidian Capital Partners, LP, which
directly owns such shares; and 27,140 shares of common stock over which Mr.
Whitesell shares voting and dispositive power and that may be deemed to be
beneficially owned by Mr. Whitesell due to his position as a managing
member of Durham Whitesell and Associates, LLC, which directly owns such
shares. The address of Mr. Whitesell is 111 Monument Circle, Suite 4800,
Indianapolis, Indiana 46204.
(6) Consists of 186,324 shares of Series C preferred stock and 15,431 shares of
Series D preferred stock directly owned by Fair Holdings, Inc.
(7) Based on the information reported in a Schedule 13G filed with the SEC on
August 6, 2001.
(8) Consists of 3,755,869 shares of Series C preferred stock and 72,899 shares
of Series D preferred stock directly owned by Obsidian Capital Partners,
L.P. Voting and dispositive power over the shares may be deemed to be held
by Obsidian Capital Partners, LP, Obsidian Capital Company, LLC and the
managing members of Obsidian Capital Company LLC, which include Messrs.
Durham, Whitesell and Osler.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
All dollar amounts in this Item 13 are in thousands (except for share and per
share information).
A number of related party transactions occurred in connection with the change in
control and reorganization of the Company in 2001. The reorganization
transactions occurred in two parts:
o On June 21, 2001, the Company acquired from Obsidian Capital Partners,
L.P., Mr. Durham and certain other shareholders all of the shares of
Pyramid Coach, Inc.("Pyramid"); Champion Trailer, Inc. ("Champion") and
U.S. Rubber Reclaiming, Inc. ("U.S. Rubber").
o On July 31, 2001, the Company acquired from Obsidian Capital Partners, L.P.
and Mr. Durham substantially all of the assets of United Acquisition, Inc.,
which the Company now operates as United Expressline, Inc. ("United").
Prior to these transactions, DW Leasing, LLC ("DW Leasing"), a company owned by
Messrs. Durham and Whitesell had entered into a number of transactions with
Pyramid whereby coaches owned by DW Leasing were operated by Pyramid and the
debt on these coaches were cross guaranteed by DW Leasing and Pyramid. Although
the Company does not own any interest in DW Leasing, the accounts of DW Leasing
are included in the financial statements of the Company (see Note 1 to the
Company's Financial Statements).
The agreements entered into at the time of the Reorganization contemplated that
the coaches and related debt would be promptly transferred by DW Leasing to the
Company's subsidiary, Obsidian Leasing Co., Inc. ("Obsidian Leasing"). Twenty
seven coaches were transferred by DW Leasing to Obsidian Leasing in November
2001 in consideration of the assumption of the related debt. Pyramid continues
to operate the remaining seven coaches for DW Leasing pursuant to a management
agreement. Prior to the Reorganization described above, DW Leasing and Pyramid
were privately owned and structured in a tax-efficient manner. Because of the
nature of this structure, transfer of the remaining seven coaches owned by DW
Leasing would have adverse tax consequences to the owners of DW Leasing which
were not contemplated in the Reorganization. Accordingly, the Company has agreed
to continue to operate these coaches through DW Leasing. During 2002, the
Company received gross revenue of $674 from the coaches operated by Pyramid for
DW Leasing and paid fees of $538 to DW Leasing for the use of the coaches.
