SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2002
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
_____________________________ TO ___________________________
0-17430
----------------------------------------------------
Commission File Number
OBSIDIAN ENTERPRISES, INC.
----------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 35-2154335
----------------------------- -----------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
111 MONUMENT CIRCLE, SUITE 3680
INDIANAPOLIS, INDIANA 46204
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(Address of principal executive offices) (Zip code)
317-237-4122
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ___ No X
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKTUPCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes ___ No ___
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock Outstanding at March 15, 2002
$.0001 par value 36,007,855 shares
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
January 31, October 31,
2002 2001
----------------------------------
Assets
Current assets:
Cash and cash equivalents $ 417 $ 529
Marketable securities 194 223
Accounts receivable, net of allowance for doubtful accounts
of $95 for 2002 and $90 for 2001 3,883 3,744
Accounts receivable, related parties -- 217
Inventories, net 7,152 6,694
Prepaid expenses and other assets 731 1,275
----------------------------------
Total current assets 12,377 12,682
Property, plant and equipment, net 23,807 24,232
Other assets:
Goodwill, net of accumulated amortization of $76 9,165 9,210
Other intangible assets, net of accumulated amortization of $365 for 2002
and $270 for 2001 2,052 2,147
Other 602 579
----------------------------------
$ 48,003 $ 48,850
==================================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
2
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
January 31, October 31,
2002 2001
----------------------------------
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Current portion of long-term debt $ 14,383 $ 9,233
Accounts payable, trade 3,399 3,620
Accounts payable, related parties 658 925
Accrued expenses and customer deposits 2,961 2,388
----------------------------------
Total current liabilities 21,401 16,166
Long-term debt, net of current portion 22,228 27,546
Deferred income tax liabilities 1,528 1,672
Accounts payable, related parties 3,169 2,170
Commitments and Contingencies -- --
Stockholders' equity (deficit):
Common stock, par value $.0001 per share; 40,000,000 shares authorized,
36,007,855 shares outstanding 3 3
Preferred stock, 5,000,000 shares authorized; Class of Series C convertible
preferred stock, par value $.001, 4,600,000 authorized and 3,739,169 shares
issued and outstanding, 400,000 shares of undesignated Preferred
Stock authorized 4 4
Additional paid-in capital 5,612 5,612
Accumulated other comprehensive income 8 37
Accumulated deficit (5,950) (4,360)
----------------------------------
Total stockholders' equity (deficit) (323) 1,296
----------------------------------
$ 48,003 $ 48,850
==================================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share And Share Data)
(unaudited)
Three Months Three Months
Ended January 31, Ended
2002 January 31, 2001
-------------------------------------
Net sales $ 12,483 $ 3,743
Cost of sales 11,026 3,301
-------------------------------------
Gross profit 1,457 442
Selling, general and administrative expenses 2,206 515
-------------------------------------
Loss from operations (749) (73)
Other income (expense):
Interest expense, net (874) (217)
Other expense (29) (77)
-------------------------------------
Loss before income taxes (1,652) (367)
Income tax (expense) benefit 155 12
-------------------------------------
Net loss $ (1,497) $ (355)
=====================================
Basic and diluted earnings (loss) per share $ (.01) $ (.01)
=====================================
Weighted average common and common equivalent shares outstanding basic and
diluted: 110,791,370 39,419,240
=====================================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(dollars in thousands)
(unaudited)
Accumulated
Common Stock Preferred Stock Additional Other Retained
Comprehensive ------------------------------------ Paid-in Comprehensive Earnings
Income(Loss) Shares Amount Shares Amount Capital Income (Deficit) Total
--------------------------------------------------------------------------------------------------
Balance at October 31, 2001 $ -- 36,007,855 $ 3 3,739,169 $ 4 $ 5,612 $ 37 $ (4,360) $ 1,296
Distributions to members -- -- -- -- -- -- -- (93) (93)
of DW Leasing, LLC
Unrealized loss on available-
for-sale marketable securities (29) -- -- -- -- -- (29) -- (29)
Net loss (1,497) -- -- -- -- -- -- (1,497) (1,497)
--------------------------------------------------------------------------------------------------
Total comprehensive loss $(1,526)
=================
Balance at January 31, 2002 36,007,855 $ 3 3,739,169 $ 4 $ 5,612 $ 8 $ (5,950) $ (323)
=====================================================================================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Three Months
Ended Ended
January 31, January 31,
2002 2001
-------------------------------
Cash flow from operating activities:
Net loss $ (1,497) $ (355)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization 701 286
Other (140) 77
Changes in operating assets and liabilities net of effect of acquisitions:
Accounts receivable, net (139) (98)
Inventories (458) 456
Other, net 1,193 (309)
-------------------------------
Net cash provided by (used in) operating activities (340) 57
-------------------------------
Cash flows from investing activities:
Capital expenditures (222) (293)
Payments to acquire U.S. Rubber -- (5,528)
Other 11 9
-------------------------------
Net cash used in investing activities (211) (5,812)
-------------------------------
The accompanying notes are an integral part of the condensed consolidated
financial statements.
6
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Three Months
Ended Ended
January 31, January 31,
2002 2001
-------------------------------
Cash flows from financing activities:
Borrowings from and distributions to related parties, net $ 856 $ 484
Net borrowings (payments) on lines of credit and long-term debt 961 (366)
Borrowings (repayments) on long-term debt (1,378) 4,555
Debt issuance cost -- (76)
Proceeds from issuance of U.S. Rubber common stock -- 880
-------------------------------
Net cash provided by (used in) financing activities 439 5,477
-------------------------------
Decrease in cash and cash equivalents (112) (278)
Cash and cash equivalents, beginning of period 529 341
-------------------------------
Cash and cash equivalents, end of period $ 417 $ 63
===============================
Interest paid $ 915 $ 238
===============================
Taxes paid $ 15 $ --
===============================
Supplemental disclosure of noncash operating, investing and financing
activities:
Purchase price adjustment and conversion of accounts payable to debt for
United $ 294 $ --
Advances to construct coaches funded by issuance of debt $ -- $ 50
Seller notes issued in acquisition of U.S. Rubber $ -- $ 2,573
The accompanying notes are an integral part of the condensed consolidated
financial statements.
7
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Description of Business:
Danzer Corporation was reorganized through an Acquisition and Plan of
Reorganization with U.S. Rubber Reclaiming, Inc. and Related Entities ("U.S.
Rubber Companies"), which was consummated on June 21, 2001 (the "Effective
Date"). In addition, Danzer Corporation changed its name to Obsidian
Enterprises, Inc. However, the operating company, Danzer Industries, Inc.,
retained its name. Hereafter, the names Danzer, Danzer Corporation, and Obsidian
Enterprises, Inc. are used interchangeably. The operating company will continue
to be referred to as Danzer Industries, Inc. The Acquisition and Plan of
Reorganization of Danzer Corporation with U.S. Rubber Companies (see Note 2, 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.
Pursuant to the Plan of Acquisition and Reorganization, United Expressline, Inc.
was acquired July 31, 2001.
The accompanying financial data as of January 31, 2002 and for the three months
ended January 31, 2002 and 2001 has been prepared by the Company, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC"). Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted pursuant
to such rules and regulations. The October 31, 2001 consolidated balance sheet
was derived from audited financial statements, but does not include all
disclosures required by accounting principles generally accepted in the United
States of America. However, the Company believes that the disclosures are
adequate to make the information presented not misleading. These consolidated
financial statements should be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-K for the period ended October 31, 2001. The Company follows
the same accounting policies in preparation of interim reports.
In the opinion of management, all adjustments (which include normal recurring
adjustments except as disclosed herein) necessary to present a fair statement of
financial position as of January 31, 2002, results of operations, cash flows,
and stockholders' deficit for the three months ended January 31, 2002 have been
made. The results of operations for the three months ended January 31, 2002 are
not necessarily indicative of the operating results for the full fiscal year or
any future periods.
The entities resulting from the merger described above, considered accounting
subsidiaries of U.S. Rubber Reclaiming, Inc. (the accounting acquirer) and legal
subsidiaries of Obsidian Enterprises, Inc. (formerly Danzer) after the
Acquisition and Plan of Reorganization, are as follows:
U.S. Rubber Reclaiming, Inc. ("U.S. Rubber", the accounting acquirer), which is
engaged in reclaiming scrap butyl rubber into butyl reclaim for resale to
manufacturers of rubber products.
Obsidian Enterprises, Inc. (formerly Danzer, the legal acquirer), a holding
company.
8
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
Danzer Industries, Inc. ("Danzer Industries"), which is principally engaged in
the design, manufacture and sale of truck bodies.
