SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K/A
Amendment No. 1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _______________
Commission file number 0-17430
OBSIDIAN ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Delaware 35-2154335
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
111 Monument Circle, Suite 3680 46204
Indianapolis, Indiana (Zip Code)
(Address of principal executive offices)
(317) 237-4122
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section
12(g) of the Act:
Common Stock ($0.0001 par value)
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES ____ NO X
-------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of the Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
As of February 11, 2002, the aggregate market value of the Company's common
stock held by non-affiliates of the registrant, based on the average bid and ask
price on such date, was approximately $2,951,000.
As of February 11, 2002, the registrant had 36,007,855 shares of common stock
and 3,739,169 shares of Series C Preferred Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Information required in Part II and Part III has not
been incorporated by reference.
Introductory Note
This Amendment No. 1 amends the Registrant's Annual Report on Form 10-K for the
fiscal year ended October 31, 2001, by amending and restating Items 1, 6, 7 and
8 to incorporate certain changes.
PART I
ITEM 1. BUSINESS.
HISTORY AND DEVELOPMENT OF BUSINESS
A change in control and reorganization of the Registrant occurred on June 21,
2001. On that date, Timothy S. Durham was elected Chief Executive Officer and
Chairman of the Board of the Registrant and the Registrant acquired from
Obsidian Capital Partners, L.P. (the "Partnership"), Mr. Durham and certain
other shareholders all of the shares of the following companies: Pyramid Coach,
Inc., a Tennessee corporation ("Pyramid"); Champion Trailer, Inc., an Indiana
corporation ("Champion"); and U.S. Rubber Reclaiming, Inc., an Indiana
corporation ("U.S. Rubber"). On July 31, 2001, the Registrant acquired from the
Partnership and Mr. Durham substantially all of the assets of United
Acquisition, Inc., an Indiana corporation ("UAI"), which the Registrant now
operates as United Expressline, Inc. ("United"). All of the acquisitions were
made in exchange for shares of the Registrant's Series C Preferred Stock
("Series C Preferred Stock") and were pursuant to an Acquisition Agreement and
Plan of Reorganization by and among the Registrant, Danzer Industries, Inc.
("DII"), Pyramid, Champion, UAI, U.S. Rubber, the Partnership, Timothy S. Durham
and other related parties, dated as of June 21, 2001. Prior to the
reorganization, the Registrant had engaged through its wholly owned subsidiary,
DII, in the fabrication of metal parts and truck bodies for the service and
utility markets.
In October 2001, the Registrant's state of incorporation was changed from New
York to Delaware and the Registrant's name was changed from Danzer Corporation
to Obsidian Enterprises, Inc. The Registrant was originally incorporated in New
York in 1987 under the name Affiliated National, Inc. and subsequently changed
its name to Global Environmental Corp. and then to Danzer Corporation.
As used in this report, the term "Company" refers to Obsidian Enterprises, Inc.
together with its consolidated subsidiaries.
DESCRIPTION OF THE BUSINESS
OVERVIEW
The Company is a holding company headquartered in Indianapolis, Indiana. The
Company conducts business through five subsidiaries: U.S. Rubber, a butyl-rubber
reclaiming operation; Pyramid a provider of short and long-term luxury coach
leases for corporations and the entertainment industry; Champion, a manufacturer
of customized racecar transporters, specialty exhibit trailers and mobile
hospitality units; United, a manufacturer of steel-framed cargo, racing and
specialty trailers; and DII, a manufacturer of service and utility truck bodies
and accessories.
The Company operates in three industry segments comprised of butyl-rubber
processing; trailer and related transportation equipment manufacturing; and
leasing of transportation. All sales are in the Western Hemisphere, primarily in
the United States. For quantitative segment information see Note 13 to the
Consolidated Financial Statements.
BUTYL RUBBER PROCESSING
The Company's butyl rubber processing facilities are located in two adjacent
plants in Vicksburg, Mississippi. The Company is the sole manufacturer of
reclaimed butyl rubber in the domestic tire, tape and tube business in the
Western Hemisphere. The Company collects various used and scrap butyl rubber
products, primarily inner tubes from tires, which are then reprocessed into
reclaimed butyl rubber sheets. Customers mix the product with virgin butyl
rubber and use the product predominately as the inner liner of tubeless tires,
and also as inner tubes for tires and for tapes and mastics for pipelines.
Reclaimed butyl rubber used in combination with virgin butyl rubber has
properties that facilitate some manufacturing processes. However, the primary
reason manufacturers use reclaimed butyl rubber is the cost savings offered
compared to virgin butyl rubber.
