SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2003; OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
_____________________________ TO ___________________________
0-17430
-----------------------
Commission File Number
OBSIDIAN ENTERPRISES, INC.
------------------------------------------------------------------------------
------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 35-2154335
-------------------------------- ------------------------------------
-------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
111 MONUMENT CIRCLE, SUITE 4800 46204
INDIANAPOLIS, INDIANA
-------------------------------- ------------------------------------
(Address of principal (Zip code)
executive offices)
(317) 237-4122
------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
---- ----
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
$.0001 par value June 20, 2003
36,007,855 shares
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
INDEX
PAGE
PART I - FINANCIAL INFORMATION:
Item 1 - Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets - April 30, 2003 and October 31, 2002....3
Condensed Consolidated Statements of Operations
Three and Six Months Ended April 30, 2003 and 2002.....................5
Condensed Consolidated Statement of Changes of Stockholders'
Deficit and Comprehensive Loss.........................................6
Condensed Consolidated Statements of Cash Flows
Three and Six Months Ended April 30, 2003 and 2002.....................7
Notes to Condensed Consolidated Financial Statements...........................9
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................26
Item 3 - Quantitative and Qualitative Disclosures About Market Risk...........38
Item 4 - Controls and Procedures..............................................38
PART II - OTHER INFORMATION:
Item 1 - Legal Proceedings....................................................39
Item 2 - Changes in Securities and Use of Proceeds............................39
Item 3 - Defaults Upon Senior Securities......................................39
Item 4 - Submission of Matters to a Vote of Security Holders..................39
Item 5 - Other Information....................................................39
Item 6 - Exhibits and Reports on Form 8-K.....................................39
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
(unaudited)
April 30, October 31,
2003 2002
----------------------------------
Assets
Current assets:
Cash and cash equivalents $ 747 $ 920
Marketable securities 115 137
Accounts receivable, net of allowance for doubtful accounts
of $495 for 2003 and $495 for 2002 3,994 3,307
Accounts receivable, related parties 211 206
Inventories, net 7,928 7,315
Prepaid expenses and other assets 635 1,049
----------------------------------
Total current assets 13,630 12,934
Property, plant and equipment, net 24,411 23,048
Other assets:
Goodwill, net 6,434 6,434
Other intangible assets, net of accumulated amortization of $694 for
2003 and $461 for 2002 1,655 1,853
Other 131 116
Assets of subsidiary held for sale - 1,538
----------------------------------
$ 46,261 $ 45,923
==================================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
(unaudited)
April 30, October 31,
2003 2002
----------------------------------
Liabilities and Stockholders' Deficit
Current liabilities:
Current portion of long-term debt $ 7,130 $ 5,667
Current portion of long-term debt, related parties 119 --
Accounts payable, trade 3,188 3,450
Accounts payable, related parties 838 668
Accrued expenses and customer deposits 1,871 1,558
----------------------------------
Total current liabilities 13,146 11,343
Long-term debt, net of current portion 20,203 23,879
Long-term debt, related parties 12,126 5,518
Deferred income tax liabilities 817 1,624
Liabilities of subsidiary held for sale - 2,848
Commitments and contingencies
Mandatory redeemable preferred stock:
Class of Series C Preferred Stock: 386,206 shares outstanding for
2003 and 2002 1,536 1,400
Class of Series D Preferred Stock: 32,143 shares outstanding for 2003 675 --
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, 3,982,193 issued
and outstanding for 2003 and 2002, 200,000 shares of undesignated
preferred stock authorized 5 5
Preferred stock, 200,000 shares authorized; Class of Series D convertible
preferred stock, par value $.001, 88,330 shares issued and outstanding in
2003 and 2002 -- --
Additional paid-in capital 11,155 10,184
Accumulated other comprehensive loss (70) (49)
Accumulated deficit (13,335) (10,832)
----------------------------------
Total stockholders' deficit (2,242) (689)
----------------------------------
$ 46,261 $ 45,923
==================================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share and share data)
(unaudited)
Three Months Ended Six Months Ended
------------------------------------------------------------------------
April 30, 2003 April 30, 2002 April 30, 2003 April 30, 2002
------------------------------------------------------------------------
(as restated) (as restated)
Net sales $ 15,107 $ 15,598 $ 26,007 $ 27,064
Cost of sales 13,316 12,973 23,056 22,921
------------------------------------------------------------------------
Gross profit 1,791 2,625 2,951 4,143
Selling, general and administrative
expenses 2,197 2,260 4,253 4,264
------------------------------------------------------------------------
Income (loss) from operations (406) 365 (1,302) (121)
Other income (expense):
Interest expense, net (904) (931) (1,688) (1,776)
Other expense, net -- (4) 3 (33)
------------------------------------------------------------------------
Loss before income taxes and discontinued
operations (1,310) (570) (2,987) (1,930)
Income tax benefit 401 -- 559 155
------------------------------------------------------------------------
Loss before discontinued operations (909) (570) (2,428) (1,775)
Loss from discontinued operations, net of
tax - (395) (49) (721)
------------------------------------------------------------------------
------------------------------------------------------------------------
Net loss $ (909) $ (965) $ (2,477) $ (2,496)
========================================================================
========================================================================
Basic and diluted loss per share
attributable to common shareholders:
From continuing operations $ (.03) $ (.02) $ (.07) $ (.04)
Discontinued operations, net of tax -- (.01) (.00) (.02)
------------------------------------------------------------------------
------------------------------------------------------------------------
Net loss per share $ (.03) $ (.03) $ (.07) $ (.06)
========================================================================
========================================================================
Weighted average common shares outstanding
basic and diluted 36,007,855 36,007,855 36,007,855 36,007,855
========================================================================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
DEFICIT AND COMPREHENSIVE LOSS
(dollars in thousands)
(unaudited)
Series C Series D
Convertible Convertible Accumulated
Comprehensive Common Stock Preferred Stock Preferred Stock Additional Other
------------------------------------------------ Paid-in Comprehensive Accumulated
Loss Shares Amount Shares Amount Shares Amount Capital Loss Deficit Total
--------------------------------------------------------------------------------------------------------
Balance at October 31, 2002 $ -- 36,007,855 $ 3 4,368,399 $ 5 88,330 $ -- $10,184 $ (49) $(10,832) $ (689)
Contribution to capital from
sale of Champion to related
party -- -- -- -- -- -- -- 1,142 -- -- 1,142
Fair value adjustment on -- -- -- -- -- -- -- (105) -- (26) (131)
redeemable preferred stock
Tax effect of sale of coaches -- -- -- -- -- -- -- (96) -- -- (96)
to DC Investments Leasing, LLC
Extension of stock options -- -- -- -- -- -- -- 30 -- -- 30
Unrealized loss on available (21) (21) -- (21)
-for -sale marketable
securities
Net loss (2,477) -- -- -- -- -- -- -- -- (2,477) (2,477)
--------------------------------------------------------------------------------------------------
Total comprehensive loss $(2,498)
========
Balance at April 30, 2003 36,007,855 $ 3 4,368,399 $ 5 88,330 $-- $11,155 $ (70) $ (13,335) $(2,242)
============================================================================================
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
--------------------------------
April 30, 2003 April 30, 2002
--------------------------------
(as restated)
Cash flow from operating activities:
Loss from continuing operations $ (2,428) $ (1,775)
Adjustments to reconcile loss from continuing operations to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,446 1,271
Other (413) (161)
Changes in operating assets and liabilities
Accounts receivable, net (687) (746)
Inventories, net (614) (427)
Other, net 100 1,779
--------------------------------
Net cash used in operating activities (2,596) (59)
--------------------------------
Cash flows from investing activities:
Capital expenditures (296) (405)
Other -- 11
--------------------------------
Net cash used in investing activities (296) (394)
--------------------------------
Cash flows from financing activities:
Advances from (repayments to) related parties, net (961) 305
Net borrowings on lines of credit 1,188 601
Net borrowings (repayments) on long-term debt, including related parties 2,533 (721)
--------------------------------
Net cash provided by financing activities 2,760 185
Net cash provided by (used in) discontinued operations (41) 6
--------------------------------
Decrease in cash and cash equivalents (173) (262)
Cash and cash equivalents, beginning of period 920 529
--------------------------------
Cash and cash equivalents, end of period $ 747 $ 267
================================
Interest paid $ 832 $ 1,562
================================
Taxes paid $ 63 $ 15
================================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
--------------------------------
April 30, 2003 April 30, 2002
--------------------------------
(as restated)
Supplemental disclosure of noncash operating, investing and financing
activities:
Acquisition of coaches and equipment through issuance of debt $ 2,304 $ --
Contribution to capital from sale of Champion to related party $ 1,142 $ --
Issuance of mandatory redeemable preferred stock in conjunction with the sale of
Champion $ 675 $ --
Tax effect of sale of coaches to a related party $ 96 $ --
Fair value change on mandatory redeemable preferred stock $ (131) $ 423
Reclassification of debt due to assumption of credit agreement by
Fair Holdings $ 1,488 $ --
Conversion of debt to preferred stock and additional paid-in capital $ -- $ 3,348
Conversion of accounts payable, related parties to debt $ -- $ 1,295
Purchase price adjustment and conversion of accounts payable to debt for United $ -- $ 294
The accompanying notes are an integral part of the condensed consolidated
financial statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share and share data)
(unaudited)
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS:
Obsidian Enterprises, Inc. ("Obsidian Enterprises"), formerly Danzer
Corporation, was reorganized (the "Reorganization") through an Acquisition and
Plan of Reorganization with U.S. Rubber Reclaiming, Inc. and Related Entities
("U.S. Rubber Companies"), which was consummated on June 21, 2001 (the
"Effective Date"). The Acquisition and Plan of Reorganization of Obsidian
Enterprises with U.S. Rubber Companies was accounted for as a reverse
acquisition as the shareholders of the U.S. Rubber Companies owned a majority of
the outstanding stock of Obsidian Enterprises subsequent to the Acquisition and
Plan of Reorganization. For accounting purposes, U.S. Rubber Reclaiming, Inc. is
deemed to have acquired Obsidian Enterprises.