Pyramid Coach, Inc. ("Pyramid"), which is engaged in the leasing of coaches,
designed and fitted out for use for travel by country, rock bands and other
business enterprises, primarily on weekly to monthly leases. The 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 Company,
Inc. ("Obsidian Leasing"), formed November 1, 2001. DW Leasing is controlled by
individuals which are also controlling shareholders of Obsidian Enterprises,
Inc. and, accordingly, Pyramid. DW Leasing and Obsidian Leasing also own all
coaches operated by Pyramid. All intercompany transactions are eliminated in
combination of this entity.
To complete the Plan of Reorganization, Pyramid and DW Leasing were required to
obtain lender approval of the transfer of assets subject to liabilities to
Obsidian Leasing Company, Inc. ("Obsidian Leasing"), a wholly owned subsidiary
of the Company. On November 1, 2001, the Company completed the tax-free exchange
contemplated by the Acquisition Agreement of June 21, 2001, whereby all but
seven coaches and the liabilities thereon were transferred to Obsidian Leasing
to operate this segment of business previously under DW Leasing. However, as of
January 31, 2002, the entities are combined due to cross-guarantees associated
with the debt on the seven coaches.
Champion Trailer, Inc. ("Champion"), which manufactures and sells transport
trailers to be used primarily in the auto racing industry.
United Expressline, Inc. ("United") manufactures and sells general use cargo
trailers and specialty trailers used in the racing industry and for other
special purposes.
Basis of Presentation:
The Company's January 31, 2002 consolidated financial statements have been
presented on the basis that it is a going concern which contemplates the
realization of assets and satisfaction of liabilities in the normal course of
business. The Company incurred a loss from operations for the ten months ended
October 31, 2001 of $2,149,000 and a net loss of $4,360,000, which included an
asset impairment charge of $2,305,000. In addition, the Company has incurred a
loss of $1,497,000 for the three months ended January 31, 2002. The losses have
weakened the Company's financial condition and contributed to its failure to
meet certain financial covenants required by the lenders. As a result of these
covenant violations which were not waived or were only waived through November
2002, $4,343,000 of long-term debt has been reclassified and included in the
current debt caption of current liabilities as of January 31, 2002. A
significant portion of the Company's assets is pledged as collateral on these
loans and foreclosure by the bank would seriously impair the Company's
existence. In addition, these losses and the reclassification of long-term debt
have contributed to a total deficit in working capital of $9,024,000 at January
31, 2002.
9
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
In view of these matters, realization of the assets and satisfaction of the
liabilities in the ordinary course of business is dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely basis, comply
with the terms of its debt financing agreements, obtain refinancing of certain
obligations, and continue to receive capital contributions from its majority
shareholder.
Management, as a part of its plan towards resolving these issues and generating
revenue and cash flow, has taken the actions described below during and
subsequent to the quarter ended January 31, 2002. Although management believes
these actions will improve operations and liquidity, there can be no assurance
that such actions will sufficiently improve operations or liquidity, or occur on
terms acceptable to the Company. See Management's Discussion and Analysis of
Financial Condition and Results of Operations elsewhere in the this filing for
further discussions of the liquidity issues facing the Company and the risk
factors associated with these issues as well as management's plans for
addressing them.
o The Board of Directors has agreed in principle to divest Champion to a
group consisting of the Chairman of the Board of the Company, the President
and the management group of Champion pursuant to the terms of a nonbinding
Letter of Intent subject to an independent review of fair value by the
independent Board members of the Company. DC Investments, LLC ("DC
Investments"), an entity controlled by the Company's Chairman, is
negotiating to purchase the loans of Bank One to Champion and has agreed in
principle to contribute the loan to the Company in exchange for an as yet
undetermined number of Series C Preferred Stock. The Company would
contribute that note to Champion as additional capital. The management
group would acquire Champion in exchange for the assumption of the
$1,250,000 subordinated debt of Champion and all accrued interest and
either a release of the Company's guarantee of that debt or an
indemnification of the Company for any loss to the Company as a result of
the guarantee. This proposed sale would result in the Company disposing of
a subsidiary that comprised 77% of the Company's net loss for the ten-month
period ended October 31, 2001 and 22% of the Company's net loss for the
quarter ended January 31, 2002.
o DC Investments, as approved by the Company Board of Directors, has made a
loan in the amount of $570,000 to pay down a portion of the Champion debt
that will be converted to equity after final review by the Board.
o Obsidian Capital Partners, LP ("OCP"), majority owner of the Company, is
negotiating with the Board of Directors to convert to capital $1,222,000 of
loans made at the date of the Acquisition and Plan of Reorganization.
o Negotiations have been ongoing with a new lender to refinance the debt with
the primary lender of U.S. Rubber at more favorable terms than the current
terms. Management anticipates the refinancing will be concluded by the
third fiscal quarter. Management and an affiliated entity subsequent to
year-end have negotiated with the subordinated debt holder of U.S. Rubber
to pay off the debt and reduce debt amounts and accrued interest by
approximately $1,400,000. Such agreement was finalized in February 2002.
See Note 9.
o The Company is undertaking to refinance the coaches transferred from DW
Leasing to a new wholly owned subsidiary of the Company (Obsidian Leasing
Company, Inc.) with existing
10
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
lenders and a related party (DC Investments, LLC). Management anticipates
that this will be concluded by the third fiscal quarter.
o OCP has entered into agreements related to the debt of U.S. Rubber and
United. Specifically, in the event of and in accordance with the default
provisions, Obsidian is obligated to make capital contributions to these
subsidiaries of $1,620,000 and $1,000,000, respectively. In addition, OCP
has committed to fund through the purchase of additional preferred stock
the costs of all legal, accounting and related costs to complete the Plan
of Reorganization and the costs to meet all regulatory requirements to
allow continued trading of Company stock by shareholders.
SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation:
The accompanying condensed consolidated financial statements as of and for the
three months ended January 31, 2002 present the accounts of Obsidian
Enterprises, Inc. and its wholly owned subsidiaries described above, all of
which are treated for accounting purposes as purchases in a reverse merger more
fully described in Note 2. The entities are collectively referred to herein as
the "Company". All significant intercompany transactions and balances have been
eliminated in consolidation. The accompanying financial statements include the
operations of Obsidian Enterprises, Inc. (formerly Danzer Corporation), Danzer
Industries, United Expressline, U.S. Rubber, Champion, Pyramid, Obsidian
Leasing, and a related entity (DW Leasing) for the three-month period ended
January 31, 2002. The accompanying condensed financial statements for the
three-month period ended January 31, 2001 represent the financial position of
U.S. Rubber, Champion, Pyramid and DW Leasing as of January 31, 2001. The
statements of operations and cash flows include the results of U.S. Rubber for
the three months ended January 31, 2001 and Champion, Pyramid, and DW Leasing
from January 1, 2001 through January 31, 2001.
Goodwill, Intangible Assets and Other Assets:
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets, effective
November 1, 2001 and accordingly, goodwill is no longer amortized.
Other intangible assets include trade names, customer relations and backlogs and
other items, which are being amortized on a straight-line basis over lives
ranging from 3 months to 15 years.
Earnings Per Share:
Basic per-share amounts are computed, generally, by dividing net income or loss
by the weighted-average number of common shares outstanding. Basic and diluted
weighted average common shares outstanding for 2002 and 2001 are the same
because the Company incurred losses for all periods presented. Therefore, the
inclusion of options, warrants and other common
11
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
stock equivalents as described in Note 5 in the calculation of diluted loss per
share would have an antidilutive effect.
In arriving at the weighted average number of common shares outstanding for
basic income (loss) per share, the Company's Series C Convertible Preferred
Stock, which has all the rights and privileges of the Company's common stock,
has been reflected as equivalent common shares. Therefore, for the three months
ended January 31, 2002, the 3,739,169 shares of Series C Convertible Preferred
Stock have been reflected as common equivalent shares of 74,783,380. The
weighted average common shares outstanding for the quarter ended January 31,
2001 reflects the 1,970,962 shares of Series C Convertible Preferred Stock
issued to the former stockholders of the companies acquired in the reverse
merger as described in Note 2, as if such shares had been converted into their
equivalent number of common shares of 39,419,240.
Recently Issued Accounting Pronouncements:
In June 2001, the Financial Accounting Standards Board (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
will result in $5,829,000 of goodwill not being amortized and the elimination of
approximately $225,000 of amortization annually on an additional $3,381,000 of
goodwill previously being amortized.
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 July 2001, the FASB issued SFAS No. 144, Impairment or Disposal of Long-Lived
Assets, which is effective for fiscal years beginning after December 15, 2001.
The provisions of this statement provide a single accounting model for
impairment of long-lived assets. The Company is currently assessing the impact
of this new standard.