The Company distributes its reclaimed butyl rubber products through an internal
sales force.
The Company is the sole supplier of reclaimed butyl rubber to most of the tire
industry in the United States and has tire manufacturer customers in Canada and
Brazil.
There are three other enterprises engaged in reclaiming butyl rubber worldwide:
o The Gujarat Company in India;
o Han Cook in Korea; and
o Vrederstein N.V. in the Netherlands.
Due to the cost of transporting reclaimed butyl rubber, these enterprises are
not major competitors with the Company in the Western Hemisphere. The primary
competitive factor is price.
Two enterprises manufacture virgin butyl rubber for sale in the United States:
o Exxon Corporation; and
o Bayer AG.
Both these enterprises are much larger than the Company, well capitalized and
have larger sales staffs. The prices charged by these enterprises places an
upper limit on the prices that may be set for reclaimed butyl rubber.
The Company obtains its supply of scrap inner tubes from approximately 1000
scrap merchants worldwide. The Company's ability to produce reclaimed butyl
rubber is potentially restrained by the limited supply of scrap butyl rubber
products. Since the introduction of tubeless tires for automobiles in the 1970s,
the number of scrap inner tubes from sources in the United States has declined
substantially. In the United States, inner tubes are now primarily limited to
the agricultural and large truck tire market. In 2001, the Company began to
experiment with reclaiming scrap butyl rubber pads from the manufacturers of
other butyl rubber products. This scrap is created as a result of the
manufacturing process for molded butyl rubber products and is available at
approximately 60% of the cost of scrap inner tubes. The Company's work to date
suggests that pad scrap may be a partial substitute for inner tubes as raw
material for the Company's reclaimed butyl rubber product.
Although the Company has had a long-term relationship with its primary
customers, it does not have long-term contracts with them. Two of its reclaimed
butyl rubber customers account for a substantial portion of the sales of this
segment. Uniroyal-Goodrich and Kelley Springfield accounted for the sales of 38%
and 22% of the sales of this segment in 2001. The loss of either of these
customers would materially and adversely affect the Company. The Company's
reclaimed butyl rubber products are generally ordered by customers monthly and
shipped promptly after the order. Accounts are generally paid on 30 to 60 day
terms.
TRAILER AND RELATED TRANSPORTATION EQUIPMENT MANUFACTURING
The Company manufactures service truck bodies at its facility in Hagerstown,
Maryland where the Company produces truck bodies for sale under the Morrison
trademark as well as bodies built to order for other original equipment truck
manufacturers. The finished bodies are shipped to the customer for installation
on truck body chassis. The Company markets truck bodies through an internal
sales force. It sells its private label products directly to its private label
customers and markets its proprietary "Morrison" products through a network of
approximately 300 dealers who, in turn, sell to municipalities, utility
companies, cable companies, phone companies and contractors. Most truck body
customers are in the East and Southeast United States. Slightly more than one
half of the Company's truck body revenue is accounted for by sales to one
installer. Although the Company's relationship with this manufacturer has been
long term it does not have a supply contract and is not the sole supplier of
truck bodies to that enterprise. The loss of the Company's relationship with the
truck manufacturer could have a material adverse effect on the Company. There
are a significant number of companies engaged in the manufacture of service
truck bodies in the United States. While many of these companies are relatively
small and do not possess the Company's technical capacity, a number of its
competitors are much larger and possess equal or greater technical and financial
resources. Four such competitors are: Knapheide Manufacturing Co., Omaha
Standard, Inc., Reading Body Works, Inc., and Stahl, a Scott Fetzer Co., which
is a wholly owned subsidiary of Berkshire Hathaway, Inc. The Company competes
with others for truck body sales through price and service, with price being the
most important factor, and offers truck bodies made to the individually
specified requirements of its customers.
The Company manufactures specialty racing, cargo and ATV trailers at a facility
owned by the Company in Bristol, Indiana and at another facility owned by the
Company in White Pigeon, Michigan. The business is somewhat seasonal with fewer
orders during the months from November through January. The trailers are
marketed under two names "United Expressline" and "Southwest Expressline." While
the Company markets some trailers under these brands at prices up to $75,000,
the average price for these trailers is approximately $3,900. The Company sells
the "United Expressline" and "Southwest Expressline" trailers through two dealer
networks comprised of an aggregate of approximately 300 dealers in the United
States and Canada, most of whom are located in the Midwest United States. The
Company's sales activities are conducted through an internal sales force. While
the Company has formal agreements with a few of the dealers, most of the
dealership arrangements are informal and are nonexclusive. The trailers are
built to order to dealer specifications. The terms of sale for the "United
Expressline" and "Southwest Expressline" trailers are FOB the plant with payment
generally due upon the dealer taking delivery of the trailer. A few dealers have
30 or 60 day terms. There are a significant number of companies engaged in the
manufacture of specialty racing, cargo and ATV carriers in the United States.