Pursuant to the Plan of Acquisition and Reorganization, United Expressline, Inc.
was acquired July 31, 2002.
The accompanying financial data as of April 30, 2003 and for the three and six
months ended April 30, 2003 and 2002 has been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. The October 31,
2002 consolidated balance sheet was derived from audited financial statements,
but does not include all disclosures required by accounting principles generally
accepted in the United States of America. However, the Company believes that the
disclosures are adequate to make the information presented not misleading. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the period ended October 31, 2002. The
Company follows the same accounting policies in preparation of interim reports.
In the opinion of management, all adjustments (which include normal recurring
adjustments except as disclosed herein) necessary to present a fair statement of
financial position as of April 30, 2003, results of operations for the three and
six months ended April 30, 2003 and cash flows and stockholders' deficit for the
six months ended April 30, 2003 have been made. The results of operations for
the three and six months ended April 30 , 2003 are not necessarily indicative of
the operating results for the full fiscal year or any future periods.
The entities resulting from the merger described above, considered accounting
subsidiaries of U.S. Rubber Reclaiming, Inc. (the accounting acquirer) and legal
subsidiaries of Obsidian Enterprises, Inc. 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 Corporation, the legal acquirer), a
holding company.
Danzer Industries, Inc. ("Danzer Industries"), which is principally engaged in
the design, manufacture and sale of truck bodies and cargo trailers.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share and share data)
(unaudited)
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
Pyramid Coach, Inc. ("Pyramid"), which is engaged in the leasing of coaches,
designed and fitted out for use for travel by country, rock bands and other
business enterprises, primarily on weekly to monthly leases. The coach leasing
segment also includes the assets, liabilities, equity and results of operations
of DW Leasing, LLC ("DW Leasing"), Obsidian Leasing Company, Inc. ("Obsidian
Leasing"), formed November 1, 2001 and DC Investments Leasing, LLC ("DC
Investments Leasing), formed December 13, 2002. DW Leasing and DC Investments
Leasing are controlled by individuals who are also controlling shareholders of
Obsidian Enterprises, Inc. and, accordingly, Pyramid. DW Leasing, Obsidian
Leasing and DC Investments Leasing also own the majority of the coaches operated
by Pyramid. All intercompany transactions are eliminated in consolidation.
United Expressline, Inc. ("United") manufactures and sells general use cargo
trailers and specialty trailers used in the racing industry and for other
special purposes.
Champion Trailer, Inc. ("Champion") manufactures and sells transport trailers to
be used primarily in the auto racing industry. During October 2002, the
Company's Board of Directors agreed to a plan to dispose of substantially all
assets and liabilities of Champion as further discussed in Note 3. The sale of
Champion was completed January 30, 2003. Accordingly, the operations of Champion
are classified as discontinued operations in the accompanying financial
statements.
BASIS OF PRESENTATION:
Over the past year, the Company has undertaken various actions to improve its
operations and liquidity. Such actions include the sale of Champion described in
Note 3, as well as conversion of debt to equity and refinancing of certain of
its debt agreements as described in detail in the Company's 10-K for the year
ended October 31, 2002. Management believes that the Company has financing
agreements in place to provide adequate liquidity and working capital throughout
fiscal 2003. However, there can be no assurance that such working capital and
liquidity will in fact be adequate. Therefore, the Company may be required to
draw upon other liquidity sources. The Company has therefore secured an
increased financial commitment from Fair Holdings, Inc. ("Fair Holdings"), an
entity controlled by the Company's Chairman, to provide, as needed, additional
borrowings under a $8,000 line of credit agreement, which expires January 9,
2005. As of April 30, 2003, availability under the agreement is approximately
$2,700.
The Company incurred a net loss for the year ended October 31, 2002 of $6,330,
which included an asset impairment charge of $720, cumulative effect of change
in accounting principle of $2,015 and a loss from discontinued operations of
$1,040. In addition, the Company incurred a loss from continuing operations of
$909 and $2,428 for the three and six months ended April 30, 2003, respectively.
Several of the Company's subsidiaries were acquired in highly leveraged
transactions and this factor combined with the loss has contributed to its
failure to meet certain financial covenants required by one of its lenders. As
of April 30, 2003, the lender has waived all covenant violations.
In view of these matters realization of assets and satisfaction of liabilities
in the ordinary course of business is dependent on the Company's ability to
generate sufficient cash flow to satisfy its obligations on a timely basis,
maintain compliance with its financing agreements and continue to receive
financing support from Fair Holdings to provide liquidity if needed.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share and share data)
(unaudited)
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
Management, as a part of its plan towards resolving these issues and generating
positive cash flow and earnings, has taken the actions as described in the
Company's 10-K for the year ended October 31, 2002 as well as the actions
described below during the six months ended April 30, 2003.
o During 2002, the Board of Directors authorized the Chairman of the Board to
explore various options regarding the operations at Champion. Options
included divestiture, restructuring of operations or closing the facility.
It was determined in the best interests of the Company to sell Champion. On
January 30, 2003, the Company completed the sale of substantially all
assets of Champion to an entity owned by Messrs. Durham and Whitesell,
Chairman and President of the Company, respectively. The sale resulted in
an increase in equity of $1,142 as further described in Note 3.
o During December 2002, the Company sold certain coaches of Obsidian Leasing
to DC Investments Leasing for assumption of the existing debt. DC
Investments Leasing then refinanced this debt at terms more favorable than
the previous terms.
o On April 1, 2003, the Company obtained an increase in its available line of
credit with Fair Holdings to $8,000.
o On January 3, 2003, Obsidian Leasing refinanced debt due to former
shareholders in the amount of $928 with Fair Holdings at terms further
described in Note 4.
o During January 2003, United and U.S. Rubber obtained modifications to
provide less stringent requirements on certain financial covenants with
their respective lenders.
o On March 28, 2003, Fair Holdings acquired the line of credit and term debt
due to the senior lender of Danzer in the amount of $1,488 under an
assignment and assumption agreement. The maturity date of the line of
credit included in the assignment and assumption agreement was extended to
April 2006, and the debt covenants required by the senior lender were
waived through the end of the term. All other terms of the assumed notes
remain the same.
o During March 2003, United completed a compensation review and update and
provided a revised pay scale which realigns the Company with its industry
and reduces compensation costs. United also continues to develop its new
production facility to increase productivity and plant efficiency.
o During 2003, U.S. Rubber has continued to consolidate its butyl reclaiming
operations from two plants to one to maximize production and efficiently
utilize equipment. The consolidation has caused some pieces of equipment to
be temporarily idle until the Company completes its implementation of a new
production process for "fine grind rubber". Existing and new equipment will
be required to complete the "fine grind" production line. The new process
will maximize the use of the existing raw materials in the Company's
existing butyl reclaim production and also provide additional products of
natural rubber.
o The Company's truck body division at Danzer continues to negatively impact
the Company's cash flows. The trailer production line was put in place in
the fourth quarter of 2002 to support the production needs at United and
also provide a new product line to the existing customers of Danzer and
open a potential new market along the East coast of the U.S. Given the
current state of the telecommunications industry and economic conditions,
management will continue to evaluate the operations and progress with the
implementation of the trailer production. Management also expects to make a
decision to continue or discontinue operations by the end of fiscal 2003.
In conjunction with the analysis of the Danzer operations, we are also
analyzing the potential for asset impairment at the Danzer operation. Total
assets of Danzer as of April 30, 2003 were $3,250 which represents
approximately 7% of total consolidated assets.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share and share data)
(unaudited)
The above factors combined with additional actions by management at the
operating subsidiaries are expected to contribute to an increase in the
Company's working capital and liquidity.
Although management believes the actions described above will improve operations
and liquidity, there can be no assurance that such actions will sufficiently
improve operations or liquidity. In addition, management is continuing to
explore various opportunities to refinance the current outstanding debt.
SIGNIFICANT ACCOUNTING POLICIES:
Earnings Per Share:
Basic per-share amounts are computed, generally, by dividing net income or loss
attributable to common shareholders by the weighted-average number of common
shares outstanding. Diluted per-share amounts are computed similar to basic
per-share amounts except that the weighted-average shares outstanding are
increased to include additional shares for the assumed exercise of stock options
and warrants, if dilutive.
Basic and diluted loss per share have been computed as follows:
Three Months Ended Six Months Ended
--------------------------------------- --------------------------------------
April 30, 2003 April 30, 2002 April 30, 2003 April 30, 2002
------------------- ------------------- ------------------ -------------------
(as restated) (as restated)
Loss before discontinued operations $ (909) $ (570) $ (2,428) $ (1,775)
Change in fair value of mandatory
redeemable preferred stock (32) 232 (131) 423
------------------- ------------------- ------------------ -------------------
Loss attributable to common
shareholders before discontinued
operations (941) (338) (2,559) (1,352)
Loss from discontinued operations, net
of tax -- (395) (49) (721)
------------------- ------------------- ------------------ -------------------
Net loss attributable to common
shareholders $ (941) $ (733) $ (2,608) $ (2,073)
=================== =================== ================== ===================
Weighted average common shares
outstanding, basic and diluted 36,007,855 36,007,855 36,007,855 36,007,855
=================== =================== ================== ===================
Loss per share, basic and diluted,
attributable to common shareholders:
From continuing operations $ (.03) $ (.02) $ (.07) $ (.04)
Discontinued operations -- (.01) (.00) (.02)
------------------- ------------------- ------------------ -------------------
Net loss per share $ (.03) $ (.03) $ (.07) $ (.06)
=================== =================== ================== ===================
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share and share data)
(unaudited)
The Company's Series C Preferred Stock and Series D Preferred Stock, which have
all the rights and privileges of the Company's common stock, are convertible at
rates of 20 to 1 and 175 to 1, respectively. The inclusion of these potential
common shares in the calculation of loss per share would have an antidilutive
effect. However, pursuant to a Certificate of Designation, these shares will be
converted to common stock immediately upon approval by the stockholders.
Accordingly, we are presenting the following pro forma information to indicate
the effect on earnings per share had such shares been converted to common shares
for the periods presented.