During 2002 and 2001, Obsidian Capital Partners, LP, the majority shareholder of
the Company, advanced funds to the Company. These funds were advanced to fund
losses of Champion and to fund the professional fees with respect to the filings
with the Securities and Exchange Commission in connection with the
reorganization in 2001, and closing costs in connection with the reorganization
and the closing of the purchase of United. The maximum amount outstanding during
2002, related to funding of Champion losses and funding professional fees was
$1,290 and $1,275, respectively. On April 25, 2002, $1,290 of the amounts
advanced was converted to Series C Preferred Stock. On October 24, 2002, $1,275
of the amounts advanced was converted to Series D Preferred Stock. Advances
during 2002 were as follows:
Amounts
Additional Converted to
Balance at Advances and Equity for Balance at
October 31, 2001 Interest Accrued Preferred Stock October 31, 2002
------------------ ------------------- ------------------ ------------------
Advances to fund Champion $ 1,222 $ 68 $ (1,290) $ --
Advances to fund professional fees $ 948 $ 327 $ (1,275) $ --
During 2002, Fair Holdings, Inc. advanced funds to the Company to fund a debt
reduction at Champion and to fund certain professional fees with respect to the
filing with the Securities and Exchange Commission. The maximum amount
outstanding in 2002 to Fair Holdings related to debt restructuring at Champion
and funding certain professional fees was $596 and $270, respectively. On April
25, 2002, $596 of the amounts advanced was converted to Series C Preferred
Stock. On October 24, 2002, $270 of the amounts advanced was converted to Series
D Preferred Stock. Advances during 2002 were as follows:
Amounts
Additional Converted to
Balance at Advances and Equity for Balance at
October 31, 2001 Interest Accrued Preferred Stock October 31, 2002
------------------ ------------------- ------------------ ------------------
Advances for debt reduction $ -- $ 596 $ (596) $ --
Advances for professional fees $ -- $ 270 $ (270) $ --
In addition to the advances, Fair Holdings, Inc. has provided a $5,000 line of
credit to the Company. The maximum amount outstanding in 2002 was $1,798. The
line of credit is unsecured, bears interest at 10% per annum and matures in
January 2005.
Fair Holdings, Inc. has also leased certain computer equipment to the Company on
a short-term basis commencing on August 1, 2002. The rental paid in 2002 was $1.
Fair Holdings, Inc. lent Obsidian Leasing an aggregate of $1,588 in connection
with the refinancing of coaches. The maximum amount outstanding during 2002 for
this refinancing was $1,588. The loans are ten year, interest only loans,
subordinate to the bank debt on the coaches and bear interest at 14% per annum.
The Company subleases its headquarters space from Fair Holdings, Inc. under a
sublease with a monthly rental of $3,675. Prior to the sublease with Fair, the
Company sublet space from Obsidian Capital Company and paid $56 to Obsidian
Capital Company for its space in 2002.
Fair Holdings, Inc. leased certain computer equipment to Danzer under a twelve
month lease effective August 1, 2002. The aggregate rental due under the twelve
month lease is $8.
DW Trailer, a company owned by Messrs. Durham and Whitesell, has leased a
forklift to Danzer under a 38 month lease at $1 per month.
United advanced Obsidian Capital Company $216, as a part of the closing of the
purchase of the United transaction. The amount was paid back to United in 2002.
DC Investments, a company controlled by Mr. Durham, lent U.S. Rubber $700
pursuant to a subordinated note which bears interest at 15% per annum with the
principal payable in March 2007. The loan was made to permit the Company to
complete the elimination of the interest of SerVass, Inc. in U.S. Rubber.
During 2002 DC Investments purchased the senior secured loans to Champion from
the bank which held them. The maximum amount outstanding to DC Investments in
2002 was $602. The loans bear interest at 5.5%.
On October 30, 2002, the Company entered into a Memorandum of Agreement with
Messrs. Durham and Whitesell pursuant to which Champion agreed to sell all of
its assets to an entity to be designated by Messrs. Durham and Whitesell subject
to the payment by Messrs. Durham and Whitesell of $1.00 and the assumption by
the entity acquiring the assets of all of the liabilities of Champion except for
the liability of Champion to Markpoint Equity Growth Fund IV, which was settled
by the Company. This transaction closed on January 30, 2003.
Management believes that the transactions described in this Item were on terms
no less favorable to the Company and its subsidiaries than would have been the
case for transactions with unrelated third parties.
PART IV
ITEM 14. CONTROLS AND PROCEDURES.
Within the 90 days prior to the filing of this report, the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based on this evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in timely alerting them to
material information required to be included in this report. It should be noted
that the design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions, regardless of how remote. There have been no significant
changes in the Company's internal controls or in other factors that could
significantly affect internal controls subsequent to the date of the most recent
evaluation.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this Annual Report on Form 10-K:
(1) Financial Statements.