While many of these companies are relatively small and do not possess the
Company's technical capability, a number of its competitors are much larger and
possess equal or greater technical and financial resources. Three such
competitors are: Haulmark Industries, Pace American, U.S. Cargo and Wells Cargo.
The Company competes with others for specialty racing, cargo and ATV trailer
sales through price, quality and availability, with price an important factor.
The Company manufactures custom, high-end racecar transporters and specialty
trailers at a 58,500 square foot manufacturing facility in three adjacent
buildings leased by the Company in Lewisville, Texas, 15 miles north of Dallas.
At that facility it builds a variety of aluminum trailers, from 15 foot
bumper-pull units to full-size 53 foot semi models. The end uses include product
transportation, corporate display, hospitality units, and competitive racecar
transports. Among the Company's customers for these trailers are
Daimler-Chrysler, Mobil, Skoal Tobacco, Mopar, US Filter, Tenneco, Amato Racing,
Mike Gunderson, Skuza Motorsports, and Vincent Motorsports. The Company competes
with others for sales of these high-end, custom trailers on quality and price.
Its largest competitor in this respect is Featherlite Trailers.
The Company purchases its raw materials for the trailer and related
transportation equipment segment from numerous suppliers and has not had any
difficulty in obtaining components or raw materials.
The Company generally warrants its product to be free from defects in material
and workmanship and performance under normal use and service for a period of
twelve months after shipment. The obligation of the Company is generally limited
to the repair or replacement of the defective product.
At October 31, 2001, the backlog of the trailer and related transportation
segment was approximately $4,100,000 composed of approximately $200,000 for
truck bodies, $1,900,000 for specialty racing, cargo and ATV trailers and
$2,000,000 for high end customer trailers. The October 31, 2001 backlog is
expected to be filled within the 2002 fiscal year.
COACH LEASING
The Company leases high-end luxury entertainment coaches from its facility
located in Joelton, Tennessee. The leases are for both short-term (weekly or
monthly) and long-term periods. At October 31, 2001, the Company had 34 coaches
in its fleet under management. In addition, the Company subleases coaches from
other coach owners on a short-term basis, from time to time. All of the coaches
under management at October 31, 2001, were owned by DW Leasing, a company
controlled by Messrs. Durham and Whitesell. Twenty-seven of these coaches were
transferred to the Company on November 1, 2001, and the remainder continue to be
owned by DW Leasing and managed by the Company. The Company leases the coaches
through an internal sales force. The coaches are leased primarily to the
country, rock-n-roll, pop and traveling Broadway show entertainment industries.
The coaches are also leased to various corporations. The leases are generally on
a net basis, with the customer responsible for fuel and drivers and other
personnel. During the year ended October 31, 2001, the Company leased coaches to
a number of touring groups in connection with their tours including Ozzie
Osborn, Brad Paisley and the Broadway Show "Stomp." The Company's corporate
customers include the Golf Channel. There are several other companies that lease
luxury coaches. Some of the larger competitors include Entertainer Coaches of
America, Florida Coach, Senators Coach and Hemphill Brothers. The Company
believes that amenities are an important factor in leasing coaches to its target
market and equips its coaches with a full complement of amenities. The Company
competes with other luxury coach providers based on a combination of quality,
amenities, availability and price.
GOVERNMENT REGULATION
The Company is subject to regulation by federal, state, and local agencies that
have jurisdiction over areas such as environmental and fire hazard control
issues and regulate the work place to insure safe working conditions for the
Company's employees. The trailers and truck bodies manufactured by the Company
must meet standards set by state and federal transportation authorities and the
coaches leased by the Company must comply with those standards and regulations.
These regulatory bodies could take actions that would have a material adverse
affect upon the Company's ability to do business. The business of the Company
does not subject it to any special regulatory authority.