Pro forma basic and diluted loss per share have been computed below as if the
Series C and Series D Preferred Stock were converted to common stock. For the
three and six months ended April 30, 2003 and 2002, respectively, the Series C
Preferred Stock has been reflected on a weighted average basis outstanding as
common shares of 87,367,980 and 75,212,925 respectively. The Series D Preferred
Stock has been reflected on a weighted average basis outstanding as common
shares of 21,082,775 and 18,364,013 for the three and six months ended April 30,
2003, respectively. There were no Series D Preferred Stock shares issued or
outstanding during the three and six months ended April 30, 2002.
Three Months Ended Six Months Ended
--------------------------------------- --------------------------------------
April 30, 2003 April 30, 2002 April 30, 2003 April 30, 2002
------------------- ------------------- ------------------ -------------------
(as restated) (as restated)
Pro forma weighted average common
shares outstanding, basic and diluted 144,458,610 111,220,780 141,739,848 111,001,235
=================== =================== ================== ===================
Pro forma loss per share, basic and diluted, attributable to common
shareholders:
From continuing operations $ (.01) $ (.00) $ (.02) $ (.01)
Discontinued operations -- (.00) (.00) (.01)
------------------- ------------------- ------------------ -------------------
Pro forma net loss per share $ (.01) $ (.00) $ (.02) $ (.02)
=================== =================== ================== ===================
The pro forma net loss per share is presented for informational purposes only
and is not indicative of the weighted average common shares outstanding or net
loss per share presented in accordance with accounting principles generally
accepted in the United States of America.
The Company has a note payable agreement which is convertible by the holder to
common stock totaling 5,000,000 shares at a conversion rate of $0.10 per share.
In addition, the Company has options outstanding to purchase a total of 800,000
shares of common stock, at a weighted average exercise price of $.09. However,
because the Company incurred a loss for the periods ended April 30, 2003 and
2002, respectively, the inclusion of those potential common shares in the
calculation of diluted loss per share would have an antidilutive effect.
RECENTLY ISSUED PRONOUNCEMENTS:
In January 2003, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 46 (FIN No. 46), Consolidation of Variable Interest Entities,
an interpretation of Accounting Research Bulletin No., 51. This Interpretation
addresses the application of Accounting Research Bulletin No. 51, Consolidated
Financial Statements, to certain entities in which equity investors do not have
the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. The Interpretation
applies immediately to variable interest entities created after January 31,
2003, and to variable interest entities in which an enterprise obtains an
interest after that date. It applies in the first interim period beginning after
June 15, 2003, to variable interest entities in which an entity holds a variable
interest that it acquired prior to February 1, 2003. Management does not expect
the adoption of FIN No. 46 to have a material impact on the Company's financial
position, results of operations, cash flows, or its debt covenants.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure. SFAS 148 amends FASB Statement No. 123
(SFAS 123), Accounting for Stock-Based Compensation, to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS 148 amends
the disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The transition guidance and annual disclosure provisions of SFAS 148
are effective for fiscal years ending after December 15, 2002. The interim
disclosure provisions are effective for financial reports containing financial
statements for interim periods beginning after December 15, 2002. The Company
plans to continue accounting for stock options under Accounting Principles
Bulletin Opinion No. 25, Accounting for Stock Issued to Employees, (APB No. 25)
and has adopted the disclosure provisions of SFAS 148.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, which amends SFAS No. 133. This
statement amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under FASB Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities. This statement is effective
for contracts entered into or modified after June 30, 2003. We do not anticipate
that the adoption of this statement will have a significant impact on our
financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. The standard
further defines the accounting for certain financial instruments that, under
previous guidance, issuers could account for as equity or report between the
liability and equity section of the balance sheet. The standard requires that
those instruments be classified as liabilities in statements of financial
position. This standard is effective for interim periods beginning after June
15, 2003. We believe the adoption of this standard will result in mandatory
redeemable preferred stock currently reported on our balance sheet between
equity and liabilities being reclassified as a liability. We do not expect the
adoption of SFAS No. 150 to have a material impact on the Company's results of
operations, cash flows, or its debt covenants.
2. INVENTORIES
Inventories are stated at the lower-of-cost (first-in, first-out method) or
market and are comprised of the following components:
April 30, October 31, 2002
2003
------------------ -------------------
Raw materials $ 4,207 $ 3,655
Work-in-process 855 709
Finished goods 3,220 3,417
Valuation reserve (354) (466)
------------------ -------------------
Total $ 7,928 $ 7,315
================== ===================
3. DISCONTINUED OPERATIONS
On October 30, 2002, the Company's Board of Directors agreed to sell the assets
of Champion to an entity controlled by Messrs. Durham and Whitesell (Officers of
the Company) for the assumption of all liabilities of Champion excluding its
subordinated debt. The decision to divest Champion was based on the entity's
inability to achieve profitable operations in the foreseeable future without
substantial cash infusion. The Company also agreed in principal to settle the
outstanding subordinated debt due to Markpoint Equity Fund J.V. ("Markpoint")
from Champion in exchange for a cash payment of $675 and issuance to the debt
holder of 32,143 shares of the Company's Series D Preferred Stock. In addition,
the agreement provides Markpoint the option to require the Company to repurchase
these shares at a price of $21 per share. The sale of Champion was completed on
January 30, 2003. Champion is accounted for as a discontinued operation and
therefore the results of operations and cash flows have been removed from the
Company's continuing operations for all periods presented. In addition, assets
and liabilities of Champion included in the sale have been removed from the
consolidated balance sheet as of April 30, 2003 and are included in the
consolidated balance sheet as of October 31, 2002 as "Assets of subsidiary held
for sale" and "Liabilities of subsidiary held for sale," respectively.
The sale of Champion resulted in an increase in equity of the Company of $1,142,
net of tax of $97. No gain or loss was recognized on the sale because of the
involvement of related parties.
A summary of the Company's discontinued operations for the three and six months
ended April 30, 2003 and 2002 are as follows:
Three Months Ended Six Months Ended
-------------------------------------- -------------------------------------
April 30, 2003 April 30, 2002 April 30, 2003 April 30, 2002
------------------ ------------------- ------------------ ------------------
Net sales $ -- $ 1,375 $ 170 $ 2,392
Operating expenses -- (1,690) (286) (2,970)
Interest -- (80) (85) (143)
Other -- -- 127 --
Tax benefit -- -- 25 --
------------------ ------------------- ------------------ ------------------
Net loss $ -- $ (395) $ (49) $ (721)
================== =================== ================== ==================
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share and share data)
(unaudited)
A summary of assets and liabilities of Champion held for sale at October 31,
2002 are as follows:
October 31, 2002
----------------------------
Inventories $ 551
Other current assets 177
Property and equipment, net 715
Other 95
----------------------------
$ 1,538
============================
Accounts payable and accrued expenses $ 709
Customer deposits 313
Long-term debt, related parties 1,826
----------------------------
$ 2,848
============================
4. FINANCING ARRANGEMENTS
OBSIDIAN LEASING:
On January 3, 2003, Obsidian Leasing refinanced debt in the amount of $928 to
former shareholders of Pyramid and related companies. Terms of the new note with
Fair Holdings include monthly interest payments of 13% of the outstanding
principal amount and a balloon principal payment in January 2006.
On December 17, 2002, Obsidian Leasing sold four coaches to DC Investments
Leasing in exchange for DC Investments Leasing's satisfaction of the debt
outstanding on such coaches. In addition, DC Investments Leasing also acquired
five additional coaches that were previously to be purchased by the Company
thereby eliminating the Company's existing purchase commitment for such coaches.
The Company refinanced the debt on the four coaches in addition to financing the
five additional coaches. DC Investments Leasing entered into an agreement with
First Indiana for $2,741 of the debt with interest payable at prime plus 1/2%
and a maturity of December 2007. DC Investments Leasing also incurred debt with
Fair Holdings for the remaining 20% of the net book value of the transferred and
new coaches. Terms of the debt with Fair Holdings include monthly interest
payments on the principal amount of $677 at 14% and a maturity of January 2008.
DC Investments Leasing also entered into a management agreement with Pyramid
under which all nine coaches described above will be leased by Pyramid.
UNITED:
On December 26, 2002, United amended its credit agreement to provide additional
working capital during the winter months. The amendment included a "temporary
overline" line of credit with maximum borrowings not to exceed the lesser of
$650 or the remainder of the borrowing base less the outstanding principal
amount of the revolving line of credit. Interest is payable monthly at a rate of
prime plus 3/4%. The temporary overline line of credit matures on June 30, 2003.
The Company is currently in negotiations with its lender to convert the
temporary overline to additional availability under the current line of credit.
Should such an agreement not be reached, the line will be repaid from borrowings
under the Company's line of credit with Fair Holdings and from operating cash
flow.
United was in technical default of certain loan covenants with its subordinated
lender at April 30, 2003. United has obtained a waiver of the violations from
the lender.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share and share data)
(unaudited)
OBSIDIAN ENTERPRISES:
On April 1, 2003, Obsidian Enterprises, Inc.'s line of credit with Fair Holdings
was amended. Maximum borrowings were increased from $5,000 to $8,000.
At October 31, 2002, the Company was in violation of negative covenants with
Renaissance US Growth & Income Trust PLC and FBSUS Special Opportunities Trust
PLC, the holders of debentures that completed the financing of United. During
January 2003, the Company received a waiver of the violations and obtained
modifications of terms with the debenture holders to provide for less stringent
covenants. In exchange for the waiver and modifications, the Company issued
warrants to the debenture holders to purchase up to 16,000 shares of the
Company's common stock at an exercise price of $.20 per share.
DANZER:
As of January 31, 2003, Danzer was in violation of certain covenants included in
its credit agreement and First Forbearance Agreement dated October 14, 2002 with
its senior lender. On February 28, 2003, the Company and the lender entered into
a Second Forbearance Agreement waiving these violations. On March 28, 2003, the
credit agreement was assumed by Fair Holdings under an assumption and
continuation agreement. An amendment was made as of the effective date of the
agreement to extend the maturity date of the line of credit agreement to April
1, 2006 and the debt covenants required by the senior lender were waived through
the end of the term. All other terms of the agreement will continue as stated in
the original agreement dated August 15, 2001.