2. ACQUISITIONS AND PLAN OF REORGANIZATION
The Reorganization (reverse merger) with Danzer, and subsequent acquisition of
United, were accounted for under the purchase method of accounting. U.S. Rubber,
the largest company owned by OCP Partners, was considered the acquirer for
accounting purposes and recorded
12
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
2. ACQUISITIONS AND PLAN OF REORGANIZATION, CONTINUED
Danzer's assets and liabilities based upon their estimated fair values, under
the purchase method of accounting for business combinations. The operating
results of Danzer have been included in the accompanying consolidated financial
statements from the date of acquisition. Under the purchase method of
accounting, the acquired assets and assumed liabilities have been recorded at
their estimated fair values at the date of the acquisition.
The acquisition of Champion and Pyramid were also accounted for under the
purchase method of accounting; however, due to the related-party relationships
of the previous owners to the Company, the assets were recorded at net book
value similar to pooling-of-interest accounting, referred to as reorganization
of entities under common control. Accordingly, no additional goodwill was
recognized beyond that recorded during the original acquisition from unrelated
third parties.
Champion and Pyramid, included in the financial statement as of January 1, 2001
and part of the Plan of Reorganization of June 21, 2001 as discussed above, were
previously owned by individuals who are also the members and managing directors
of Obsidian Capital Company, LLC ("OCC"), the General Partner of OCP. Purchase
accounting and a goodwill allocation of $2.6 million were recorded on Champion
when the managing members of OCC and other related parties acquired those
entities from unrelated third parties.
Pro Forma Information:
The unaudited condensed consolidated results of operations shown below are
presented on a pro forma basis and represent the results of Obsidian
Enterprises, Inc. (formerly Danzer), Danzer Industries, U.S. Rubber, United,
Champion, Pyramid, Obsidian Leasing and DW Leasing on a combined basis. The
schedule below includes all depreciation, amortization and nonrecurring charges
for all entities for the period shown.
Three Months Ended
January 31,
2001
---------------------
Net sales $ 13,999
Net loss $ (882)
Net loss per share - basic and diluted $ (.02)
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.
13
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. INVENTORIES
Inventories are stated at the lower-of-cost (first-in, first-out method) or
market and are comprised of the following components (in thousands):
January 31, October 31,
2002 2001
------------------ -------------------
Raw materials $ 3,907 $ 3,734
Work-in-process 1,636 1,471
Finished goods 2,317 2,322
Valuation reserve (708) (833)
------------------ -------------------
Total $ 7,152 $ 6,694
================== ===================
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 (in thousands):
U.S. Rubber United Total
------------------ ------------------ ------------------
Balance at December 31, 2000 $ (1,338) $ -- $ (1,338)
Provision for losses, 2001 (60) (13) (73)
Write-off of inventory, 2001 578 -- 578
------------------ ------------------ ------------------
Balance at October 31, 2001 (820) (13) (833)
Write-off of inventory, first
quarter 2002 121 4 125
------------------ ------------------ ------------------
Balance at January 31, 2002 $ (699) $ (9) $ (708)
================== ================== ==================
4. FINANCING ARRANGEMENTS
In connection with the Acquisitions described in Note 2 and to provide working
capital, the Company has incurred the following debt as of January 31, 2002 and
October 31, 2001:
14
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
4. FINANCING ARRANGEMENTS, CONTINUED
-------------------------------------
Debt Amount (in thousands)
-------------------------------------
January 31, October 31,
2002 2001
------------------ ------------------
U.S. Rubber
Line of credit due November 1, 2002, bearing interest at the prime rate plus
..75% (5.5% at January 31, 2002), borrowings not to exceed the greater of
$3,000,000 or the borrowing base (80% of eligible accounts receivable and 50% of
eligible inventories), collateralized by substantially all assets of
U.S. Rubber* $ 2,093 $ 1,732
Note payable to a bank due November 1, 2002, interest payable monthly at prime
rate plus 1% (5.75% at January 31, 2002), monthly principal payments of $2,395
beginning January 2002, collateralized by substantially all assets
of U.S. Rubber* 195 200
Note payable to a bank, due November 1, 2002, monthly principal payments of
$34,725, balloon payment and accrued interest due at maturity, accruing interest
at the prime rate plus 1% (5.75% at January 31, 2002), used to finance the
acquisition and capital expenditures, collateralized by
substantially all assets of U.S. Rubber* 2,049 2,187
As part of the original acquisition of U.S. Rubber, the Company issued a note
payable to former owner (SerVaas, Inc.) in the amount of $1,750,000. The note
requires interest payable monthly at fourteen percent (14%) from the date of
this note until March 31, 2001 and at a rate of twenty percent (20%) thereafter.
The former owner agreed to defer interest and principal payments through May of
2001. The amounts accrued during this period will become part of the balloon
payment due December 28, 2005. The note is collateralized by a Stock Pledge
Agreement given by OCP. In addition, this note is subordinated to the lines of
credit and note payable described above. On February 26, 2002, the Company
refinanced the debt, as further described in Note 9.* 1,750 1,750
15
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
4. FINANCING ARRANGEMENTS, CONTINUED
-------------------------------------
Debt Amount (in thousands)
-------------------------------------
January 31, October 31,
2002 2001
------------------ ------------------
U.S. Rubber, Continued
Note payable to a bank, due November 1, 2002, monthly principal payments of
$2,778, balloon payment and accrued interest due at maturity, accruing interest
at the prime rate plus 1% (6.5% at January 31, 2002), to be used to finance the
acquisition, collateralized by substantially all assets of U.S. Rubber* 463 474
Other 77 88
------------------ ------------------
Subtotal U.S. Rubber 7,357 7,161
------------------ ------------------
*U.S. Rubber was in technical default of various loan covenants with its primary
and subordinated lender at January 31, 2002. The Company has entered into an
amendment to the credit agreement with the primary lender which includes waiver
of the covenant violations and resets the maturity date on all loans to November
1, 2002. The Company also obtained a waiver through November 1, 2002 from the
subordinated lender.
Champion
Bank One, N.A. Facility 1--Line of Credit, maximum borrowing equal to $200,000,
interest payable monthly at prime plus 1/2% (5.25% at January 31, 2002) due
March 15, 2002, collateralized by substantially all assets of Champion and
guaranteed by Messrs. Durham and Whitesell. On March 15, 2002, the Company
refinanced the debt with a related party and paid off the Bank
One debt, as further described in Note 9.* $ 159 $ 200
Bank One, N.A. Facility 2--term loan, note payable $650,000, requires monthly
principal installments of $7,738 plus interest at prime plus 3/4% (5.5% at
January 31, 2002), matures June 2005, collateralized by substantially all assets
of Champion and guaranteed by Messrs. Durham and Whitesell. On March 15, 2002,
the Company refinanced the debt with a related party and paid off
the Bank One debt, as further described in Note 9.* 503 526
16
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
4. FINANCING ARRANGEMENTS, CONTINUED
Debt Amount (in thousands)
-------------------------------------
January 31, October 31,
2002 2001
------------------ ------------------
Champion, Continued
Bank One, N.A. Facility 3 - term loan, note payable $1,118,000, requires monthly
principal installments of $31,056 plus interest at prime matures 1 1/2% (6.25%
at January 31, 2002), matures June 2003, paid off on January 8, 2002,
collateralized by substantially all assets of Champion and guaranteed by
Messrs. Durham and Whitesell* -- 621
Note payable to The Markpoint Company, $1,250,000, interest payable monthly at
13 1/2%, commencing June 1, 2000, balloon payment of outstanding principal
balance due May 2005, collateralized by substantially all assets of Champion
and subordinate to senior bank debt described above* 1,250 1,250
Other 8 15
------------------ ------------------
Subtotal Champion 1,920 2,612
------------------ ------------------
*Champion was in technical default of all of its debt as of January 31, 2002 and
October 31, 2001, respectively. The Company has not been able to obtain waivers
from the lenders. Accordingly, all debt has been classified as current.
Pyramid, DW Leasing and Obsidian Leasing
Ford Motor Credit installment loan, $39,104 repayable in monthly installments of
$667 including interest at .9% through October 2005, first
lien on asset (purchase asset) $ 29 $ 31
Various installment loans, $11,796,038 repayable in monthly installments
totaling $151,453 including interest ranging from 7.5% to 11.8% through November
2007 and applicable balloon payments thereafter through December 2007, first
lien on assets financed (finance acquisition and asset purchases). Substantially
all borrowings guaranteed by the members of DW Leasing.* 9,411 9,584
17
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
4. FINANCING ARRANGEMENTS, CONTINUED
Debt Amount (in thousands)
-------------------------------------
January 31, October 31,
2002 2001
------------------ ------------------
Pyramid, DW Leasing and Obsidian Leasing, Continued
Various installment loans, $3,636,145 repayable in monthly installments totaling
$51,950 including interest ranging from 8.0% to 13.2% through July 2007, first
lien on assets financed (finance acquisition and asset purchases). Substantially
all borrowings guaranteed by the members of DW Leasing. 3,280 3,345
Former shareholders of Pyramid and related companies installment loans, $927,500
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) 928 928
------------------ ------------------
Subtotal Pyramid, DW Leasing and Obsidian Leasing 13,648 13,888
------------------ ------------------
*DW Leasing was in technical default of several loan covenants with two of its
primary lenders. The Company has obtained bank waivers through November 2002 for
a portion of this amount. Amounts classified as current as of January 31, 2002
and October 31, 2001 due to defaults that have not been waived are $622 thousand
and $639 thousand, respectively.