See the Financial Statements included in Item 8.
(2) Financial Statement Schedules Required to be Filed by Item 8 on
this Form.
See Item 8
(3) Exhibits.
The exhibits filed as part of this Annual Report on Form 10-K are
identified in the Exhibit Index, which Exhibit Index specifically
identifies those exhibits that describe or evidence all
management contracts and compensating plans or arrangements
required to be filed as exhibits to this Report. Such Exhibit
Index is incorporated herein by reference.
(b) Reports on Form 8-K
The following Reports on Form 8-K were filed during the last quarter
of the fiscal year ended October 31, 2001:
(1) Report on Form 8-K regarding July 31, 2001 acquisition of
substantially all of the assets of United Expressline, Inc.
(filed August 15, 2001).
(2) Report on Form 8-K regarding change in independent auditors
(filed November 13, 2001).
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf, by the undersigned, thereunto
duly authorized.
Dated: February 11, 2003 OBSIDIAN ENTERPRISES, INC.
By /s/ Timothy S. Durham
-------------------------
Timothy S. Durham
Chief Executive Officer
In accordance with the Exchange Act, this report was signed by the following
persons on behalf of the Registrant and in the capacities and on the dates
indicated.
Dated: February 11, 2003 /s/ Timothy S. Durham
-----------------------------
Timothy S. Durham
Chief Executive Officer
(Principal Executive Officer)
and Chairman of the Board and
Director
Dated: February 11, 2003 /s/ Jeffrey W. Osler
-----------------------------
Jeffrey W. Osler, Executive
Vice President, Secretary and
Treasurer, (Principal
Financial and Accounting
Officer) and Director
Dated: February 11, 2003 /s/ Terry G. Whitesell
-----------------------------
Terry G. Whitesell, Director
Dated: February 11, 2003 /s/ Goodhue W. Smith, III
-----------------------------
Goodhue W. Smith, III,
Director
Dated: February 11, 2003 /s/ John A. Schmit
-----------------------------
John A. Schmit, Director
Dated: February 11, 2003 /s/ D. Scott McKain
-----------------------------
D. Scott McKain, Vice Chairman
and Director
Dated: February 11, 2003 /s/ Daniel S. Laikin
-----------------------------
Daniel S. Laikin, Director
CERTIFICATIONS
I, Timothy S. Durham, certify that:
1. I have reviewed this annual report on Form 10-K of Obsidian Enterprises,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to use by others within those
entities, particularly during the period in which this annual report
is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c. Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls.
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
OBSIDIAN ENTERPRISES, INC.
By: /s/ Timothy S. Durham
------------------------------------
Timothy S. Durham
Chairman and Chief Executive Officer
I, Barry S. Baer, certify that:
1. I have reviewed this annual report on Form 10-K of Obsidian Enterprises,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to use by others within those
entities, particularly during the period in which this annual report
is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c. Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls.
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
OBSIDIAN ENTERPRISES, INC.