EMPLOYEES
As of October 31, 2001, the Company had 469 employees. The Company has a labor
contract through January 2003 with United Brotherhood of Carpenters and Joiners
of America for the approximately 60 production workers at its truck body
manufacturing facility in Hagerstown, Maryland. None of the employees at the
other facilities of the Company is represented by a labor union. The Company
believes its employee relations are satisfactory.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company does not rely on any patents, registered trademarks, or special
licenses to give it a competitive advantage. The "Morrison," "Danzer,"
"Pyramid," "Champion," "United Expressline" and "Southwest Expressline" brand
names have brand recognition in the relevant market.
RESEARCH AND DEVELOPMENT
The Company did not incur, during any of its last three fiscal years, and does
not contemplate incurring, any material research and development expenses.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report on Form 10-K contains
forward-looking statements that involve risks and uncertainties that could cause
actual results to differ materially. Factors that might cause or contribute to
such differences include, but are not limited to, those discussed in the section
entitled "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations." Readers should carefully review the risks described
in this and other documents that the Company files from time to time with the
Securities and Exchange Commission, including the quarterly reports on Form 10-Q
to be filed by the Company in 2002. Readers are cautioned not to place undue
reliance on the forward-looking statements, which speak only to the date of this
Annual Report on Form 10-K. The Company undertakes no obligation to publicly
release any revisions to the forward-looking statements or reflect events or
circumstances after the date of this document.
PART II
ITEM 6. SELECTED FINANCIAL DATA, AS RESTATED.
The following table sets forth certain selected consolidated financial
information concerning the Company. This information is not covered by the
independent auditor's report. For further information, see the accompanying
Consolidated Financial Statements of Obsidian Enterprises, Inc. (formerly Danzer
Corporation) and subsidiaries for the ten-month period ended October 31, 2001
and the years ended December 31, 2000, 1999, 1998, and 1997, and the information
set forth in Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and in Item 8, "Financial Statements and
Supplementary Data" below.
The following information is a summary of the consolidated financial statements
of the Company included elsewhere and should be read in conjunction with such
consolidated financial statements. The information for the years ended December
31, 2000, 1999, 1998, and 1997 are for that of U.S. Rubber Reclaiming only, the
accounting acquirer in the reverse merger further described in the financial
statements referenced above.
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 ten months ended October 31, 2001 for these errors.
OPERATING DATA:
(Amounts in thousands, except per share data)
Ten Months
Ended
October 31, Year Ended December 31,
--------------------------------------------------
2001 2000 1999 1998 1997
-----------------------------------------------------------------
Net sales $ 28,055 $ 12,583 $ 11,439 $ 12,575 $ 13,728
Income (loss) from operations (2,149) 184 413 107 819
Net income (loss) (4,395) 48 216 74 525
Net income (loss) per common share, basic and diluted (.17) -- -- -- --
BALANCE SHEET DATA:
October 31, December 31,
--------------------------------------------------
2001 2000 1999 1998 1997
----------------------------------------------------------------
Working capital (deficit) $(3,484) $ 864 $ 1,896 $ 2,864 $ 2,261
Total assets 48,850 9,633 11,633 11,914 8,745
Long-term debt, including current portion and
mandatory redeemable preferred stock 36,744 3,846 5,914 6,365 3,085
Stockholders' equity 1,331 4,939 4,890 4,674 4,600
No dividends have been declared or paid in any period presented.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
INTRODUCTION
The transactions in June and July 2001 (see "Item 1. Business--History and
Development of Business") were treated for accounting purposes as an acquisition
by U. S. Rubber. For this reason, the fiscal 2000 and 1999 financial information
represents only the financial results of U. S. Rubber and does not include the
rest of the operations which are now part of the Company. For this reason,
comparisons to prior periods are of limited utility.
The results of operations for 2001 include the operations of U. S. Rubber,
Champion and Pyramid and a related entity (D. W. Leasing) for the ten months
ended October 31, 2001, the operations of DII for the period from June 21, 2001
through October 31, 2001 and the operations of United from July 31, 2001 through
October 31, 2001. See "Principles of Consolidation" in Note 2 to the
Consolidated Financial Statements.
RESULTS OF OPERATIONS - 2001 COMPARED WITH 2000
PERCENTAGE OF SALES
The following table details the Company's results of operations as a percentage
of sales:
Ten Months Ended Year Ended
October 31, December 31,
2001 2000
------------------------ --------------------
Net sales 100.0% 100.0%
Cost of sales, other than depreciation 73.3 86.1
Cost of sales, depreciation 7.8 4.4
Selling, general and administrative expenses 18.3 8.0
Loss on asset impairment 8.2 --
Interest expense 9.3 3.5
Interest income -- (2.8)
Other expense .1 --
SEGMENT SALES
The following table shows net sales by segment:
Ten Months Ended
October 31, Year Ended December 31,
2001 2000
------------------------- --------------------------
Trailer and related transportation equipment
manufacturing $ 14,016 $ --
Butyl rubber reclaiming 9,874 12,583
Coach leasing 4,165 --
------------------------- --------------------------
Total $ 28,055 $ 12,583
========================= ==========================
The Company's revenue was less than expected for each of its segments in 2001.