5. MANDATORY REDEEMABLE PREFERRED STOCK
In conjunction with the sale of Champion discussed in Note 3, the Company agreed
to settle the outstanding subordinated debt due to Markpoint from Champion in
exchange for a cash payment of $675 and issuance to the debt holder of 32,143
shares of the Company's Series D Preferred Stock. The agreement provides
Markpoint the option to require the Company to repurchase these shares at a
price of $21 per share. The repurchase option is available to Markpoint as
follows: 16,072 shares during the period May 1, 2003 to June 1, 2003 and 16,071
shares during the period November 1, 2003 to December 1, 2003. The repurchase
options expire if not exercised during the specified periods. The Company's
repurchase obligation is guaranteed by Mr. Durham. Accordingly, the Company has
recorded mandatory redeemable preferred stock of $675 at April 30, 2003.
Subsequent to April 30, 2003 Markpoint exercised its option for 16,072 shares as
further described in Note 10.
6. STOCKHOLDERS' DEFICIT
STOCK OPTIONS
The Company accounts for stock-based compensation under the provisions of APB
No. 25. The Company has adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. Accordingly, no compensation expense is
recognized if the exercise price of stock options equals the fair market value
of the underlying stock at the date of grant. Had compensation expense for the
Company's stock option plans been determined based on the fair value at the
grant date for awards consistent with the provisions of SFAS No. 123, the
Company's basic and diluted net loss per share would have been as follows:
Three Months Ended Six Months Ended
-------------------------------------- -------------------------------------
April 30, 2003 April 30, 2002 April 30, 2003 April 30, 2002
------------------ ------------------- ------------------ ------------------
Net loss as reported $ (909) $ (965) $ (2,477) $ (2,496)
Deduct total stock-based employee
compensation expense determined under
fair value methods -- -- -- --
------------------ ------------------- ------------------ ------------------
------------------ ------------------- ------------------ ------------------
Pro forma net loss (909) (965) (2,477) (2,496)
Basic and diluted loss per share:
As reported (0.03) (0.03) (0.07) (0.06)
Pro forma (0.03) (0.03) (0.07) (0.06)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 2000 and 1999, respectively: risk-free interest
rates of 6.4 and 5.5 percent; dividend yield of 0 percent in both years;
expected lives of 5 years; and volatility of 978 and 170 percent. The estimated
weighted average fair value of options granted during 2000 and 1999 were $0.10
and $0.05 per share, respectively.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share and share data)
(unaudited)
7. BUSINESS SEGMENT DATA AND GEOGRAPHIC DATA
The Company operates in three industry segments comprised of trailer and related
transportation equipment manufacturing (trailer manufacturing); coach leasing;
and butyl rubber reclaiming. All sales are in North and South America primarily
in the United States, Canada and Brazil. Selected information by segment
follows:
Three Months Ended April 30, 2003
------------------------------------------------------------------------------
Trailer Butyl Rubber
Manufacturing Coach Leasing Reclaiming Total
------------------------------------------------------------------------------
Sales:
Domestic $ 9,970 $ 1,419 $ 2,439 $ 13,828
Foreign 876 -- 403 1,279
------------------------------------------------------------------------------
Total $ 10,846 $ 1,419 $ 2,842 $ 15,107
Cost of goods sold $ 10,034 $ 732 $ 2,550 $ 13,316
Loss before taxes $ (865) $ (173) $ (129) $ (1,167)**
Identifiable assets $ 21,271 $ 13,871 $ 10,363 $ 45,505*
Depreciation and amortization expense $ 189 $ 258 $ 311 $ 758
*Identifiable assets, as stated above $ 45,505
Corporate-level goodwill 650
Other corporate-level assets 106
--------------------
--------------------
Total assets $ 46,261
====================
**Identifiable loss before taxes, as stated above $ (1,167)
Corporate-level loss before taxes, not identifiable with a specific segment (143)
--------------------
Total loss before taxes $ (1,310)
====================
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share and share data)
(unaudited)
Three Months Ended April 30, 2002
------------------------------------------------------------------------------
Trailer Butyl Rubber
Manufacturing Coach Leasing Reclaiming Total
------------------------------------------------------------------------------
Sales:
Domestic $ 11,503 $ 1,511 $ 2,383 $ 15,397
Foreign -- -- 201 201
------------------------------------------------------------------------------
Total $ 11,503 $ 1,511 $ 2,584 $ 15,598
Cost of goods sold $ 9,854 $ 766 $ 2,353 $ 12,973
Loss before taxes $ (295) $ (20) $ (255) $ (570)
Identifiable assets $ 22,468 $ 12,518 $ 10,067 $ 45,053*
Depreciation and amortization expense $ 190 $ 165 $ 253 $ 608
*Identifiable assets, as stated above $ 45,053
Corporate-level goodwill 650
Assets of subsidiary held for sale 1,518
--------------------
--------------------
Total assets $ 47,221
====================
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share and share data)
(unaudited)
Six Months Ended April 30, 2003
------------------------------------------------------------------------------
Trailer Butyl Rubber
Manufacturing Coach Leasing Reclaiming Total
------------------------------------------------------------------------------
Sales:
Domestic $ 16,982 $ 2,526 $ 4,652 $ 24,160
Foreign 1,223 -- 624 1,847
------------------------------------------------------------------------------
Total $ 18,205 $ 2,526 $ 5,276 $ 26,007
Cost of goods sold $ 16,754 $ 1,354 $ 4,948 $ 23,056
Loss before taxes $ (1,867) $ (400) $ (478) $ (2,745)**
Identifiable assets $ 21,271 $ 13,871 $ 10,363 $ 45,505*
Depreciation and amortization expense $ 378 $ 448 $ 620 $ 1,446
*Identifiable assets, as stated above $ 45,505
Corporate-level goodwill 650
Other corporate-level assets 106
--------------------
--------------------
Total assets $ 46,261
====================
**Identifiable loss before taxes, as stated above $ (2,745)
Corporate-level loss before taxes, not identifiable with a specific segment (242)
--------------------
Total loss before taxes $ (2,987)
====================
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share and share data)
(unaudited)
Six Months Ended April 30, 2002
------------------------------------------------------------------------------
Trailer Butyl Rubber
Manufacturing Coach Leasing Reclaiming Total
------------------------------------------------------------------------------
Sales:
Domestic $ 19,736 $ 2,554 $ 4,462 $ 26,752
Foreign -- -- 312 312
------------------------------------------------------------------------------
Total $ 19,736 $ 2,554 $ 4,774 $ 27,064
Cost of goods sold $ 17,183 $ 1,339 $ 4,399 $ 22,921
Loss before taxes $ (917) $ (395) $ (618) $ (1,930)
Identifiable assets $ 22,468 $ 12,518 $ 10,067 $ 45,053*
Depreciation and amortization expense $ 350 $ 410 $ 511 $ 1,271
*Identifiable assets, as stated above $ 45,053
Corporate-level goodwill 650
Assets of subsidiary held for sale 1,518
--------------------
--------------------
Total assets $ 47,221
====================
Obsidian Enterprises, Inc. (legal parent) allocates selling, general and
administrative expenses to the respective companies primarily based on a
percentage of sales. For the three and six months ended April 30, 2003 and 2002,
allocated corporate expenses by segment were as follows:
Three Months Ended Six Months Ended
-------------------------------------------------------------------------------
April 30, April 30, April 30, April 30,
2003 2002 2003 2002
-------------------------------------------------------------------------------
Trailer manufacturing $ 339 $ 462 $ 657 $ 673
Coach leasing 44 61 92 101
Butyl rubber reclaiming 90 104 189 160
-------------------------------------------------------------------------------
$ 473 $ 627 $ 938 $ 934
===============================================================================
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share and share data)
(unaudited)
8. RELATED PARTIES
The Company makes advances, receives loans and conducts other business
transactions with affiliates resulting in the following amounts for the periods
ended:
April 30, October 31,
2003 2002
------------------ ------------------
Balance sheet:
Current assets:
Accounts receivable, Obsidian Capital Partners $ 165 $ 181
Accounts receivable, Fair Holdings 12 --
Accounts receivable, Obsidian Capital Company 4 13
Accounts receivable, other affiliated entities 30 12
------------------ ------------------
Total assets $ 211 $ 206
================== ==================
Current liabilities:
Accounts payable, Obsidian Capital Company $ 283 $ 279
Accounts payable, stockholders 322 338
Accounts payable, DC Investments and Fair Holdings 209 42
Accounts payable, other affiliated entities 24 9
Notes payable, Fair Holdings 119 --
Long-term portion:
Notes payable, DC Investments 700 700
Notes payable, Fair Holdings 6,153 3,020
Line of credit, Fair Holdings 5,273 1,798
------------------ ------------------
Total liabilities $ 13,083 $ 6,186
================== ==================
Three Months Ended Six Months Ended
-------------------------------------- -------------------------------------
April 30, 2003 April 30, 2002 April 30, 2003 April 30, 2002
------------------- ------------------ ------------------ ------------------
Statement of operations:
Interest expense, DC Investments and
Fair Holdings $ 324 $ 104 $ 503 $ 104
Rent expense, Obsidian Capital Company $ 15 $ 15 $ 30 $ 30
Rent expense, Fair Holdings $ 13 $ -- $ 18 $ --
Related-party amounts classified as current reflect those portions of the total
receivable or payable that were currently due in accordance with the terms.
Amounts classified as long term represent amounts not currently due, amounts
that are expected to be converted to equity subsequent to April 30, 2003 and
October 31, 2002, respectively, or amounts converted to long-term debt
subsequent to April 30, 2003.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share and share data)
(unaudited)
9. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company is liable for contract completion
and product performance. In the opinion of management, such obligations will not
significantly affect the Company's financial position or results of operations.
10. SUBSEQUENT EVENTS
On May 12, 2003, Markpoint exercised its Put Option rights to require the
Company to purchase 16,072 shares of Series D Preferred Stock for $21 per share
or $338 (the "Put Option") as discussed in Note 5. Under an Assignment
Agreement, the Company transferred all rights, title and interest in the Put
Option to Fair Holdings, who exercised the option and acquired the shares.
11. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
In December 2002, the Company became aware of an error related to the accounting
for the redeemable preferred stock issued in connection with subordinated debt
pertaining to the United acquisition on July 31, 2001. In addition, we have also
determined the weighted average common and common equivalent shares outstanding
as previously reported should not have included Series C and Series D preferred
stock as they have not yet been converted to common shares and thus are
antidilutive. The Company is restating its previously issued financial
statements for the three and six months ended April 30, 2002 for these errors.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share and share data)
(unaudited)
Below is a comparison of previously reported and restated balances included in
the Condensed Consolidated Statements of Operations as of and for the three and
six months ended April 30, 2002.
Previously
Reported Change As Restated
------------------ ------------------- ------------------
Statements of Operations:*
Three months ended April 30, 2002:
Interest expense, net $ 892 $ 39 $ 931
Loss before income taxes (531) (39) (570)
Net loss (926) (39) (965)
Net loss per share basic and diluted (.01) (.02) (.03)
Weighted average common shares outstanding 111,220,780 (75,212,925) 36,007,855
Six months ended April 30, 2002:
Interest expense, net 1,703 73 1,776
Loss before income taxes 1,857 (73) (1,930)
Net loss (2,423) (73) (2,496)
Net loss per share basic and diluted (.02) (.04) (.06)
Weighted average common shares outstanding 111,001,235 (74,993,380) 36,007,855
* Amounts do not include the operations of Champion which have been reclassified
as discontinued operations.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS IMPORTANT NOTE ABOUT FORWARD-LOOKING STATEMENTS.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. The Company and its representatives may from time to
time make written or oral forward-looking statements, including statements
included in or incorporated by reference into this Quarterly Report on Form 10-Q
and the Company's other filings made with the Securities and Exchange
Commission. These forward-looking statements are based on management's views and
assumptions and involve risks, uncertainties and other important factors, some
of which may be beyond the control of the Company, that could cause actual
results to differ materially from those expressed or implied in the
forward-looking statements. Factors that might cause or contribute to such
differences include, but are not limited to, those discussed in this Item 2.
Readers should carefully review the risks described in this and other documents
that the Company files from time to time with the Securities and Exchange
Commission. The forward-looking statements speak only as of the date that they
are made and the Company undertakes no obligation to update or revise any of the
forward-looking statements.
OVERVIEW
The Company operates in three industry segments, comprised of trailer and
related transportation equipment manufacturing, butyl rubber reclaiming, and
coach leasing. Trailer and related transportation equipment manufacturing
includes the operations of United and Danzer Industries. Butyl rubber reclaiming
includes the operations of U.S. Rubber and coach leasing includes the operations
of Pyramid, DW Leasing, Obsidian Leasing and DC Investments Leasing.
Champion is accounted for as a discontinued operation, therefore, its results of
operations and cash flow have been removed from the Company's continuing
operations for all periods presented.
In December 2002, the Company became aware of an error related to the accounting
for the redeemable preferred stock issued in connection with subordinated debt
pertaining to the United acquisition on July 31, 2001. In addition, we have also
determined the weighted average common and common equivalent shares outstanding
as previously reported should not have included Series C and Series D preferred
stock as they have not yet been converted to common shares and thus are
antidilutive. The Company is restating its previously issued financial
statements for the three and six months ended April 30, 2002 for these errors.
RESULTS OF OPERATIONS
The Company's overall operating results and financial condition during the three
and six months ended April 30, 2003 compared to the three and six months ended
April 30, 2002 were adversely affected by the overall economic situation in the
United States, the limited availability of raw materials in the butyl reclaiming
segment and the business seasonality in the trailer and related transportation
equipment manufacturing and coach leasing segments.
The following table shows net sales by product segment:
Three Months Ended Six Months Ended
------------------------------------------ -------------------------------------------
April 30, 2003 April 30, 2002 April 30, 2003 April 30, 2002
--------------------- -------------------- --------------------- ---------------------
Trailer manufacturing $ 10,846 $ 11,503 $ 18,205 $ 19,736
Butyl rubber reclaiming 2,842 2,584 5,276 4,774
Coach leasing 1,419 1,511 2,526 2,554
--------------------- -------------------- --------------------- ---------------------
Net Sales $ 15,107 $ 15,598 $ 26,007 $ 27,064
===================== ==================== ===================== =====================
The following is a discussion of the major elements impacting the Company's
operating results by segment for the three and six months ended April 30, 2003
compared to the three and six months ended April 30, 2002. The comments that
follow should be read in conjunction with the Company's condensed consolidated
financial statements and related notes contained in this Form 10-Q.
TRAILER AND RELATED TRANSPORTATION EQUIPMENT MANUFACTURING
The following table shows sales, cost of sales and gross profit for this segment
for the periods indicated:
Three Months Ended Six Months Ended
------------------------------------------ -------------------------------------------
April 30, 2003 April 30, 2002 April 30, 2003 April 30, 2002
--------------------- -------------------- --------------------- ---------------------
Net Sales $ 10,846 $ 11,503 $ 18,205 $ 19,736
Cost of Sales 10,034 9,854 16,754 17,183
--------------------- -------------------- --------------------- ---------------------
Gross Profit $ 812 $ 1,649 $ 1,451 $ 2,553
===================== ==================== ===================== =====================
Gross Profit % 7.5% 14.3% 8.0% 12.9%
===================== ==================== ===================== =====================
Three Months Ended April 30, 2003 Compared to The Three Months Ended April 30,
2002
Net sales in this segment for the three months ended April 30, 2003 as compared
to the three month period ended April 30, 2002 decreased 5.7% in the amount of
$657. Sales in this segment were lower than the prior year due primarily to two
factors. First, a new discount/rebate program was implemented in February 2003
for the cargo trailers to stimulate sales. The trailer market remains very price
competitive and all major competitors are offering similar discount programs.
Second, the sales of truck bodies for the three months ended April 30, 2003
decreased $239 compared to April 30, 2002. The decrease in sales was due
primarily to the loss of this segment's primary truck body customer due to the
customer's bankruptcy. We believe sales of truck bodies will continue at a level
below 2002 as the Company does not anticipate any orders from this segment's
primary truck body customer in the future. In addition, the sales
discount/rebate program for cargo trailers is expected to continue through June
2003, which may result in lower sales than 2002.
The gross profit percentage decreased 6.8% for the three months ended April 30,
2003. The reduction in gross profit is attributable to three primary factors.
First, the sales discount/rebate program discussed above has reduced gross
profit by approximately 3.3%. Second, during the fourth quarter of 2002, the
Company opened an additional cargo trailer manufacturing facility. This facility
has not as yet obtained the level of efficiency of the existing production
facilities. Efficiency is improving and should be in line with existing
facilities by June 2003. Lastly, gross profit has been negatively impacted by a
reduction in sales of truck bodies, which has reduced the ability to absorb
overhead at the truck body manufacturing facility. During late 2002, the Company
began manufacturing cargo trailers in this facility to provide additional
capacity and serve new markets. Production levels are increasing but have not
yet reached a level of efficiency of existing cargo trailer facilities.
Management is currently analyzing the use of the truck body facility and
considering options of continuing production of truck bodies and cargo trailers,
discontinuing one of these lines at this facility or closing the facility. A
decision is expected prior to October 31, 2003. In conjunction with the analysis
of operations at the truck body manufacturing facility, management is also
analyzing any potential asset impairment at this facility. Total assets of
Danzer as of April 30, 2003 were $3,250 which represents approximately 7% of
consolidated total assets.
Six Months Ended April 30, 2003 Compared to The Six Months Ended April 30, 2002
Sales in this segment decreased $1,531 or 7.8% over the comparable period of
2002. The decrease was primarily related to the following factors.
First, sales of truck bodies decreased by $317 over the six months ended April
30, 2003. This reduction was related to the continued depressed condition of the
telecommunications industry which has historically been a significant consumer
of truck bodies, as well as the bankruptcy filing of a significant truck body
customer in late 2002. Sales to this customer in the first quarter did not
decline significantly from 2002, but the Company anticipates little to no future
sales from this customer after January 31, 2003.
Second, the sale of cargo trailers decreased by $574 as a result of the general
state of the U.S. economy and harsher weather during the winter of 2003. In
addition, as noted above the Company began a sales discount/rebate program to
stimulate sales and to stay price competitive in the cargo trailer market.
The gross profit decrease was primarily a result of decreased volume at the
Company's truck body plant which resulted in an inability to absorb fixed
overhead costs. To offset these costs, management began production of cargo
trailers in this facility during late 2002. Inefficiencies in the start up of
this operation have also had a negative impact in gross profit margins as
compared to the six months ended April 30, 2002. Management believes gross
profits will continue to be adversely impacted by the lack of sales volume in
truck bodies and sales discounts/rebates offered during 2003.
BUTYL RUBBER RECLAIMING
The following table shows sales, cost of sales and gross profit for this segment
for the periods indicated:
Three Months Ended Six Months Ended
------------------------------------------ -------------------------------------------
April 30, 2003 April 30, 2002 April 30, 2003 April 30, 2002
--------------------- -------------------- --------------------- ---------------------
Net Sales $ 2,842 $ 2,584 $ 5,276 $ 4,774
Cost of Sales 2,550 2,353 4,948 4,399
--------------------- -------------------- --------------------- ---------------------
Gross Profit $ 292 $ 231 $ 328 $ 375
===================== ==================== ===================== =====================
Gross Profit % 10.3% 8.9% 6.2% 7.9%
===================== ==================== ===================== =====================
Three Months Ended April 30, 2003 Compared To The Three Months Ended April 30,
2002
Net sales for the three months ended April 30, 2003 compared to same period for
2002 increased $258 or 10%. The increase relates to the demand from the
Company's tire manufacturing customers for the three months ended April 30,
2003. The Company also benefited from a 2.2% price increase over the comparable
period in 2002. The Company also plans a price increase to its customers which
will take effect in the third quarter of 2003. While the Company expects the
price increase to increase the level of sales, management does not anticipate
the return to historical levels due to the availability of raw materials
discussed below.