Danzer Industries
Bank of America line of credit, maximum borrowing equal to $1,000,000, 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% (5.5% at January 31, 2002), due March 31,
2002, collateralized by substantially all assets of Danzer
Industries and guaranteed by Obsidian Enterprises, Inc.* $ 575 $ 75
18
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
4. FINANCING ARRANGEMENTS, CONTINUED
Debt Amount (in thousands)
-------------------------------------
January 31, October 31,
2002 2001
------------------ ------------------
Danzer Industries, Continued
Bank of America loan--note payable $1,000,000, requires monthly principal
installments of $5,555 plus interest at the LIBOR Daily Floating Rate plus 3.2%
(5.5% at January 31, 2002), due August 15, 2006. Collateralized by substantially
all assets of Danzer Industries and guaranteed by Obsidian Enterprises, Inc.* 967 983
Equipment loans payable--monthly payments currently aggregating $2,443 including
interest of 8.90% to 11.25% through September 2006. Collateralized
by equipment financed. 107 53
Term loans payable to US Amada, Ltd. Monthly payments currently aggregating
$12,668 including interest at 10%, loans due January 2003, collateralized by
equipment financed 254 285
Other 9 10
------------------ ------------------
Subtotal Danzer Industries 1,912 1,406
------------------ ------------------
* Danzer Industries was in default of its credit agreement for failure to
provide audited financial statements within 90 days of fiscal year end. The
Company has obtained an additional 45-day extension from the lender and
anticipates providing audited statements within the extension period.
United
First Indiana Bank Revolving Line of Credit, maximum borrowing equal to
$3,500,000, 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 prime plus .75% (5.5% at January 31, 2002) due July 1, 2002, collateralized
by substantially all assets of United and guaranteed by
Obsidian Enterprises, Inc.* $ 3,185 $ 3,111
19
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
4. FINANCING ARRANGEMENTS, CONTINUED
Debt Amount (in thousands)
-------------------------------------
January 31, October 31,
2002 2001
------------------ ------------------
United, Continued
First Indiana Term Loan I--note payable $291,000, requires monthly principal
installments of $4,850 plus interest at prime plus 1% (5.75% at January 31,
2002), due July 1, 2006, collateralized by substantially all assets of
United and guaranteed by Obsidian Enterprises, Inc.* 267 281
First Indiana Term Loan II--note payable $1,116,000, requires monthly principal
installments of $6,200 plus interest at prime plus 1% (5.75% at January 31,
2002), due July 1, 2006, collateralized by substantially all
assets of United and guaranteed by Obsidian Enterprises, Inc.* 1,085 1,104
First Indiana Term Loan III--note payable $1,750,000, requires monthly principal
installments of $72,917 plus interest at prime plus 2% (6.75% at January 31,
2002), due July 1, 2003, collateralized by substantially all
assets of United and guaranteed by Obsidian Enterprises, Inc.* 1,385 1,604
Subordinated note payable to Huntington Capital Investment Company, $3,500,000,
interest payable quarterly at 14% per annum, balloon payment of outstanding
principal balance due July 26, 2006. Unsecured and subordinate
to First Indiana debt. 3,500 3,500
Note payable to former shareholder $1,500,000, interest payable monthly at 9%
per annum, balloon payment of outstanding principal balance due July 27,
2006. Unsecured and subordinate to First Indiana and Huntington debt. 1,500 1,500
20
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
4. FINANCING ARRANGEMENTS, CONTINUED
Debt Amount (in thousands)
-------------------------------------
January 31, October 31, 2001
2002 2001
------------------ ------------------
United, Continued
Note payable to Renaissance (former majority stockholder of 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 former shareholder, $248,840, interest payable at 9% per annum,
balloon payment of outstanding principal balance due February 1, 2003 249 --
Other 103 112
------------------ ------------------
Subtotal United 11,774 11,712
------------------ ------------------
* United Expressline was in technical default of loan covenants with one of
its primary lenders as of October 31, 2001. The Company has obtained bank
waivers from the lender through January 2002, at which time, the defaults
were cured. ------------------ ------------------
Total all companies 36,611 36,779
Less current portion 14,383** 9,233
------------------ ------------------
$ 22,228 $ 27,546
================== ==================
** The current portion of long-term debt includes $4,343,000 of amounts in
default or in default with waivers which expire November 1, 2002.
The Company was in violation of three negative covenants and failure of the
Company to submit audited financial statements within 90 days of year end with
Renaissance US Growth & Income Trust PLC and FBSUS Special Opportunities Trust
PLC, the holders of debentures that completed the financing of United. The
Company has received a waiver of all of these violations through November 1,
2002.
21
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
4. 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 year-end. Management has received waivers on all of these covenants.
The Company has an agreement with OCP that gives it the right to mandate a
capital contribution from OCP if the lenders to U.S. Rubber and United were to
declare a default. In that event, the Company has the right to enforce a capital
contribution agreement with OCP up to $1,620,000 on U.S. Rubber and $1,000,000
on United to fund the respective subsidiary's shortfall. Those payments, if any,
would be applied directly to reduce the respective subsidiary's debt obligations
to the lender.
5. STOCKHOLDERS' EQUITY
Preferred Stock:
In conjunction with the merger and acquisitions (described previously) 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 convertible preferred
stock related to the United acquisition.
The convertible 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 Corporation the
number of votes equal to the number of shares of common stock into which such
shares of Series C Preferred could be converted.
These shares were offered and sold in transactions 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. No underwriters were
involved in the sale of these shares. The Corporation will use its best efforts
to file, as soon as reasonable practicable following the date of issuance of the
Series C Preferred, a registration statement ("Registration Statement") on Form
S-1, pursuant to the rules of the Securities and Exchange Commission ("SEC") or
on such other form promulgated by the SEC for which the Corporation then
qualifies, which is available to Corporation, and which counsel for the
Corporation shall deem appropriate for the registration under the Securities Act
of 1933.
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 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.
22
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
5. STOCKHOLDERS' 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 January 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 expire November 2001. As a
result of voluntary termination, 75,000 options expired in 1999 and 192,000
options expired in 2000. None of these options were exercised as of January 31,
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 and 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 Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation.
Accordingly, no compensation expense has been recognized for the stock option
plans.
23
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
5. STOCKHOLDERS' EQUITY, CONTINUED
Stock Options and Warrants:
The following table summarizes the outstanding options and warrants for the
three-month period ended January 31, 2002:
January 31, 2002
----------------------------
Weighted
Average
Exercise
Shares Price
-------------- -------------
Total granted stock options outstanding, January 31, 2002 800,000 $ .09
============== =============
Fixed options:
Exercise price $.10 600,000 $ .10
Exercise price $.05 200,000 $ .05
============== =============
Warrants:
On June 21, 2001, Duncan-Smith Co. terminated warrant for 650,000 common
shares and was issued new warrant for 10,000 shares Series C Preferred
exercisable at $2.00 per
share, expiring August 31, 2002 200,000 $2.00
============== =============
Markpoint financing agreement expiring May 2008 associated with Champion Zero* $ .01
============== =============
* 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.
Convertible Debt:
As described in Note 4, at January 31, 2002, 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 at January 31, 2002.
24
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
6. BUSINESS SEGMENT DATA AND GEOGRAPHIC DATA
The Company operates in three industry segments comprised of trailer and related
transportation equipment manufacturing (trailer manufacturing); coach leasing;
and butyl rubber reclaiming. All sales are in North and South America primarily
in the United States, Canada and Brazil. Selected information by segment follows
(in thousands):
Three Months Ended January 31, 2002
------------------------------------------------------------------------------
Trailer Butyl Rubber
Manufacturing Coach Leasing Reclaiming Total
------------------------------------------------------------------------------
Sales:
Domestic $ 9,250 $ 1,043 $ 2,079 $ 12,372
Foreign -- -- 111 111
------------------------------------------------------------------------------
Total $ 9,250 $ 1,043 $ 2,190 $ 12,483
Cost of goods sold $ 8,407 $ 573 $ 2,046 $ 11,026
Income (loss) before taxes $ (933) $ (367) $ (352) $ (1,652)
Identifiable assets $ 25,370 $ 12,380 $ 10,253 $ 48,003
Depreciation and amortization expense $ 197 $ 245 $ 259 $ 701
Three Months Ended January 31, 2001
------------------------------------------------------------------------------
Trailer Butyl Rubber
Manufacturing Coach Leasing Reclaiming Total
------------------------------------------------------------------------------
Sales:
Domestic $ 118 $ 278 $ 3,082 $ 3,478
Foreign -- -- 265 265
------------------------------------------------------------------------------
Total $ 118 $ 278 $ 3,347 $ 3,743
Cost of goods sold $ 83 $ 88 $ 3,130 $ 3,301
Income (loss) before taxes $ (137) $ (165) $ (65) $ (367)
Identifiable assets $ 5,415 $ 12,604 $ 11,519 $ 29,538
Depreciation and amortization expense $ 29 $ 75 $ 182 $ 286
Obsidian Enterprises, Inc. (legal parent) allocates selling, general and
administrative expenses to the respective companies primarily based on a
percentage of sales.