This is primarily due to interruptions in production in reclaimed butyl rubber,
softer than expected sales of reclaimed butyl rubber, transport specialty
trailers and truck bodies and the overall slowing of economic activity during
the third quarter ended July 31, 2001 and the fourth quarter ended October 31,
2001. The Company's revenue in 2001 from its "United Expressline" and "Southwest
Expressline" trailer manufacturing operations and from its coach leasing
operations were generally in line with management's budgets.
TRAILER AND RELATED TRANSPORTATION EQUIPMENT MANUFACTURING
The gross profit and gross profit percentage for the ten months ended October
31, 2001, for the trailer and related transportation equipment manufacturing
segment were $1,740,320 and 12.4%. The Company had no sales in this segment in
2000.
The depressed conditions in the telecommunications industry were the primary
factor that led to lower than expected truck body sales during 2001. A majority
of the Company's truck bodies are used in the telecommunications industry. Sales
were further affected by the recession and the consequent reduction in the
overall level of capital spending. The Company reduced costs in 2001, primarily
by reducing the number of personnel employed (a 35% reduction in August 2001)
and by changing vendors for blank materials (an annualized reduction in costs of
$56,000), but the reduction in costs was not sufficient to offset the effect of
the reduced revenue. The Company anticipates that overall economic conditions
and the economic state of the telecommunications industry will continue to
adversely impact sales of truck bodies into 2002.
The Company's transport specialty trailer revenues were substantially below
expectations in 2001. When this operation was acquired, management anticipated
that it would continue to generate repair revenue at historic levels. This did
not occur. Management believes this was because the relationships with repair
customers were personal to the former owner and, for that reason, the Company
was unable to maintain those relationships. In addition, the Company was unable
to maintain trailer sales at anticipated levels, in part, because of the overall
reduction in the level of capital expenditures throughout the economy. Finally,
the Company was unable to efficiently complete the trailers that were in process
at the time of acquisition. As a result of operating losses, the Company has
made additional capital contributions to the operating subsidiary during fiscal
2001 of approximately $1,222,000 and the operating subsidiary was in default of
certain loan covenants. The Company is in discussions to divest this operation.
Given these facts, the Company concluded that the goodwill in the amount of
$2,304,682, in connection with this operation, had been impaired and recorded a
charge against income to reflect that impairment. (See "Loss on Asset
Impairment.")
The Company's results of operations in its "United Expressline" and "Southwest
Expressline" trailer manufacturing operations were in line with management's
expectations for 2001.
BUTYL RUBBER RECLAIMING
Net sales for the periods reported in this segment are as follows:
Ten Months Ended Twelve Months
Ended
October 31, December 31,
---------------------------------------
2001 2000 2000
--------------------------------------- --------------------
Rubber net sales $ 9,875,813 $ 10,499,610 $ 12,583,017
======================================= ====================
Net sales in this segment for the ten months ended October 31, 2001 as compared
to the comparable ten-month period ended October 31, 2000 decreased 5.9% in the
amount of $623,797. Net sales in this segment for the twelve months ended
December 31, 2000 as compared to an annualized sales for all of 2001 decreased
approximately 5.8%.
Because of the widespread tire recalls at Bridgestone/Firestone and Goodyear,
demand for the Company's reclaimed butyl products increased significantly during
June, July and August 2001 over prior similar periods. However, the Company was
not able to take advantage of this demand since the Company had scheduled a
complete renovation of its 12" extruder (a key element of its manufacturing
process) that began in June 2001. During 2001, the Company expended over
$850,000 in this and other major renovations and the 12" extruder was not fully
operational until late October 2001 after the increased demand had subsided.
After Company's customers built up large inventories in anticipation of demand
under the recalls, the number of tires submitted by consumers to be replaced was
lower than anticipated and, as a result, tire manufacturers accumulated a large
inventory of tires. Tire manufacturers reduced production in response to the
inventory problem and this caused a substantial decrease in reclaimed butyl
demand starting in September 2001. The Company anticipates that more normal
inventory levels at its tire manufacturer customers will result in a return to
historic levels of demand for reclaimed butyl rubber by tire manufacturers in
calendar 2002.