Gross profit increased 1.4% for the three months ended April 30, 2003. This
increase was due to increased volume and the continuing improvements in the
production process with equipment maintenance and the realignment of production
facilities. The Company has consolidated part of its equipment from two plants
into one. The Company continues to utilize as much equipment in one plant to
maximize the production facilities. A portion of the equipment not consolidated,
with a carrying value of approximately $650, is temporarily idle and is
evaluated on an ongoing basis for its use in a production process for "fine
grind" rubber. Existing and new equipment will be required to complete the "fine
grind" production line. If it is determined the idle equipment does not have any
foreseeable use, the equipment will be reclassified as idle equipment on the
balance sheet, not depreciated and tested for impairment. Due to specific
manufacturing nature of this equipment, we are not currently able to determine
if an impairment charge will be recorded should this equipment not be utilized
in the fine grind process.
In addition, the Company utilized $143 of its inventory reserve as of April 30,
2003 compared to $134 as of April 2002. This increase is primarily due to the
factors in using the specific inventory in production for which the reserve was
established. Reserves have been established primarily for inventory not usable
without additional processing costs and currently usable only when mixed in the
production process at a low rate with quality raw material. Reserves are
reversed when such inventory is used in production.
Six Months Ended April 30, 2003 Compared To The Six Months Ended April 30, 2002
Net sales in this segment for the six months ended April 30, 2003 as compared to
the six-month period ended April 30, 2002 increased 10.5% in the amount of $501.
Sales in this segment were higher than the six months ended April 30, 2002
because of increased demand from Company's tire manufacturing customers as noted
above. While the Company experienced an increase in sales throughout calendar
year 2002, management does not anticipate a return to historic levels of sales
of reclaimed butyl rubber to tire manufacturers during fiscal 2003, in part due
to the lack of consistent sources of raw materials.
Net sales also increased over the second quarter of 2002 due to the demand for
pipeline mastic wraps produced with reclaimed butyl rubber. Demand for this
product fell dramatically beginning in October 2001 as a result of the decline
in the price of crude oil in late 2001, which caused a decline in new oil
exploration. As the price of crude oil increased, the demand for those uses has
also increased. Although this demand has increased from its lows at the end of
fiscal 2001 and beginning 2002, demand has not returned to historical levels.
Gross profit percentage decreased 1.7% for the six months ended April 30, 2003
compared to the six months ended April 30, 2002. The primary reasons for this
decrease in a lack of a consistent supply of raw materials and increasing energy
costs. The Company's reclaim process is most efficient when raw material
consists of primarily road worn inner tubes with a mix of other butyl rubber.
Since the introduction of the tubeless tire for automobiles in the 1970s,
sources of material have declined substantially and the cost of available raw
materials has increased. As a result of having to use less than optimum raw
material mix in the reclaiming process, additional processing time is incurred
to ensure delivery of quality product. Management has been testing other
materials including butyl pad scrap as a replacement material for the past
several years with some success. In addition, alternative sources of material,
including overseas sources, are being pursued to provide a consistent supply of
material in the future. Until such time that consistent sources of raw materials
are available, sales growth and gross profit in this segment will be limited.
COACH LEASING
The following table shows sales, cost of sales and gross profit for this segment
for the periods indicated:
Three Months Ended Six Months Ended
------------------------------------------ -------------------------------------------
April 30, 2003 April 30, 2002 April 30, 2003 April 30, 2002
--------------------- -------------------- --------------------- ---------------------
Net Sales $ 1,419 $ 1,511 $ 2,526 $ 2,554
Cost of Sales 732 766 1,354 1,339
--------------------- -------------------- --------------------- ---------------------
Gross Profit $ 687 $ 745 $ 1,172 $ 1,215
===================== ==================== ===================== =====================
Gross Profit % 48.4% 49.3% 46.4% 47.6%
===================== ==================== ===================== =====================
Three Months Ended April 30, 2003 Compared To The Three Months Ended April 30,
2002
Sales for the three months ended April 30, 2003 decreased $92 or 6.1% from the
period April 30 2002. The decrease in sales relates to a lower utilization of
the fleet for March and April of 2003 compared to the same period for 2002. The
seasonality of the segment sales also have an impact and historically are
stronger in the spring, summer and fall. The Company has increased its fleet
size by adding four new coaches during the current fiscal year to a total of 37
coaches as of April 30, 2003 compared to 30 coaches for the same period for
2002. The increase in number of coaches to the fleet is expected to increase
revenues during the remainder of 2003 which historically is the highest
utilization period for the segment.
The gross profit percentage decreased .9% for the three months ended April 30,
2003 compared to the period April 30, 2002. The reduction is attributable
primarily to the cost of maintaining a larger fleet during a lower utilization
period for the three months ended April 30, 2003.
Six Months Ended April 30, 2003 Compared To The Six Months Ended April 30, 2002
Sales for the six months ended April 30, 2003 decreased 1.0% in the amount of
$28 over the comparable six-month period ended April 30, 2002. The decrease in
sales is attributable to decreased utilization of the coach fleet. Management
believes the increased utilization will result from its marketing efforts to
specialized tour groups (i.e. golf course trips) and corporate customers through
the remainder of 2003. These customers are in addition to the traditional
country and western performers who have traditionally been this segment's
primary customer base.
The first half of the year is typically the segment's lowest sales period due to
seasonality. Business is historically stronger in the summer and fall.
Gross profit for this segment was 46.4% for the six months ended April 30, 2003
compared to 47.6% for the comparable six-month period ended April 30, 2002. As
noted above, the reduction is attributable primarily to additional costs of
maintaining a larger fleet during the lower utilization period of the year.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES
The Company's selling, general and administrative expenses decreased $63 or 2.8%
for the three months ended April 30, 2003 compared to the three-month period
ended April 30, 2002 and $11 or .2% for the six months ended April 30, 2003
compared to the six-month period ended April 30, 2002. The decreases are related
primarily to the overall reduction in administrative costs.
INTEREST EXPENSE--AS RESTATED
Interest expense as a percentage of average borrowings is as follows:
Three Months Ended Six Months Ended
------------------------------------------ -------------------------------------------
April 30, 2003 April 30, 2002 April 30, 2003 April 30, 2002
--------------------- -------------------- --------------------- ---------------------
Average debt borrowings $ 39,300 $ 34,085 $ 37,321 $ 33,806
Interest expense as a
percentage of average debt
borrowings 2.3% 2.7% 4.5% 5.3%
Interest expense as a
percentage of average debt
borrowings, annualized 9.2% 10.8% 9.0% 10.6%
===================== ==================== ===================== =====================
The decrease is primarily due to the reduction of the prime rate and refinancing
of a significant portion of the coach debt at lower rates during the fourth
quarter of fiscal 2002.
INCOME TAX PROVISION
The income tax benefit for the three-month period ended April 30, 2003 increased
by $401 compared to the three-month period ended April 30, 2002 and increased
$404 for the six-month period ended April 30, 2003 as compared to the six-month
period ended April 30, 2002. The income tax benefit is created primarily through
net operating loss carryforwards recognized to the extent they are available to
offset the Company's net deferred tax liability. Any quarterly tax benefits are
based on the estimated effective tax rate for the full year.
DISCONTINUED OPERATIONS
On October 30, 2002, the Company's Board of Directors agreed to sell
substantially all assets of Champion to an entity controlled by Messrs. Durham
and Whitesell in exchange for assumption of all liabilities of Champion, other
than its subordinated debt. In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 144, Accounting for Impairment of Long-Lived Assets, the
operating results of Champion have been classified as discontinued operations.
The losses from discontinued operations for the six months ended April 30, 2003
and 2002 represent the losses of Champion during these periods, net of tax
benefit of $97 and $0, respectively. The loss from discontinued operations for
the three and six months ended April 30, 2003 and were $0 and $49, respectively,
as compared to the three and six months ended April 30, 2002 and totaled $395
and $721, respectively.
Substantially all assets of Champion subject to its liabilities were sold on
January 30, 2003. No gain or loss was recognized in the consolidated statement
of operations due to the involvement of related parties. This transaction
resulted in an increase in equity of $1,142.
LIQUIDITY AND CAPITAL RESOURCES
Each of the subsidiaries of the Company have separate revolving credit
agreements and term loan borrowings through which the subsidiary finances its
operations together with cash generated from operations. The principal balances
of some of these loans reflect the fact that Obsidian Capital Partners
("Partners"), from whom four of the five subsidiaries were purchased, entered
into highly leveraged acquisitions of U.S. Rubber, Pyramid, and United.
This high level of debt has created liquidity issues for the Company and the
stringent financial covenants that are common for this type of debt increase the
probability that the Company's subsidiaries may from time to time be in
technical violation of their credit agreements. These risks are mitigated, in
part, for the Company's United and U.S. Rubber subsidiaries by the right
described below under "Guarantees of Partners." Liquidity and capital resources
have also been negatively impacted by consolidated losses.
The high level of debt also subjects the Company to additional liquidity risk
should interest rates increase by a material amount. Approximately 46% of the
Company's outstanding debt is variable and based on market factors such as the
prime rate or LIBOR rates. A significant increase in these market indexes could
have a material adverse affect on the Company's liquidity.
The Company's working capital position (current assets over current liabilities)
was positive at April 30, 2003 by $484. The working capital position was $1,561
at October 31, 2002. This decrease is attributable to the lack of positive
results primarily from the trailer manufacturing segment and certain line of
credit renewal dates which resulted in reclassification of $4,288 to current
liabilities as of April 30, 2003. This is partially offset by the assumption of
Danzer Industries bank debt by Fair Holdings and the extension of the term
resulting in a reclassification of $1,488 of debt from current to long term.
The Company continues to address liquidity and working capital issues.
Management believes that the steps started in 2002 and currently underway will
continue to improve the Company's working capital, strengthen its equity and
place the Company in a position to successfully enhance its liquidity. These
steps include:
o During 2002, the Board of Directors authorized the Chairman of the Board to
explore various options regarding the operations at Champion. Options
included divestiture, restructuring of operations or closing the facility.