25
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
7. RELATED PARTIES
The Company makes advances, receives loans and conducts other business
transactions with affiliates resulting in the following amounts for the periods
ended (in thousands):
January 31, October 31,
2002 2001
----------------- ------------------------
Balance sheet:
Current assets:
Accounts receivable, Obsidian Capital Company (OCC) $ -- $ 217
Long-term portion:
Investment banking fees, purchase accounting* -- 1,960
----------------- ------------------------
Total assets $ -- $ 2,177
================= ========================
Current liabilities:
Accounts payable, Obsidian Capital Company (OCC) $ 314 $ 625
Accounts payable, Obsidian Capital Partners 16 --
Accounts payable, stockholders 328 300
Long-term portion:
Accounts payable, DC Investments 1,295 --
Accounts payable, Obsidian Capital Partners (OCP) 1,874 2,170
----------------- ------------------------
Total liabilities $ 3,827 $ 3,095
================= ========================
January 31, January 31,
2002 2001
----------------- ------------------------
Income statement:
Rent expense, Obsidian Capital Company (OCC) $ 15 $ --
================= ========================
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 January 31, 2002 or October 31, 2001,
respectively. Amounts classified as long term represent amounts not currently
due, amounts that are expected to be converted to equity subsequent to January
31, 2002 and October 31, 2001, respectively, or amounts converted to long-term
debt subsequent to January 31, 2002. (See Note 9.)
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. The details of these notes payable are
included in Note 4.
* 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 were $760,000, $600,000, and $600,000 respectively.
26
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
8. COMMITMENTS AND CONTINGENCIES
The Company has a purchase commitment to purchase or lease three (3) coaches
within 60 days of completion, expected to be in the second quarter of calendar
2002. The cost of these coaches will approximate $1.35 million.
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.
9. SUBSEQUENT EVENTS
On February 26, 2002, the Company entered into a series of transactions with US
Rubber, SerVaas, Inc. ("SerVaas"), the former owner of US Rubber, and DC
Investments, an entity controlled by the Company's Chairman) whereby certain
existing debt of US Rubber was acquired from SerVaas. DC Investments acquired
the SerVaas interest in the debt agreement with a remaining balance of $730,000
plus accrued interest for $700,000. US Rubber then acquired this agreement in
exchange for a new note payable to DC Investments with a face amount of
$700,000. The note requires monthly interest payments at 15% with the principal
payable March 2007. The note is subordinate to debt outstanding with the senior
lender of US Rubber.
The Company also acquired the SerVaas interest in the US Rubber $1,750,000
subordinated note payable in exchange for $700,000 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 $700,000 issued to DC Investments. The note
requires monthly interest payments at 15% with the principal payable March 2007.
No gain or loss will be recognized in the transactions because of the
involvement of related parties. The transaction will result in an increase in
equity of the consolidated group of approximately $1,400,000.
On February 12, 2002, U.S. Rubber entered into a "Second Amendment to Credit
Agreement" with its primary lender. The terms of the amendment require scheduled
debt service payments under substantially the same terms as described in Note 4
through November 1, 2002 when all debt outstanding with the primary lender will
become due. The agreement also modifies the terms of an operating lease with the
lender requiring payment in full of the remaining lease obligation as of
November 1, 2002 of approximately $738,000.
After October 31, 2001, Champion is in violation of its Senior Credit facility
with Bank One. Champion is working under a forbearance agreement through March
15, 2002. Champion has paid down the Bank One debt by $570,000 during the
quarter ended January 31, 2002 as consideration for such agreements. The Company
made a capital contribution to Champion of $570,000 from loan proceeds from DC
Investments.
27
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
9. SUBSEQUENT EVENTS, CONTINUED
DC Investments has purchased accounts receivable from DW Leasing, recorded by DW
Leasing as deposits on trailers, in the amount of $1,050,000 as of February 13,
2002. 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
$624,000 and the amount due shareholders and other related parties in the
approximate amount of $300,000.
On March 15, 2002, the Company and DW Leasing converted amounts owed to DC
Investments to notes payable. The notes bear interest at 10% payable quarterly,
with principal due in one installment in March 2005. The total amounts payable
under these notes to DC Investments are $1,085,000 and $210,000 for Obsidian
Enterprises and DW Leasing, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Cautionary Statement Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. The Company and its representatives may from time to
time make written or oral forward-looking statements, including statements
included in or incorporated by reference into this Quarterly Report on Form 10-Q
and the Company's other filings made with the Securities and Exchange
Commission. These forward-looking statements are based on management's views and
assumptions and involve risks, uncertainties and other important factors, some
of which may be beyond the control of the Company, that could cause actual
results to differ materially from those expressed or implied in the
forward-looking statements. Factors that might cause or contribute to such
differences include, but are not limited to, those discussed in Item 2.,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, in this Form 10-Q. Readers should carefully review the risks
described in this and other documents that the Company files from time to time
with the Securities and Exchange Commission. The forward-looking statements
speak only as of the date that they are made and the Company undertakes no
obligation to update or revise any of the forward-looking statements.
Overview
The reverse merger transactions, completed in June and July 2001, have been
treated for accounting purposes as an acquisition by U.S. Rubber. For this
reason, the first quarter results for 2001 represent only the financial results
of U.S. Rubber for three months, Champion Trailer for one month, and the Pyramid
Group for one month based on the January 1, 2001 acquisition date. Danzer
Industries and United Expressline were acquired June 21, 2001 and July 31, 2001,
respectively, and, accordingly, are not included in financial condition at
January 31, 2001 or the results of operations for the first quarter ended
January 31, 2001.
The financial condition as of January 31, 2002 and the results of operations for
the first quarter ended January 31, 2002, include the operations of U.S. Rubber,
Champion Trailer, Pyramid Coach, Obsidian Leasing, DW Leasing, United
Expressline, and Danzer Industries.
28
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS 2002 COMPARED WITH 2001
The Company operates in three segments, trailer and related transportation
manufacturing, butyl rubber reclaiming, and coach leasing. Trailer and related
transportation manufacturing includes the operations of United, Danzer
Industries, and Champion. Butyl rubber reclaiming includes the operations of
U.S. Rubber and coach leasing includes the operations of Pyramid, DW Leasing,
and Obsidian Leasing.
Segment Sales
The following table shows net sales by segment:
Three Months Ended January 31,
-------------------------------------
2002 2001
------------------ ------------------
(in thousands)
Trailer and related transportation
equipment manufacturing $ 9,250 $ 118
Butyl rubber reclaiming 2,190 3,347
Coach leasing 1,043 278
------------------ ------------------
Total $ 12,483 $ 3,743
================== ==================
The Company's operating results and revenue were less than expected for each of
its segments in the first quarter ended January 31, 2002. This is primarily due
to softer than expected sales of reclaimed butyl rubber, transport specialty
trailers, and truck bodies, and the overall continued slowdown of economic
activity during the first quarter ended January 31, 2002. The results of
operations were also negatively impacted by normal seasonal slow activity for
the coach leasing activities and the Company's sales from its trailer
manufacturing operations. Management is still focused on creating consistent
reporting systems and communication with each of its subsidiaries. In addition
Management is continuing to address the transition of the subsidiaries from
closely held mostly non-audited private companies to public entities. Management
has no prior history in effecting such an integration of subsidiaries under a
holding company and its ability to successfully accomplish this task will have a
substantial impact on future Company revenues and profits. Subsequent to the
first quarter, the Company hired a new Chief Financial Officer to direct many of
these functions including cash management, debt consolidation, more timely
reporting, development of programs to incentives personnel, and to help
integrate the acquired subsidiaries into an effective operating Company.
TRAILER AND RELATED TRANSPORTATION EQUIPMENT MANUFACTURING
Company gross profit and gross profit percentage for the three months ended
January 31, 2002, for the trailer and related transportation equipment
manufacturing segment were $842,256 and 9.1%. This segment had one month of
operations only generated by Champion Trailer resulting in gross profit and
gross profit percentage of $34,670 and 29.5% for the three months ended January
31, 2001.
Sales and gross profits were lower than expected in this segment due to various
factors described below.