The decline in the price of crude oil in September and October 2001 caused a
decline in new oil exploration. As a result, the demand for pipeline mastic
wraps produced with reclaim butyl rubber supplied by the Company also fell
dramatically beginning in October 2001. As the price of crude oil begins to
climb again, management believes the demand for those uses will return to
historic levels in calendar 2002.
Cost of goods sold in this segment were as follows:
Ten Months Ended Twelve Months Ended
October 31, December 31,
----------------------------------------
2001 2000 2000
---------------------------------------- --------------------
Rubber cost of goods sold $ 8,883,969 $ 8,845,338 $ 11,389,820
Less nonrecurring settlement termination cost -- -- (407,000)
---------------------------------------- --------------------
Adjusted rubber cost of goods sold $ 8,883,969 $ 8,845,338 $ 10,982,820
======================================== ====================
% of sales 89.9% 84.2% 87.3%
======================================== ====================
Manufacturing costs increased in 2001 from the prior year for the ten-month
period ended October 31, 2001 due to the 12" extruder renovation, the Company's
inefficiencies in mixing poor raw material with quality raw material and butyl
raw material buying competition. With the 12" extruder renovation completed in
September 2001 and the increased use of butyl rubber pad scrap, management
anticipates that the cost of goods sold percentage should decline in 2002 from
that experienced in 2001.
Gross profit and gross profit percentage for the ten months ended October 31,
2001 and the twelve months ended December 31, 2000 were as follows:
Ten Months Ended Twelve Months Ended
October 31, December 31,
----------------------------------------
2001 2000 1999
-------------------- ----------------------------------------
Rubber gross profit $ 991,845 $ 1,193,197 $ 1,355,435
Add back nonrecurring settlement termination cost -- 407,000 --
-------------------- ----------------------------------------
Adjusted Rubber gross profit $ 991,845 $ 1,600,197 $ 1,355,435
==================== ========================================
Rubber gross percentage 10.0% 12.7% 11.8%
==================== ========================================
This reduction in gross profit percentage was due to lower sales and higher cost
of sales, associated with the extruder renovation project and the lack of, and
higher cost of, raw materials.
The Company obtains its raw material inventory through an extensive collection
system consisting of small rubber collectors and large scrap tire recyclers.
During 2001 the Company has experienced competition for its raw material
inventory from Korean buyers and other overseas buyers. This resulted in higher
raw material costs in 2001 and, to a lesser extent, limited sales because of the
limited supply of raw materials.
Management believes that the use of butyl rubber pad scrap will help control the
cost of raw materials in 2002 and that the Company has the ability to raise
prices in 2002.
COACH LEASING
The revenue from the Company's coach leasing operations in 2001 exceeded
management's expectations because of increased utilization of the coaches and an
increase in the size of the fleet that the Company manages. Management believes
that the increased utilization reflects the emphasis of its marketing efforts on
rock and roll, pop, touring Broadway show and corporate customers. The financial
statements for this segment in 2001 include income and expenses of D.W. Leasing,
LLC ("DW Leasing"). DW Leasing is controlled by Messrs. Durham and Whitesell,
the Chairman and President of the Company. At the time of the closing of the
acquisition in June 2001, the Company and DW Leasing conducted cooperative
operations through a management agreement, cross-guarantees of debt and shared
management. On November 1, 2001, a transfer of a substantial part of DW
Leasing's assets and liabilities was made to Obsidian Leasing Company, Inc., a
Mississippi corporation ("Obsidian Leasing"), wholly owned by the Company.
For the ten months ended October 31, 2001, the coach leasing segment had gross
profit and gross profit percentage of $2,547,065 and 61.1%. The Company had no
sales in this segment in 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses are higher for the ten months ended
October 31, 2001, versus the twelve-month period ended December 31, 2000, due to
the operations added in 2001 as discussed previously.
Selling, general and administrative expenses for the ten-month period are higher
than would be expected on an on-going basis because of the administrative costs
that were necessary to start a process of creating better subsidiary reporting,
the use of outside professionals for services to assist in the post-acquisition
activities, the cost to obtain prior year audits to meet regulatory filing
requirements, and the cost of providing services to management normally
performed by Company personnel.