It was determined in the best interests of the Company to sell Champion. On
January 30, 2003, the Company completed the sale of substantially all
assets of Champion to an entity owned by Messrs. Durham and Whitesell,
Chairman and President of the Company, respectively. The sale resulted in
an increase in equity of $1,142 as further described in Note 3.
o During December 2002, the Company sold certain coaches of Obsidian Leasing
to DC Investments Leasing for assumption of the existing debt. DC
Investments Leasing then refinanced this debt at terms more favorable than
the previous terms.
o On April 1, 2003, the Company obtained an increase in its available line of
credit with Fair Holdings to $8,000.
o On January 3, 2003, Obsidian Leasing refinanced debt due to former
shareholders in the amount of $928 with Fair Holdings at terms further
described in Note 4 to the Financial Statements.
o During January 2003, United and U.S. Rubber obtained modifications to
provide less stringent requirements on certain financial covenants with
their respective lenders.
o On March 28, 2003, Fair Holdings acquired the line of credit and term debt
due to the senior lender of Danzer in the amount of $1,488 under an
assignment and assumption agreement. The maturity date of the line of
credit included in the assignment and assumption agreement was extended to
April 2006, and the debt covenants required by the senior lender were
waived through the end of the term. All other terms of the assumed notes
remain the same.
o During March 2003, United completed a compensation review and update and
provided a revised pay scale which realigns the Company with its industry
and reduces compensation costs. United also continues to develop its new
production facility to increase productivity and plant efficiency.
o During 2003, U.S. Rubber has continued to consolidate its butyl reclaiming
operations from two plants to one to maximize production and efficiently
utilize equipment. The consolidation has caused some pieces of equipment to
be temporarily idle until the Company completes its implementation of a new
production process for "fine grind rubber". Existing and new equipment will
be required to complete the "fine grind" production line. The new process
will maximize the use of the existing raw materials in the Company's
existing butyl reclaim production and also provide additional products of
natural rubber.
o The Company's truck body division at Danzer continues to negatively impact
the Company's cash flows. The trailer production line was put in place in
the fourth quarter of 2002 to support the production needs at United and
also provide a new product line to the existing customers of Danzer and
open a potential new market along the East coast of the U.S. Given the
current state of the telecommunications industry and economic conditions,
management will continue to evaluate the operations and progress with the
implementation of the trailer production. Management also expects to make a
decision to continue or discontinue operations by the end of fiscal 2003.
In conjunction with the analysis of the Danzer operations, we are also
analyzing the potential for asset impairment at the Danzer operation.
As a result of the actions described above, management believes that the Company
has financing agreements in place to provide adequate liquidity and working
capital for the remainder of fiscal 2003. However, there can be no assurance
that refinancing will be obtained or that such working capital and liquidity
will, in fact, be adequate. Future liquidity is also dependent upon the ability
of the company to generate profitable operations and positive cash flow from its
operating entities and maintain compliance with its credit agreements.
FINANCIAL COVENANT WAIVERS
At April 30, 2003, United was in violation of certain financial covenants with
Huntington Capital Investment Company. United has received a waiver of these
violations.
FUNDS AVAILABILITY
On a consolidated basis, as of April 30, 2003, the Company had approximately
$747 of cash and cash equivalents. Danzer Industries, U.S. Rubber, United and
Obsidian Enterprises each have revolving credit lines available for working
capital at each individual entity. Borrowings under the credit facilities are
available to the lesser of the maximum amount or the borrowing base as defined
in the credit agreement. At April 30, 2003, additional current availability
under these credit lines and maximum additional availability if supported by
their individual borrowing base are:
Company Current Availability Maximum Availability
--------------------- --------------------------- ------------------------------
--------------------- --------------------------- ------------------------------
Danzer Industries $ 110 $ 110
U.S. Rubber 108 2,149
United 112 112
Obsidian Enterprises 2,727 2,727
The Company generated negative net cash flow of $2,596 from operations during
the six months ended April 30, 2003. Cash used in operations during this period
is primarily due to increases in inventories and accounts receivable. The
Company has increased inventories during the first and second quarter primarily
in the trailer and related transportation equipment manufacturing segment. The
first quarter is historically the lowest volume quarter due to seasonality of
this business. Inventories were increased during the first quarter to provide an
increase in the Company's ability to deliver orders during the second and third
quarters when sales have historically been higher than in the first quarter.
Inventory has continued to be above historic levels in the second quarter
primarily due to lower than anticipated sales of cargo trailers. Funding during
this period was provided through borrowings on lines of credit and from related
parties.
REFINANCING ACTIVITIES
Refinancing activity during the six months ended April 30, 2003 included the
following:
o On December 17, 2002, Obsidian Leasing sold four coaches to DC Investments
Leasing in exchange for DC Investments Leasing's satisfaction of the debt
outstanding on such coaches. DC Investments Leasing paid this debt through
a refinancing at terms that included a reduction in interest rates. In
addition, DC Investments Leasing also acquired five additional coaches that
were previously to be purchased by the Company thereby eliminating the
Company's existing purchase commitment for such coaches. DC Investments
Leasing also entered into a management agreement with Pyramid under which
all nine coaches described above will be leased by Pyramid.
o On January 3, 2003, Obsidian Leasing refinanced debt in the amount of $928
to former shareholders of Pyramid and related companies. Terms of the new
note with Fair Holdings include monthly interest payments of 13% of the
outstanding principal amount and a balloon principal payment in January
2006.
o On March 28, 2003, Danzer's line of credit and term loan were assumed by
Fair Holdings. The maturity date on the line of credit was extended to
April 1, 2006 and all covenants were waived through the end of the term.
GUARANTEES OF PARTNERS
The Company has an agreement with Partners that gives it the right to mandate a
capital contribution from Partners if the lenders to U.S. Rubber or United were
to declare a default. In either of those events, the Company has the right to
enforce a capital contribution agreement with Partners up to $1,620 on U.S.
Rubber and $1,000 on United to fund the respective subsidiary's shortfall. These
payments, if any, would be applied directly to reduce the respective
subsidiary's debt obligations to the lender.
CASH FLOWS (EBITDA)
A summary of our contractual cash obligations for the fiscal years ending 2003
through 2006 and 2007 and thereafter at April 30, 2003 is as follows:
2007 and
Contractual Obligations Total 2003 2004 2005 2006 Thereafter
------------ ------------- ------------ ------------ ------------ ------------
Long-term debt, and all debt service
interest payments $ 50,616 $ 3,659 $ 8,621 $ 19,384 $ 8,689 $ 10,263
Operating leases 1,397 450 353 274 189 131
Mandatory redeemable preferred stock 2,211 337 338 -- 1,536 --
------------ ------------- ------------ ------------ ------------ ------------
------------ ------------- ------------ ------------ ------------ ------------
Total contractual cash obligations $ 54,224 $ 4,446 $ 9,312 $ 19,658 $ 10,414 $ 10,394
============ ============= ============ ============ ============ ============
Cash flow and liquidity are discussed further below, and the footnotes to our
financial statements discuss cash flow, liquidity and the current classification
of debt.
We also have a commercial commitment as described below:
Other Commercial Commitment Total Amount Committed Outstanding at April 30, Date of Expiration
2003
----------------------------------- -------------------------- --------------------------- ---------------------------
Line of credit, related party $ 1,000 $ 890 April 1, 2006
Line of credit 3,750 3,750 February 1, 2004
Line of credit 4,000 1,742 October 1, 2005
Line of credit 650 538 June 30, 2003
Line of credit, related party 8,000 5,273 January 9, 2005
The Company's net cash used in operations for the six months ended April 30,
2003 was $2,596. This is comprised of a loss from continuing operations of
$2,428, offset by noncash changes as follows: depreciation and amortization of
$1,446, deferred tax benefit of $595, accretion of interest expense of $182, and
the extension of stock options of $30. In addition, the Company had increases in
accounts receivable of $687, inventories of $614, and accrued expenses and
customer deposits of $313, and decreases in other assets of $20 and accounts
payable of $263.
Net cash flow provided from financing activities for the six months ended April
30, 2003 was $2,760. This is comprised of borrowings of long-term debt and net
borrowings of short-term debt of $1,265 and borrowings from related parties of
$4,212, offset by principal repayments of long-term debt of $1,756. In addition,
the Company repaid $961 of related-party payables.
Cash flow used in investing activities for the six months ended April 30, 2003
was $296 This is comprised of purchases of equipment.
The total decrease in cash is summarized as follows:
Six Months Ended
--------------------------------------
April 30, April 30,
2003 2002
------------------- ------------------
Net cash used in operations $ (2,596) $ (59)
Net cash used in investing activities (296) (394)
Net cash provided by financing activities 2,760 185
Net cash provided by (used in) discontinued operations (41) 6
------------------- ------------------
Decrease in cash and cash equivalents $ (173) $ (262)
=================== ==================
EBITDA is a measure of the Company's ability to generate cash flow and should be
considered in addition to, but not as a substitute for, other measures of
financial performance reported in accordance with accounting principles
generally accepted in the United States of America.