29
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
The continued depressed conditions in the telecommunications industry was the
primary factor that has seen lower than expected truck body sales during the
first quarter. Truck body cost of sales were greatly affected by the lower sales
and the efforts to lower reductions in costs were not sufficient to offset the
effect of the reduced revenue. The Company anticipates that overall economic
conditions and the economic state of the telecommunications industry will
continue to impact sales of truck bodies during 2002.
The Company's transport specialty trailer gross profit was substantially below
expectations in the first quarter of 2002. As a result of continued negative
operating results of Champion Trailer, including a $2.3 million impairment
charge in the fourth quarter of 2001, the Board of Directors has agreed in
principle to divest Champion to a group consisting of the Chairman of the Board
of the Company, the President and the management group of Champion pursuant to
the terms of a nonbinding Letter of Intent subject to an independent review of
fair value by the independent Board members of the Company. DC Investments is
negotiating to purchase the loans of Bank One to Champion and has agreed in
principle to contribute the loan to the Company in exchange for an as yet
undetermined number of Series C Preferred Stock. The Company would contribute
that note to Champion as additional capital. The management group would acquire
Champion in exchange for the assumption of the $1,250,000 subordinated debt of
Champion and all accrued interest and either a release of the Company's
guarantee of that debt or an indemnification of the Company for any loss to the
Company as a result of the guarantee.
The Company's gross profit and operating results in its trailer manufacturing
operations were lower for the first quarter than was expected. Although the
Company normally expects this quarter to be lower due to the seasonal nature of
the trailer manufacturing operations, the results of the first quarter of 2002
sales, gross profit and net operating income are lower than expected. Management
believes that there are operational savings available in the consolidation of
administrative functions performed at United's two facilities and expects to
make changes necessary to reduce certain common costs during the third and
fourth quarter of 2002.
Sales and gross profit were affected by the recession and the consequent
reduction in the overall level of capital spending during the first quarter
ended January 31, 2002. As capital spending increases, the Company expects sales
and gross profit to rebound to historical levels in this segment at United and
Danzer Industries.
Butyl Rubber Reclaiming
Net sales for the periods reported in this segment are as follows:
Three Months Ended January 31,
------------------------------------------
2002 2001
------------------ -----------------------
Rubber net sales $ 2,190,445 $ 3,347,276
================== =======================
Net sales in this segment for the three months ended January 31, 2002 as
compared to the comparable three-month period ended January 31, 2001 decreased
34.6% in the amount of $1,156,831.
The Company's customers had built up large inventories during the widespread
tire recalls at Bridgestone/Firestone and Goodyear in anticipation of huge
demand under such recalls. The number of tires submitted by consumers to be
replaced was substantially lower than anticipated, and as a result, tire
manufacturer orders through December 2001 were lower than the previous year,
producing a substantial decrease in reclaimed butyl demand through December
2001. The Company saw an increase in sales during January 2002 and anticipates a
return to more normal inventory levels at its tire manufacturer customers, but
doesn't anticipate a return to historic levels of demand for reclaimed butyl
rubber by tire manufacturers until the third quarter of 2002.
30
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
The decline in the price of crude oil in late 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. If the price of crude oil begins to climb again, the Company
believes the demand for those uses will return to historic levels during 2002.
Cost of goods sold in this segment were as follows:
Three Months Ended January 31,
----------------------------------------
2002 2001
----------------- ----------------------
Rubber cost of goods sold $ 2,045,930 $ 3,130,018
==========================================
% of sales 93.4% 93.5%
==========================================
Manufacturing costs remained stable in 2002 when compared to the prior year for
the three-month period ended January 31, 2001. With the 12" extruder renovation
completed in September 2001 and the increased use of butyl rubber pad scrap,
management anticipates that the cost of goods sold percentage should continue to
decline in 2002 from that experienced in 2001 so long as sales volume increases
as expected.
Gross profit and gross profit percentage for the three months ended January 31,
2002 and 2001 were as follows:
Three Months Ended January 31,
------------------------------------------
2002 2001
------------------- ----------------------
Rubber gross profit $ 144,515 $ 217,258
============================================
Rubber gross percentage 6.6% 6.5%
============================================
Gross profit was consistent during the first quarter of 2002 as compared to the
2001 period.
Management believes that the use of butyl rubber pad scrap will help control the
cost of raw materials during the remainder of 2002 and that the Company has the
ability to raise prices in late 2002.
On February 26, 2002, the Company entered into a series of transactions with US
Rubber, SerVaas, Inc. ("SerVaas"), the former owner of US Rubber, and DC
Investments whereby certain existing debt of US Rubber was acquired from
SerVaas. DC Investments acquired the SerVaas interest in the debt agreement with
a remaining balance of $730,000 plus accrued interest for $700,000. US Rubber
then acquired this agreement in exchange for a new note payable to DC
Investments with a face amount of $700,000. The note requires monthly interest
payments at 15% with the principal payable March 2007. The note is subordinate
to debt outstanding with the senior lender of US Rubber.
The Company also acquired the SerVaas interest in the US Rubber $1,750,000
subordinated note payable in exchange for $700,000 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 $700,000 issued to DC Investments. The note
requires monthly interest payments at 15% with the principal payable March 2007.
31
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
No gain or loss will be recognized in the transactions because of the
involvement of related parties. The transaction will result in an increase in
equity of the consolidated group of approximately $1,400,000.
Coach Leasing
The results of operations for the three months ended January 31, 2001 includes
only one month of operating results of coach leasing, as Pyramid, Obsidian
Leasing and DW Leasing ("Pyramid Group") were not a part of the Company until
January 1, 2001. Coach leasing revenue was higher due to the increase in size of
the coach fleet. Management expects decreased utilization during the second
quarter of fiscal 2002. Management believes its marketing efforts to rock and
roll, pop, touring Broadway shows and corporate customers will result in
increased utilization during the third quarter of the Company's fiscal year.
Through the fiscal year ended October 31, 2001, the Company and DW Leasing
conducted cooperative operations through a management agreement,
cross-guarantees of debt and shared management and expense. On November 1, 2001,
a substantial part of DW Leasing's asset and liabilities were transferred to
Obsidian Leasing Company, Inc. ("Obsidian Leasing"), wholly owned by the
Company, to complete the purchase of the Coach Leasing business contemplated by
the purchase transaction in June 2001. The operations of Obsidian Leasing have
been included in the first quarter results of operation of the Company. DW
Leasing's operations are also included in the results of operations for the
first quarter of 2002.
For the three months ended January 31, 2002, the coach leasing segment had gross
profit and gross profit percentage of $470,537 and 45.1%.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES
Selling, general and administrative expenses are higher for the three months
ended January 31, 2002 versus the three-month period ended January 31, 2001 due
to the operations added in 2001, as previously discussed.
Selling, general and administrative expenses are higher for the three month
period 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, normally performed by Company
personnel.
INTEREST EXPENSE
The Company's interest expense is a very high percentage when calculated as a
percentage of net sales, as all acquisitions were made on a highly leveraged
basis. For the three-month period ended January 31, 2002, the percentage of
interest expense to net sales of 7% was lower than the 7.4% for the comparable
Pro Forma period ended January 31, 2001 reflecting the lower sales for the three
months ended January 31, 2002, offset by debt reductions during 2001 primarily
from capital contributions. The historical three-month period ended January 31,
2002, the percentage of interest expense to sales of 7% was higher than the 5.8%
for the comparable period ended January 31, 2001, due to the cost of financing
the subsidiary purchases in June and July 2001.
INCOME TAX PROVISION
The income tax benefit for the three-month period ended January 31, 2002
increased by $143,000 as compared to the three-month period ended January 31,
2001. The income tax benefit is created primarily through operating loss
carryforwards recognized in the quarter to the extent they are available to
offset the Company's net deferred tax liability. Quarterly tax benefits are
based on the estimated effective tax rate for the full year.
32
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES
Each of the subsidiaries of the Company have separate revolving credit
agreements and term loan borrowings through which the subsidiary finances its
operations together with cash generated from operations. The high principal
balances of some of these loans reflect the fact that Obsidian Capital Partners,
LP, from whom four of the five subsidiaries were purchased, entered into highly
leveraged acquisitions of Champion, U.S. Rubber, Pyramid Group, and United.
This high level of debt creates 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 will be in technical default under
loans. These risks are mitigated, in part, for the Company's United and U.S.
Rubber subsidiaries by the right described below under "Guarantees of OCP."
The Company and most of its subsidiaries have violated certain requirements and
covenants in their debt agreements relating to maintenance of certain minimum
ratios and levels of earnings to funded debt and fixed charge coverage rate.
Management has brought these violations to the attention of its lenders and,
except for the Champion debt and one DW Leasing note agreement, the lenders have
waived these violations as described below under "Financial Covenant Waivers."
The Company's working capital position (current assets over current liabilities)
was negative at January 31, 2002 by $9,024,000 in part because approximately 39%
of the Company's debt is classified as a current liability.