INTEREST EXPENSE, AS RESTATED
The Company's interest expense is a high percentage when calculated as a
percentage of net sales since all acquisitions were highly leveraged. Interest
cost by business segment and subsidiary company for the reported periods is as
follows:
Ten Months Ended Twelve Months Ended
October 31, 2001 December 31, 2000
------------------------------------ -------------------------------------
Expense % of Expense % of
Subsidiary Sales Subsidiary Sales
------------------------------------ -------------------------------------
Trailer and related transportation equipment manufacturing:
DII $ 34,090 2.4% $ --
United 334,460 3.6% --
Champion 287,887 8.6% --
Butyl rubber reclaiming:
U.S. Rubber 657,589 6.7% 441,698 3.5%
Coach leasing:
Pyramid 1,266,292 27.4% --
Corporate 19,564 -- --
------------------------------------ -------------------------------------
Total Company $ 2,599,882 9.3% $ 441,698 3.5%
==================================== =====================================
LOSS ON ASSET IMPAIRMENT
During 2001, the Company evaluated the recoverability of Champion's long-lived
assets, including goodwill, as required by generally accepted accounting
principles. Champion has experienced significant operating losses and cash flow
deficiencies. Champion determined the estimated future undiscounted cash flows
were below the carrying value of certain long-lived assets. Champion wrote off
the goodwill remaining on its balance sheet for these assets and recorded a
charge of $2,304,682 in other income and expense as loss on asset impairment.
INCOME TAX PROVISION
The income tax provision for the twelve-month period ended October 31, 2000
decreased by $422,000 to a benefit for the ten-month period ended October 31,
2001. The income tax benefit is created primarily through the net operating
losses of Obsidian Enterprises, Inc. and Danzer.
RESULTS OF OPERATIONS - 2000 COMPARED WITH 1999
The only operations for the Company reflected in 2000 and 1999 are those of its
butyl rubber reclaiming segment.
Net sales for the periods reported in this segment are as follows:
Twelve Months Ended
---------------------------------------
December 31, 2000 December 31, 1999
---------------------------------------
Rubber net sales $ 12,583,017 $ 11,438,542
=======================================
Net sales in this segment for the twelve months ended December 31, 2000 as
compared to December 31, 1999 increased 10% in the amount of $1,144,475. This
increase was based on the Company's increased sales for 2000 to tire
manufacturers and to manufacturers of pipeline mastic wraps.
Cost of goods sold for the years ended December 31, 2000 and 1999 are as
follows:
Twelve Months Ended
-------------------------------------------------------
December 31, 2000 December 31, 1999
-------------------------------------------------------
Rubber cost of
sales $11,389,820 $10,083,107
Less nonrecurring settlement
termination cost (407,000) ---
-------------------------------------------------------
-------------------------------------------------------
Adjusted rubber cost of goods $10,982,820 $10,083,107
=========== ===========
sold
% of Sales 87.3% 88.2%
=======================================================
Cost of goods sold decreased from 1999, if nonrecurring settlement termination
cost is eliminated for comparative purposes. The Company was more efficient in
mixing lower grade raw material with quality raw material and improved
productivity with certain key pieces of equipment from 1999 to 2000. The
settlement termination cost was paid to a broker who facilitated customer and
vendor relationships. All the relationships obtained through that broker have
been preserved after termination of the broker's contract.
Gross profit and gross profit percentage for the twelve months ended December
31, 2000 as compared to December 31, 1999, decreased $162,238 and 12.0%,
respectively. After adjustment for the nonrecurring settlement termination cost,
gross profit and gross profit percentage would have increased $244,762 and 18.1%
for the twelve months ended December 31, 2000 as compared to December 31, 1999.
Selling, general and administrative expenses are higher for the twelve months
ended December 31, 2000 versus the twelve month period ended December 31, 1999
due to higher cost of labor. Increase is also due to general increase in selling
expenses due to higher sales, and increases in selected expenses related to
sales, insurance and the costs associated with selling the business to Obsidian
Capital Partners, LP.
Interest income is down for the twelve months ended December 31, 2000 as
compared to December 31, 1999 by $68,326. The interest income is being earned
due to loans made to the previous owner, recorded as notes receivable related
party. The previous owner paid off all notes due U.S. Rubber prior to December
29, 2000, the date Obsidian Capital Partners, LP purchased U.S. Rubber. Interest
income from these notes receivable was lower for the 2000 year due to the
previous owner paying down a substantial balance owed during the fall of 2000.
Interest expense decreased $55,325 for the year ended December 31, 2000 as
compared to the year ended December 31, 1999. Interest expense is lower due to
U.S. Rubber reducing the long-term debt by paying down the debt from proceeds
received from the previous owner.