By: /s/ Barry S. Baer
--------------------------------
Barry S. Baer
Executive Vice President/Chief
Financial Officer
EXHIBIT INDEX
Exhibit No. Description Incorporated by Reference/Attached
2.1 Acquisition Agreement and Plan of Reorganization, dated Incorporated by reference to Exhibit
June 21, 2001, by and among Registrant, Danzer Industries, 2.1 to the Registrant's Report on Form
Inc., Pyramid Coach, Inc., Champion Trailer, Inc., United 8-K filed on August 15, 2001
Acquisition, Inc., U.S. Rubber Reclaiming, Inc., Obsidian
Capital Partners, L.P. and Timothy S. Durham
2.2 Memorandum of Agreement between Champion Trailer, Inc. and Incorporated by reference to Exhibit
Timothy S. Durham and Terry G. Whitesell 2.1 to the Registrant's Report on Form
8-K filed on November 6, 2002
3.1 Certificate of Incorporation (filed with Delaware Incorporated by reference to Exhibit
Secretary of State on October 4, 2001) 3.1 to the Registrant's Annual Report
on Form 10-K for the Year Ended
October 31, 2001
3.2 Certificate of Designations, Preferences, Rights and Incorporated by reference to Exhibit
Limitations of Series C Preferred Stock 3.2 to the Registrant's Annual Report
on Form 10-K for the Year Ended
October 31, 2001
3.3 Bylaws of the Registrant (Restated Effective as of Attached
September 27, 2002)
3.4 Certificate of Designations, Preferences, Rights and Attached
Limitations of Series D Preferred Stock
4.1 Registration Rights Agreement, dated June 21, 2001 Incorporated by reference to Exhibit
4.1 to the Registrant's Annual Report
on Form 10-K for the Year Ended
October 31, 2001
4.2 Amendment and Joinder to Registration Rights Agreement, Incorporated by reference to Exhibit
dated July 27, 2001 4.2 to the Registrant's Annual Report
on Form 10-K for the Year Ended
October 31, 2001
4.3 8.00% Convertible Debenture Issued by Registrant on July Incorporated by reference to Exhibit 2
19, 2001 to HSBC Global Custody Nominee Due July 19, 2008 to Schedule 13D filed September 20,
2001 by Russell Cleveland, Renaissance
Capital Group, Inc.
4.4 8.00% Convertible Debenture Issued by Registrant on July Incorporated by reference to Exhibit 3
19, 2001 to Renaissance US Growth & Income Trust PLC Due to Schedule 13D filed September 20,
July 19, 2008 2001 by Russell Cleveland, Renaissance
Capital Group, Inc.
4.5 Convertible Loan Agreement, dated July 19, 2001, Among Incorporated by reference to Exhibit
Registrant, BFSUS Special Opportunities Trust PLC, 4.5 to the Registrant's Annual Report
Renaissance US Growth & Income Trust PLC and Renaissance on Form 10-K for the Year Ended
Capital Group, Inc. October 31, 2001
10.1 2001 Long Term Incentive Plan* Incorporated by reference to Appendix
E to the Registrant's Proxy Statement
filed on September 18, 2001
10.2 Asset Purchase Agreement, dated April 20, 2000, between Incorporated by reference to Exhibit
Champion Trailer Company, L.P. and Harold Peck, Mary Peck, 10.2 to the Registrant's Annual Report
Champion Trailer, Ltd. (f/k/a) Champion Trailer, LLC, on Form 10-K for the Year Ended
Champion Collision, Ltd. (f/k/a) Champion Collision, October 31, 2001
L.L.C. and Brandonson, Inc.
10.3 Stock and Asset Purchase Agreement, dated December 20, Incorporated by reference to Exhibit
1999, among Timothy S. Durham, Terry Whitesell, DW 10.3 to the Registrant's Annual Report
Leasing, LLC, Bobby Michael, Becky Michael, Jennifer on Form 10-K for the Year Ended
George, Pyramid Coach, Inc., Precision Coach, Inc., October 31, 2001
American Coach Works, Inc., Transport Trailer Service,
Inc., Rent-A-Box, Inc. and LBJ, LLC
10.4 Assumption Agreement and Second Amendment to Credit Incorporated by reference to Exhibit
Agreement, dated June 18, 2001, among Bank One, Indiana, 10.4 to the Registrant's Annual Report