EBITDA from continuing operations by business segment and reconciliation to net
loss under accounting principles generally accepted in the United States of
America by segment for the applicable periods is as follows:
Three Months Ended April 30, 2003
-------------------------------------------------------------------------
Interest Income Depreciation Net
EBITDA Expense Taxes & Amortization Loss
------------ ------------ ----------- -------------------- --------------
Trailer and related transportation
equipment manufacturing $ (338) $ 338 $ (44) $ 189 $ (821)
Coach leasing 418 333 -- 258 (173)
Butyl rubber reclaiming 272 90 (25) 311 (104)
Corporate -- 143 (332) -- 189
------------ ------------ ----------- -------------------- --------------
Total Company $ 352 $ 904 $ (401) $ 758 $ (909)
============ ============ =========== ==================== ==============
Three Months Ended April 30, 2002
----------------------------------------------------------------------------------------
------------- ----------------- ------------ ---------- -------------------- -----------
Discontinued Interest Income Depreciation Net
EBITDA Operations Expense Taxes & Amortization Loss
------------- ----------------- ------------ ---------- -------------------- -----------
Trailer and related
transportation equipment
manufacturing $ 301 $ -- $ 392 $ 57 $ 190 $ (281)
Coach leasing 460 -- 377 (57) 165 (25)
Butyl rubber reclaiming 141 -- 152 -- 253 (264)
Discontinued operations -- 395 -- -- -- (395)
------------- ----------------- ------------ ---------- -------------------- -----------
------------- ----------------- ------------ ---------- -------------------- -----------
Total Company $ 902 $ 395 $ 921 $ -- $ 608 $ (965)
============= ================= ============ ========== ==================== ===========
Six Months Ended April 30, 2003
----------------------------------------------------------------------------------------
------------- ----------------- ------------ ---------- -------------------- -----------
Discontinued Interest Income Depreciation Net
EBITDA Operations Expense Taxes & Amortization Loss
------------- ----------------- ------------ ---------- -------------------- -----------
Trailer and related
transportation equipment
manufacturing $ (833) $ -- $ 656 $ (143) $ 378 $ (1,724)
Coach leasing 651 -- 603 -- 448 (400)
Butyl rubber reclaiming 329 -- 187 (128) 620 (350)
Corporate -- -- 242 (288) -- 46
Discontinued operations -- 49 -- -- -- (49)
------------- ----------------- ------------ ---------- -------------------- -----------
------------- ----------------- ------------ ---------- -------------------- -----------
Total Company $ 147 $ 49 $ 1,688 $ (559) $ 1,446 $ (2,477)
============= ================= ============ ========== ==================== ===========
Six Months Ended April 30, 2002
----------------------------------------------------------------------------------------
------------- ----------------- ------------ ---------- -------------------- -----------
Discontinued Interest Income Depreciation Net
EBITDA Operations Expense Taxes & Amortization Loss
------------- ----------------- ------------ ---------- -------------------- -----------
Trailer and related
transportation equipment
manufacturing $ 158 $ -- $ 725 $ (46) $ 350 $ (871)
Coach leasing 749 -- 734 -- 410 (395)
Butyl rubber reclaiming 222 -- 328 (109) 512 (509)
Discontinued operations -- 721 -- -- -- (721)
------------- ----------------- ------------ ---------- -------------------- -----------
------------- ----------------- ------------ ---------- -------------------- -----------
Total Company $ 1,129 $ 721 $ 1,787 $ (155) $ 1,271 $ (2,496)
============= ================= ============ ========== ==================== ===========
Obsidian Enterprises, Inc. (legal parent) allocates selling, general and
administrative expenses to the respective companies primarily based on a
percentage of sales. Amounts allocated by segment are as follows:
Three Months Ended Six Months Ended
------------------------------------------------------------------------------
April 30, 2003 April 30, 2002 April 30, 2003 April 30, 2002
------------------------------------------------------------------------------
Trailer manufacturing $ 339 $ 462 $ 657 $ 673
Coach leasing 44 61 92 101
Butyl rubber reclaiming 90 104 189 160
------------------------------------------------------------------------------
Total $ 473 $ 627 $ 938 $ 934
==============================================================================
EBITDA by segment, exclusive of the allocation of the above selling, general and
administrative expenses, is as follows:
Three Months Ended Six Months Ended
------------------------------------------------------------------------------
April 30, 2003 April 30, 2002 April 30, 2003 April 30, 2002
------------------------------------------------------------------------------
Trailer manufacturing $ 1 $ 763 $ (176) $ 831
Coach leasing 462 521 743 850
Butyl rubber reclaiming 362 245 518 382
------------------------------------------------------------------------------
Total $ 825 $ 1,529 $ 1,085 $ 2,063
==============================================================================
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are summarized in Note 2 to the consolidated
financial statements in the Annual Report on Form 10-K for the fiscal year ended
October 31, 2002 and describe the significant accounting policies and methods
used in the preparation of the consolidated financial statements. Some of the
most critical policies are also discussed below.
As a matter of policy, we review our major assets for impairment. Our major
operating assets are accounts receivable, inventory, intangible assets and
property and equipment. We have not historically experienced significant bad
debts expense, although the filing of Chapter 11 bankruptcy during 2002 of a
customer resulted in a bad debt charge of $379. However, we believe our reserve
for doubtful accounts of $495 should be adequate for any exposure to loss in our
April 30, 2003 accounts receivable. We have also established reserves for
slow-moving and obsolete inventories and believe the reserve of $354 is
adequate. We depreciate our property and equipment and amortize intangible
assets (except for goodwill) over their estimated useful lives. Goodwill and
intangibles are reviewed annually for impairment or more frequently when events
and circumstances indicate potential impairment factors are present. The Company
has established the first day of the fourth quarter as the date for its annual
goodwill impairment test. In assessing the recoverability of the Company's
goodwill, the Company must make various assumptions regarding estimated future
cash flows and other factors in determining the fair values of the respective
assets. If these estimates or their related assumptions change in the future,
the Company may be required to record impairment charges for these assets in
future periods. Any such resulting impairment charges could be material to the
Company's results of operations. As previously discussed, we are currently
evaluating the future use of various assets at both the truck body manufacturing
operation and butyl rubber reclaiming operation. The ongoing analyses of these
operations may result in a determination that certain assets at one or both
facilities may be impaired.
The initial cost of coaches acquired is depreciated over a straight-line basis
to a salvage value of 38% of original cost. Subsequent enhancements and
refurbishments of coaches are depreciated over five years using the
straight-line method. The age of coaches in our fleet range from less than one
year to nine years, with an average age of approximately four years. Actual
value of coaches after 15 years is dependent on several factors including the
level of maintenance and the market conditions at the time of disposal. We have
not disposed of a material number of coaches, and our estimate of depreciation
is based on information other than actual disposal experience. Accordingly, we
continue to evaluate our estimates with respect to the actual depreciation of
such vehicles based on market conditions and our experience in disposals when
they occur. Should future factors indicate the current depreciation policy is
not adequate, we will adjust the depreciation rates, and such adjustments may
have an adverse impact on our results of operations.
In conjunction with financing of the acquisition of United, the Company issued
386,206 shares of Series C preferred stock to Huntington Capital Investment
Corporation ("Huntington"). The note purchase agreement includes a provision
that gives Huntington the option to require the Company to repurchase these
shares at 90% of market value upon the earlier of: a) fifth anniversary of
issuance of such shares, b) default under the subordinated debt agreement, c)
other factors related to a sale of substantially all assets of the Company as
defined in the agreement. Increases in the value of the Company's stock will
result in a corresponding increase to this repurchase requirement. Accordingly,
a substantial increase in stock price at the repurchase date may have an adverse
impact on the Company's liquidity. At April 30, 2003, the Company had violated
certain financial covenants defined in the subordinated debt agreement with
Huntington. The Company received a waiver of these violations as of April 30,
2003.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to interest rate changes. See the
discussion of market risk in Management's Discussion and Analysis of Financial
Condition and Results of Operations in Item 2, which discussion is incorporated
by reference herein.
ITEM 4 CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the reports we file pursuant
to the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms. Such
information is accumulated and communicated to the Company's management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. The
Company's management recognizes that, because the design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events and also is subject to other inherent limitations, any controls
and procedures, no matter how well designed and operated, can provide only
reasonable, and not absolute, assurance of achieving the desired objectives. The
Company's management believes, however, that the Company's disclosure controls
and procedures provide reasonable assurance that the disclosure controls and
procedures are effective.
Within the 90 days prior to the filing of this report, the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based on this evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls subsequent to the date of the most
recent evaluation.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is party to ordinary litigation incidental to its business. No
current pending litigation is expected to have a material adverse effect on
results of operations, financial condition or cash flows.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
The exhibits filed as part of this Form 10-Q are listed in the Exhibit Index,
which is incorporated herein by reference.
REPORTS ON FORM 8-K
Form 8-K (Item 2) filed on February 11, 2003, to report the sale on January 30,
2003, of the assets of the Company's wholly owned subsidiary Champion Trailer,
Inc.
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.
June 23, 2003 By: /s/ Timothy S. Durham
---------------------------- --------------------------------------------
Date Timothy S. Durham, Chairman and
Chief Executive Officer
June 23, 2003 By: /s/ Rick D. Snow
---------------------------- --------------------------------------------
Date Rick D. Snow, Executive Vice President/
Chief Financial Officer
CERTIFICATIONS
I, Timothy S. Durham, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Obsidian
Enterprises, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statement, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a- 14 and 15d-14) for the registrant and we have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made know to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: June 23, 2003 /s/ Timothy S. Durham
--------------------------------------------
Timothy S. Durham, Chief Executive Officer
I, Rick D. Snow, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Obsidian
Enterprises, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statement, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a- 14 and 15d-14) for the registrant and we have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made know to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: June 23, 2003 /s/ Rick D. Snow
----------------------------------------------
Rick D. Snow, Chief Financial Officer
EXHIBIT INDEX
Exhibit No. Description
------------------ --------------------------------------------------------------- --------------------------------
10.1 Assignment Agreement, dated May 12, 2003, between Obsidian Incorporated by reference to
Enterprises, Inc. and Fair Holdings, Inc. Exhibit B to Amendment No. 3
to the Schedule 13D filed by
Timothy S. Durham on June 2,
2003
------------------ --------------------------------------------------------------- --------------------------------
10.2 Assignment of Note and Other Loan Documents, dated March 28, Attached
2003, between Bank of America, N.A. and Fair Holdings, Inc.
------------------ --------------------------------------------------------------- --------------------------------
10.3 First Amendment to Business Loan Agreement and Promissory Attached
Note (Line of Credit), dated March 28, 2003, between Danzer
Industries, Inc. and Fair Holdings, Inc.
------------------ --------------------------------------------------------------- --------------------------------
10.4 Second Amendment to Promissory Note (Line of Credit), dated Attached
April 1, 2003, between Obsidian Enterprises, Inc. and Fair
Holdings, Inc.
------------------ --------------------------------------------------------------- --------------------------------
99.1 Statement Regarding Certification Pursuant to 18 U.S.C. Attached
Section 1350 by Timothy S. Durham, Chief Executive Officer.
------------------ --------------------------------------------------------------- --------------------------------
99.2 Statement Regarding Certification Pursuant to 18 U.S.C. Attached
Section 1350 by Rick D. Snow, Chief Financial Officer.
------------------ --------------------------------------------------------------- --------------------------------