The Company has been addressing these liquidity and working capital issues in a
variety of ways. Management anticipates that the following steps started in
early 2002 will improve the Company's working capital position, strengthen its
equity position and place the Company in a position to successfully address its
liquidity issues. These steps include:
o The transactions described below under "Partners Equity Transactions" which
converts more than $2,170,000 of long-term liabilities to equity.
o The divestiture of Champion described below under "Champion Transaction"
which would improve the Company's working capital position.
o The transactions described below under "Refinancing Activities" which
management anticipates will reduce the Company's interest costs and
decrease the proportion of debt which is treated as a current liability.
There can be no assurance that any or all of these transactions will occur.
Moreover, if these transactions do occur, there can be no assurance that they
will sufficiently address the Company's liquidity issues. Management will
continue to address the liquidity concerns as well as consider any additional
actions if the contemplated transactions either do not occur or are
insufficient.
33
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
FINANCIAL COVENANT WAIVERS
The Company has reached agreements with certain of its lenders to waive
financial covenant defaults under the following loans:
o Management has completed discussions with Bank One in respect of the
violations by U.S. Rubber of the negative covenants of (i) fixed charge
coverage ratio and (ii) funded debt to EBITDA ratio. Management has
received a waiver of these violations and an amendment of the Credit
Agreement which extends it through November 1, 2002 when the entire debt is
due.
o Pyramid is a guarantor of DW Leasing's debt to Regions Bank, Nashville,
Tennessee. DW Leasing and Pyramid have been in violation of the Funded Debt
to EBITDA ratio in the Regions Bank Credit Facility since the inception of
the loan. This is due to the fact that DW Leasing acquired eight additional
new luxury coaches, in highly leveraged transactions. At the time of the
Acquisition, Regions Bank granted a waiver of this violation. To date, the
covenant has not been rewritten. Regions Bank has waived the violation as
of October 31, 2001. However, since the Company continues to be in
violation of this covenant, $622,000 of long-term debt due Regions Bank has
been reclassified as a current liability.
o The Company was in violation of three negative covenants with Renaissance
US Growth & Income Trust PLC and FBSUS Special Opportunities Trust PLC, the
holders of debentures that completed the financing of United. The Company
has received a waiver of these violations through November 1, 2002.
Champion remains in default of both the senior and the subordinated debt
agreements, which have been classified as a current liability due to the
default, and is operating under a forbearance agreement on the senior debt
through March 15, 2002. DC Investments is negotiating with Bank One to purchase
the senior debt from Bank One. (See Champion Transactions.)
FUNDS AVAILABILITY
On a consolidated basis, as of January 31, 2002, the Company had approximately
$417,000 of cash and cash equivalents. Danzer Industries, U.S. Rubber and United
each have revolving credit lines available for working capital at each
individual entity. Borrowings under the credit facilities are available to the
lesser of the maximum amount or the borrowing base as defined in the credit
agreement. At January 31, 2002, these subsidiaries had no additional current
availability due to borrowing base limitations. Maximum additional amounts
available under these credit lines if supported by their individual borrowing
base are approximately $425,000, $900,000, and $315,000 for Danzer Industries,
U.S. Rubber, and United, respectively.
The Company did not generate net cash flow from operations during the quarter
ended January 31, 2002. Operating losses during the quarter were funded
primarily through borrowings under existing lines of credit and related-party
finished goods financing provided by DC Investments, and borrowing from DC
Investments.
REFINANCING ACTIVITIES
Management is refinancing some of the currently outstanding debt:
o Negotiations have been ongoing with a new lender to refinance the primary
lender of U.S. Rubber at more favorable terms than the current terms.
Management anticipates the refinancing will be concluded by the third
fiscal quarter.
o The Company expects in the ordinary course of business to obtain an
extension or annual renewal of the term note on the First Indiana Bank
revolving line of credit.
34
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
o The Company is undertaking to refinance the coaches transferred from DW
Leasing to a new wholly owned subsidiary of the Company (Obsidian Leasing
Company, Inc.) with DC Investments and its various existing lenders.
Management anticipates that this will be concluded by the third fiscal
quarter.
PARTNERS EQUITY TRANSACTIONS
Obsidian Capital Partners, LP, the major shareholder of the Company, is required
under the Plan of Reorganization to fund through the purchase of additional
preferred stock certain ongoing administrative expenses of the company to
complete the Plan of Reorganization, complete all required current and prior
year audits to meet the regulatory filing requirements, and ensure all annual
and quarterly SEC filings are completed to enable the registration of the
preferred stock issued to Obsidian Capital Partners, LP. Such amount expended
through January 31, 2002 approximated $645,000. Management anticipates this and
any additional items incurred will be converted to equity.
Obsidian Capital Partners, LP has indicated that it is willing to convert to
Series C Preferred Stock of the Company $1,222,000 of advances from Partners to
the Company. Management anticipates this transaction will be concluded in May of
2002.
GUARANTEES OF OCP
The Company has an agreement with Obsidian Capital Partners, LP that gives it
the right to mandate a capital contribution from Obsidian Capital Partners, LP
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 Obsidian Capital Partners, LP up to $1,620,000 on U.S. Rubber and
$1,000,000 on United to fund the respective subsidiary's shortfall. These
payments, if any, would be applied directly to reduce the respective
subsidiary's debt obligations to the lender.
CHAMPION TRANSACTIONS
The Board of Directors has agreed in principle to divest Champion to a group
consisting of Champion's management and Messrs. Durham and Whitesell pursuant to
the terms of a nonbinding Letter of Intent, subject to an independent review of
fair value by the independent Board members of the Company. DC Investments, LLC
is negotiating to purchase the loan of Bank One to Champion and has agreed in
principle to contribute the loan to the Company in exchange for an as yet
undetermined number of Series C Preferred Stock. The Company would contribute
that note to Champion as additional capital. The management group would acquire
Champion in exchange for the assumption of the $1,250,000 subordinated debt of
Champion and all accrued interest and either a release of the Company's
guarantee of that debt or an indemnification of the Company for any loss to the
Company as a result of the guarantee.
Champion was working under a forbearance agreement with Bank One on its Senior
Credit Facility which expired on March 15, 2002. Although the forbearance
agreement has not been formally extended, DC Investments is negotiating with
Bank One to purchase the loan. Champion is also indebted to Markpoint Equity
Fund IV under a subordinated credit facility in the amount of $1,250,000.
Champion has been in violation of the funded debt to EBITDA negative covenant of
the Markpoint Credit Agreement since the inception of the loan. Management
brought this violation to Markpoint's attention prior to the close of the
Acquisition and has obtained a waiver of the violation each quarter. Markpoint
has informed Champion that it may not grant waiver of this violation in the
future. The Bank One debt and the Markpoint debt have been classified as current
liabilities due to these violations.
35
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CASH FLOWS (EBITDA)
A summary of our contractual cash obligations for the fiscal years ending 2002
through 2005 and 2006 and thereafter at January 31, 2002 is as follows:
Contractual Obligations Total 2002 2003 2004 2005 2006 and
Thereafter
------------- --------------- ------------ ------------ ------------ ---------------
Long-term debt, with covenant $4,343,000 $4,343,000 $ -- $ -- $ -- $ --
violations and classified as current
Long-term debt, and all debt service
interest payments 36,108,300 7,137,800 11,264,500 3,417,400 2,559,000 12,729,600
Operating leases 1,854,000 727,000 980,000 67,000 32,000 48,000
Purchase agreement for equipment 1,350,000 1,350,000 -- -- -- --
------------- --------------- ------------ ------------ ------------ ---------------
Total contractual cash obligations $43,655,300 $13,557,800 $12,244,500 $3,484,400 $2,591,000 $12,777,600
============= =============== ============ ============ ============ ===============
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 December Date of Expiration
31, 2001
------------------------------- ---------------------------- ---------------------------- ----------------------------
Line of credit $ 200,000 $ 159,000 March 15, 2002
Line of credit 1,000,000 575,000 March 31, 2002
Line of credit 3,500,000 3,185,000 July 1, 2002
Line of credit 3,000,000 2,093,000 November 1, 2002
The Company's net cash used in operations for the three months ended January 31,
2002 was $(340,000). This is comprised of net losses of $1,497,000, increases in
inventories of $458,000, and increases in accounts receivable of $139,000,
offset by noncash depreciation and amortization of $701,000, and increases in
customer deposits and accrued expenses of $678,000 and decreases in prepaid and
other assets of $375,000.
Cash flow provided from financing activities, for the three months ended January
31, 2002 was $439,000. This is comprised of borrowings of long-term debt and
borrowings of short-term debt of $961,000, and borrowings from related parties
of $856,000, offset by principal repayments of long-term debt of $1,378,000.
Cash flow was used in investing activities for the three months ended January
31, 2002 of $211,000. This is comprised primarily of purchase of property and
equipment of $222,000.