N.A., Champion Trailer, Inc. and Champion Trailer Company, on Form 10-K for the Year Ended
L.P. October 31, 2001
10.5 Credit Agreement, dated December 29, 2000, between USRR Incorporated by reference to Exhibit
Acquisition Corp. and Bank One, Indiana, N.A. 10.5 to the Registrant's Annual Report
on Form 10-K for the Year Ended
October 31, 2001
10.6 First Amendment to Credit Agreement, dated June 20, 2001, Incorporated by reference to Exhibit
between U.S. Rubber Reclaiming, Inc. and Bank One, 10.6 to the Registrant's Annual Report
Indiana, N.A. on Form 10-K for the Year Ended
October 31, 2001
10.7 Note Purchase Agreement, dated May 2, 2000, between Incorporated by reference to Exhibit
Champion Trailer, Inc. and Markpoint Equity Growth Fund, 10.7 to the Registrant's Annual Report
J.V., and Related Documents on Form 10-K for the Year Ended
October 31, 2001
10.8 Warrant, dated May 2, 2000, from Champion Trailer Company, Incorporated by reference to Exhibit
LP to Markpoint Equity Growth Fund, J.V. 10.8 to the Registrant's Annual Report
on Form 10-K for the Year Ended
October 31, 2001
10.9 Management Agreement, dated December 29, 2000, between Incorporated by reference to Exhibit
Obsidian Capital Company, LLC and USRR Acquisition Corp. 10.9 to the Registrant's Annual Report
on Form 10-K for the Year Ended
October 31, 2001
10.10 Management Agreement, dated June 16, 2001, between Incorporated by reference to Exhibit
Pyramid, Inc. and D.W. Leasing 10.10 to the Registrant's Annual
Report on Form 10-K for the Year Ended
October 31, 2001
10.11 Promissory Note, dated June 1, 2001, from Obsidian Capital Incorporated by reference to Exhibit
Company, LLC to U.S. Rubber Reclaiming, Inc. 10.11 to the Registrant's Annual
Report on Form 10-K for the Year Ended
October 31, 2001
10.12 Promissory Note, dated June 11, 2001, from Champion Incorporated by reference to Exhibit
Trailer, Inc. to Obsidian Capital Partners, LP 10.12 to the Registrant's Annual
Report on Form 10-K for the Year Ended
October 31, 2001
10.13 Purchase Agreement, dated June 5, 2001, between United Incorporated by reference to Exhibit
Expressline, Inc., United Acquisition, Inc., J.J.M. 10.13 to the Registrant's Annual
Incorporated and the Shareholders of United Expressline, Report on Form 10-K for the Year Ended
Inc. and J.J.M. Incorporated October 31, 2001
10.14 Promissory Note, dated July 27, 2001, from United Incorporated by reference to Exhibit
Acquisition, Inc. to United Expressline, Inc. 10.14 to the Registrant's Annual
Report on Form 10-K for the Year Ended
October 31, 2001
10.15 Credit Agreement, dated July 27, 2001, between United Incorporated by reference to Exhibit
Acquisition, Inc. and First Indiana Bank 10.15 to the Registrant's Annual
Report on Form 10-K for the Year Ended
October 31, 2001
10.16 Loan and Security Agreement, dated January 21, 2000, Incorporated by reference to Exhibit
between Danzer Industries, Inc. and Banc of America 10.16 to the Registrant's Annual
Commercial Finance Corp. Report on Form 10-K for the Year Ended
October 31, 2001
10.17 Warrant, dated August 1997, by Danzer Corp. to Incorporated by reference to Exhibit
Duncan-Smith Co. and Letter Agreement, dated June 21, 10.17 to the Registrant's Annual
2001, between Danzer Corp. and Duncan-Smith Co. Report on Form 10-K for the Year Ended
October 31, 2001
10.18 Stock Purchase Agreement, dated December 29, 2000, between Incorporated by reference to Exhibit
USRR Acquisition Corp. and SerVaas, Inc. 10.18 to the Registrant's Annual
Report on Form 10-K for the Year Ended
October 31, 2001
10.19 Subordinated Secured Promissory Note, dated December 29, Incorporated by reference to Exhibit
2000, from USRR Acquisition Corp. to SerVaas, Inc. 10.19 to the Registrant's Annual
Report on Form 10-K for the Year Ended
October 31, 2001
10.20 Supply and Consignment Agreement, dated December 29, 2000, Incorporated by reference to Exhibit
between U.S.R.R. Acquisition and SerVaas, Inc. 10.20 to the Registrant's Annual
Report on Form 10-K for the Year Ended
October 31, 2001
10.21 Form of Installment Loan from Edgar County Bank & Trust Incorporated by reference to Exhibit
Co. to DW Leasing Company, LLC, Related Documents and 10.21 to the Registrant's Annual
Schedule Identifying Material Details Report on Form 10-K for the Year Ended
October 31, 2001
10.22 Loan Agreement, dated December 10, 1999, between Old Incorporated by reference to Exhibit
National Bank and DW Leasing Company, LLC, and Related 10.22 to the Registrant's Annual
Documents Report on Form 10-K for the Year Ended
October 31, 2001
10.23 Form of Promissory Note from DW Leasing Company, LLC, to Incorporated by reference to Exhibit
Former Shareholders of Pyramid Coach, Inc., Related 10.23 to the Registrant's Annual
Security Agreement, and Schedule Identifying Material Report on Form 10-K for the Year Ended
Details October 31, 2001
10.24 Form of Promissory Note from DW Leasing Company, LLC to Incorporated by reference to Exhibit
Star Financial Bank, Related Documents and Schedule 10.24 to the Registrant's Annual
Identifying Material Details Report on Form 10-K for the Year Ended
October 31, 2001
10.25 Form of Lock-Up Agreement, dated July 19, 2001, and Incorporated by reference to Exhibit
Schedule Identifying Material Details 10.25 to the Registrant's Annual
Report on Form 10-K for the Year Ended
October 31, 2001
10.26 Master Lease Agreement, dated May 17, 2000, between Old Incorporated by reference to Exhibit
National Bank and DW Leasing Company, LLC, and Related 10.26 to the Registrant's Annual
Documents Report on Form 10-K for the Year Ended
October 31, 2001
10.27 Loan Agreement, dated June 1, 2000, between DW Leasing Incorporated by reference to Exhibit
Company LLC and Regions Bank and Security Agreement 10.27 to the Registrant's Annual
Report on Form 10-K for the Year Ended
October 31, 2001
10.28 Business Loan Agreement (Asset Based), dated August 15, Incorporated by reference to Exhibit
2001, between Danzer Industries, Inc. and Bank of America, 10.28 to the Registrant's Annual
N.A. Report on Form 10-K for the Year Ended
October 31, 2001
10.29 1999 Stock Option Plan* Incorporated by reference to Exhibit
10.29 to the Registrant's Annual
Report on Form 10-K for the Year Ended
October 31, 2001
10.30 Amendment to Acquisition Agreement and Plan of Incorporated by reference to Exhibit
Reorganization, dated December 28, 2001, between 10.30 to the Registrant's Annual
Registrant and Obsidian Leasing Company, Inc. Report on Form 10-K for the Year Ended
October 31, 2001
10.31 Agreement and Plan of Reorganization and Corporate Incorporated by reference to Exhibit
Separation, dated December 28, 2001, between DW Leasing 10.31 to the Registrant's Annual
LLC and Obsidian Leasing Company, Inc. Report on Form 10-K for the Year Ended
October 31, 2001
10.32 Assignment and Assumption Agreement, dated February 19, Incorporated by reference to Exhibit
2002, between Champion Trailer, Inc. and DW Leasing, LLC 10.1 to the Registrant's Quarterly
Report on Form 10-Q for the Quarter
Ended April 30, 2002
10.33 Assignment and Assumption Agreement, dated February 20, Incorporated by reference to Exhibit
2002, between DW Leasing, LLC and Fair Holdings, Inc. 10.2 to the Registrant's Quarterly
Report on Form 10-Q for the Quarter
Ended April 30, 2002
10.34 Agreement to Purchase Subordinated Secured Promissory Note Incorporated by reference to Exhibit