The total decrease in cash is summarized as follows:
Three Months Ended
January 31, 2002
------------------------------
Net cash used in operations $ (340,000)
Net cash used in investing activities (211,000)
Net cash provided by financing activities 439,000
------------------------------
Decrease in cash and cash equivalents $ (112,000)
==============================
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.
36
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
EBITDA by business segment and reconciliation to net income or loss under
accounting principles generally accepted in the United States of America by
subsidiary for the applicable periods is as follows:
Three-month Period Ended January 31, 2002
(in thousands)
-------------------------------------------------------------------------
Net
Interest Income Depreciation Income
EBITDA Expense Taxes & Amortization (Loss)
------------ ------------ ----------- -------------------- --------------
Trailer and related transportation
equipment manufacturing $ (376) $ 360 $ (46) $ 197 $ (887)
Butyl rubber reclaiming 83 176 (109) 259 (243)
Coach leasing 235 357 -- 245 (367)
------------ ------------ ----------- -------------------- --------------
Total Company $ (58) $ 893 $ (155) $ 701 $ (1,497)
============ ============ =========== ==================== ==============
Three Months Ended January 31, 2001
(in thousands)
------------------------------------------------------------------------
Net
Interest Income Depreciation Income
EBITDA Expense Taxes & Amortization (Loss)
------------ ------------ ----------- -------------------- -------------
Trailer and related transportation
equipment manufacturing $ (73) $ 35 $ -- $ 29 $ (137)
Butyl rubber reclaiming 192 74 (12) 182 (52)
Coach leasing 17 108 -- 75 (166)
------------ ------------ ----------- -------------------- -------------
Total Company $ 136 $ 217 $ (12) $ 286 $ (355)
============ ============ =========== ==================== =============
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are summarized in the footnotes to our
financial statements. Some of the most critical policies are also discussed
below.
As a matter of policy, we review our major assets for impairment. Our major
operating assets are accounts receivable, inventory, intangible assets and
property and equipment. We have not experienced significant bad debts expense
and our reserve for doubtful accounts of $95,000 should be adequate for any
exposure to loss in our January 31, 2002 accounts receivable. We have also
established reserves for slow-moving and obsolete inventories and believe the
reserve of $708,000 is adequate. We depreciate our property and equipment and
amortize intangible assets (except for goodwill) over their estimated useful
lives. We have identified items that are impaired and the operating results for
the ten-month period ended October 31, 2001 included a goodwill impairment
charge of $2,305,000. There are no impairment charges in the three-month periods
ended January 31, 2002 and 2001.
37
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
RISK FACTORS
There are a number of risk factors related to the future results of the Company,
including those discussed in the following paragraphs.
Liquidity
The Company cannot be certain that it will have sufficient liquidity available
under existing lines of credit. Four of the Company's subsidiaries were acquired
during the last fiscal year in highly leveraged transactions. Also, four of the
Company's subsidiaries have been in violation of certain requirements and
covenants in their debt agreements relating to maintenance of specified minimum
ratios and levels of earnings to funded debt and fixed charge coverage. The
Company cannot be certain whether it will be able to meet covenant requirements
contained in debt agreements. Although the Company has been able to obtain
waivers of previous violations, the Company cannot be certain that it will be
able to obtain waivers of such covenants if waivers are needed in the future.
One lender, Markpoint, has informed the Company that it may not grant any
additional waivers of certain covenant violations.
There is no assurance that lenders will continue to lend to the Company.
Lenders' criteria for loans change and, if there is a further general tightening
of credit standards, the Company may not qualify for credit. Further, if the
Company's financial performance continues to deteriorate from the manner in
which its various operations have historically performed, the Company's lenders
may declare defaults and refuse to advance funds under revolving credit lines.
Under these circumstances the Company may not be able to obtain credit on any
terms.
Integration Of Operations
The Company consists of a business combination of Obsidian Enterprises, Inc. and
various recently purchased manufacturing entities of Obsidian Capital Partners,
L.P. The management resources to date have been spent on purchasing, continuing
operations at preacquisition capability after the purchase, and integrating
subsidiary operations with the Obsidian management. The date of purchase of each
entity by the current management is:
Operating Entity Date of Purchase
U.S. Rubber Reclaiming, Inc. December 29, 2000
Pyramid Coach, Inc. December 20, 1999
Champion Trailer, Inc. May 2, 2000
Danzer Industries, Inc. June 21, 2001
United Expressline, Inc. July 31, 2001
The Company is still in the process of resolving issues relating to the
integration of the operations of these entities. The Company nay not be
successful in integrating these businesses or the integration may take longer or
be more costly than currently anticipated.
Market Risk
The Company is exposed to market risk related to changes in interest rates on
its debt. Approximately 36% of the Company's primary debt bears interest at a
variable rate. An interest rate increase of one percentage point would increase
the Company's interest expense over a one-year period by approximately $134,000
at current debt levels.
38
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
Ability To Attract And Retain Key Managers And Employees
The Company's ability to retain key subsidiary management and employees will be
a significant factor in the Company's success. The recent acquisitions of the
four subsidiary entities and the changes in the Company's management have made
it even more important for the Company to focus on retaining former managers and
employees. In addition, the Company just recently hired a chief financial
officer and continues to seek to obtain skilled managers and employees and to
provide efficient incentives for all of the managers and employees of its
subsidiary companies.
Competition
The Company faces strong competitors in its coach leasing segment and trailer
and related transportation equipment manufacturing segment. The Company's coach
leasing business competes with a number of other companies that lease luxury
coaches. The Company's success in the coach leasing segment is dependent upon
its ability to meet demand and match the quality and amenities sought after by
its target market at competitive prices. The Company's trailer and related
transportation equipment manufacturing segment competes with a number of
companies, including a number who are much larger than the Company and have
equal or greater technical and financial resources.
Butyl Rubber Reclaiming Segment
The Company's butyl rubber reclaiming segment is highly dependent upon the
availability of raw materials. The Company is facing increased competition for
raw materials from foreign manufacturers as the supply of the scrap butyl rubber
from inner tubes continues to decline. The success of this segment will depend
in large measure upon the Company's ability to successfully develop alternative
sources of raw materials. The demand for butyl rubber by some of the Company's
customers also is closely tied to the price of crude oil, with demand falling as
the price of crude oil falls.
Coach Leasing Segment
The Company's coach leasing segment leases luxury coaches primarily to
performers in the entertainment industry. This segment is highly dependent upon
the state of the general economy and its effect on entertainment spending.
Consumer spending on entertainment tends to decline during recessionary periods
when disposable income is low. The availability of quality contract drivers is
another factor that affects the success of the coach leasing segment.
Trailer And Related Transportation Equipment Manufacturing Segment
A majority of truck bodies manufactured by the Company are used in the
telecommunications industry. The success of the Company's trailer and related
transportation equipment manufacturing segment is dependent upon overall
economic conditions and in particular on the state of the telecommunications
industry. Slightly more than one-half of the Company's revenue from the
manufacture of service truck bodies, which is part of the Company's trailer and
related transportation equipment manufacturing segment, is derived from a single
customer. The Company's success in this segment is dependent to a large degree
upon the continued financial health of this one customer and the continued
strength of the Company's relationship with this customer. The loss of this or
another significant customer could have a material adverse effect on this
segment of the Company's business.
39
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
Other Factors
Management's attention to day-to-day operating issues and the solution of such
issues is ongoing due to the very recent dates of purchase. Management's ability
to successfully integrate the operating companies into a public reporting and
cohesive operations while attempting to attain profitable operating results will
be determinative of later success. Employee uncertainty and lack of management
focus during the initial stages of purchase and continuing integration is
disruptive to the business of each Company subsidiary. Retention of employees
through support of the Company's ongoing manufacturing capability, ongoing sales
and marketing efforts will be required, but is not assured.
The Company's ability to stabilize operations and to eventually achieve growth
of each of its segments will require it to implement and expand its operating
and financial systems. This implementation will carry a significant
disproportionate cost to the operations in the next twelve months which will
have a negative impact on revenues. The Company expects any significant growth
would place a strain on its operational resources and its financial systems.
Failure to effectively manage any growth would have a material adverse effect on
the Company's business, financial condition, results of operations and cash
flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to market risk related to interest rate changes. See the
discussion of market risk in Management's Discussion and Analysis of Financial
Condition and Results of Operations in Item 2, which discussion is incorporated
by reference herein.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
None
A. EXHIBITS
None
B. REPORTS ON FORM 8-K
None
40
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OBSIDIAN ENTERPRISES, INC.
March 18, 2002 By: /s/ Timothy S. Durham
-------------------------- Timothy S. Durham, Chairman and
Date Chief Executive Officer
March 18, 2002 By: /s/ Jeffrey W. Osler
-------------------------- Jeffrey W. Osler, Principal Financial
Date Officer