and Supply and Consignment Agreement, dated February 26, 10.3 to the Registrant's Quarterly
2002, among SerVaas, Inc., the Beurt SerVaas Revocable Report on Form 10-Q for the Quarter
Trust, U.S. Rubber Reclaiming, Inc., Obsidian Enterprises, Ended April 30, 2002
Inc. and DC Investments, LLC
10.35 Replacement Promissory Note, dated February 26, 2002, from Attached
Obsidian Enterprises, Inc. to Fair Holdings, Inc. in the
principal amount of $700,000 due March 1, 2007
10.36 Promissory Note from Obsidian Enterprises, Inc. in favor Incorporated by reference to Exhibit
of Fair Holdings, Inc. in the principal amount of $570,000 10.5 to the Registrant's Quarterly
due February 1, 2007 Report on Form 10-Q for the Quarter
Ended April 30, 2002
10.37 Subscription Agreement of Fair Holdings, Inc. for 186,324 Incorporated by reference to Exhibit
shares of Series C Preferred Stock 10.6 to the Registrant's Quarterly
Report on Form 10-Q for the Quarter
Ended April 30, 2002
10.38 Subscription Agreement of Obsidian Capital Partners, LP Incorporated by reference to Exhibit
for 402,906 shares of Series C Preferred Stock 10.7 to the Registrant's Quarterly
Report on Form 10-Q for the Quarter
Ended April 30, 2002
10.39 Second Amendment to Credit Agreement, dated August 28, Incorporated by reference to Exhibit
2002, between United Expressline, Inc. and First Indiana 10.1 to the Registrant's Quarterly
Bank, N.A. Report on Form 10-Q filed for the
Quarter Ended July 31, 2002
10.40 Promissory Note, dated January 17, 2002, from DW Leasing Attached
Company, LLC, to Fair Holdings, Inc.
10.41 Promissory Note, dated September 3, 2002, from Obsidian Attached
Enterprises, Inc., to Fair Holdings, Inc.
10.42 Promissory Note, dated January 9, 2002, from Obsidian Attached
Enterprises, Inc. to Fair Holdings, Inc.
10.43 Credit Agreement, dated October 31, 2002, between Obsidian Attached
Leasing Company, Inc. and Old National Bank, N.A. and
Related Documents
10.44 Stock Purchase Agreement, dated July 27, 2001, between Incorporated by reference to Exhibit A
Danzer Corporation and The Huntington Capital Investment to the Schedule 13G filed by The
Company. Huntington Capital Investment Company
on August 6, 2001
10.45 Loan Agreement, dated September 24, 2002, between Edgar Attached
County Bank & Trust Co. and Obsidian Leasing Company, Inc.
10.46 Term Promissory Note, dated September 26, 2002, from Attached
Obsidian Leasing Company, Inc. to Fair Holdings, Inc.
10.47 Note Purchase Agreement, dated July 27, 2001, between Attached
United Acquisition, Inc. and The Huntington Capital
Investment Company.
10.48 Limited Forbearance Agreement, dated October 14, 2002, Attached
among Danzer Industries, Inc., Obsidian Enterprises, Inc.
and Bank of America, N.A.
10.49 Revolving Credit, Term Loan and Security Agreement, dated Attached
October 25, 2002, between PNC Bank, N.A. and U.S. Rubber
Reclaiming, Inc. and Related Documents
10.50 Term Promissory Note, dated October 31, 2002, from DW Attached
Leasing Company, LLC to Fair Holdings, Inc.
10.51 Rental Agreement, dated October 1, 2002, between DW Attached
Trailer, LLC and Danzer Industries, Inc.
10.52 Commercial Equipment Lease Agreement, dated August 1, Attached
2002, between Fair Holdings, Inc. and Danzer Industries,
Inc.
10.53 Commercial Equipment Lease Agreement, dated August 1, Attached
2002, between Fair Holdings, Inc. and Obsidian
Enterprises, Inc.
21 List of Subsidiaries Attached
99.1 Certification of Timothy S. Durham Attached
99.2 Certification of Barry S. Baer Attached
*Indicates Exhibits that describe or evidence management contracts or
compensatory plans or arrangements required to be filed as Exhibits to this
Annual Report on Form 10-K.