Income before income taxes decreased for the twelve months ended December 31,
2000 as compared to December 31, 1999 by $242,000. The decrease, if adjusted for
the nonrecurring settlement termination cost in the amount of $407,000 would
have been an increase of $165,000.
Income tax provision for the twelve-month period ended December 31, 2000
decreased by $74,000. The decrease is attributable to lower income before taxes.
The tax provision is based on the estimated effective tax rate for the full
fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
Each of the subsidiaries of the Company have separate revolving credit
agreements and term loan borrowings through which the subsidiary finances its
operations together with cash generated from operations. The high principal
balances of some of these loans reflect the fact that Obsidian Capital Partners,
LP, from whom four of the five subsidiaries were purchased, entered into highly
leveraged acquisitions of Champion, U.S. Rubber, Pyramid, and United.
This high level of debt creates liquidity issues for the Company and the
stringent financial covenants that are common for this type of debt increase the
probability that the Company's subsidiaries will be in technical default under
the loans. These risks are mitigated, in part, for the Company's United and U.
S. Rubber subsidiaries by the right described below under "Guarantees of OCP."
The Company was unable to obtain audited financial statements for the Company
and each of its subsidiaries within 90 days of the end of its fiscal year. This
created a technical default under most of the loans to the Company and its
subsidiaries. These technical defaults have been waived by each of the lenders.
In addition to these technical defaults, the Company and most of its
subsidiaries have violated certain requirements and covenants in their debt
agreements relating to maintenance of certain minimum ratios and levels of
earnings to funded debt and fixed charge coverage rate. Management has brought
these violations to the attention of its lenders and, except for the Champion
debt and one DW Leasing note agreement, the lenders have waived these violations
as described below under "Financial Covenant Waivers."
The Company's working capital position (current assets over current liabilities)
was negative at October 31, 2001 by $3,484,000 in part because nearly 25% of the
Company's debt is classified as a current liability.
The Company is addressing these liquidity and working capital issues in a
variety of ways. Management anticipates that these steps will improve the
Company's working capital position, strengthen its equity position and place the
Company in a position to successfully address its liquidity issues. These steps
include:
o The transactions described below under "U. S. Rubber Transaction" which
would increase the Company's equity by $1,412,000 and improve its working
capital position by approximately $570,000.
o The transactions described below under "Partners Equity Transactions" which
would convert more than $2,170,000 of long-term liabilities to equity.
o The divestiture of Champion described below under "Champion Transaction"
which would improve the Company's working capital position by approximately
$1,700,000.
o The transactions described below under "Refinancing Activities" which
management anticipates will reduce the Company's interest costs and
decrease the proportion of debt which is treated as a current liability.
There can be no assurance that any or all of these transactions will occur.
FINANCIAL COVENANT WAIVERS
The Company has reached agreements with certain of its lenders to waive
financial covenant defaults under the following loans:
o Management has completed discussions with Bank One in respect of the
violations by U.S. Rubber of the negative covenants of (i) fixed charge
coverage ratio and (ii) funded debt to EBITDA ratio. Management has
received a waiver of these violations and an amendment of the Credit
Agreement which extends it through November 1, 2002 when the entire debt is
due.
o Pyramid is a guarantor of DW Leasing's debt to Regions Bank, Nashville,
Tennessee. DW Leasing and Pyramid have been in violation of the Funded Debt
to EBITDA ratio in the Regions Bank Credit Facility since the inception of
the loan. This is due to the fact that DW Leasing acquired eight additional
new luxury coaches, which coaches are highly leveraged. At the time of the
Acquisition, Regions Bank granted a waiver of this violation. To date, the
covenant has not been rewritten. Regions Bank has waived the violation as
of October 31, 2001. However, since the Company continues to be in
violation of this covenant, $639,000 of long-term debt due Regions Bank has
been reclassified as a current liability.
o United was in violation of two negative loan covenants with First Indiana
Bank. United had borrowed approximately $200,000 more than was allowed
under the borrowing base at October 31, 2001 which was cured on January 31,
2001 and waived by the bank. In addition, United made advances to the
Company that were not pre-approved by First Indiana Bank. This covenant
violation has also been cured and the default waived through December 31,
2001. United is in compliance with these negative covenants after the date
of the waivers.
o The Company was in violation of three negative covenants and failed to
submit audited financial statements within 90 days of year-end with
Renaissance US Growth & Income Trust PLC and FBSUS Special Opportunities
Trust PLC, the holders of debentures that completed the financing of
United. The Company has received a waiver of all of these violations
through November 1, 2002.
o Various subsidiary companies were in violation of requirements to provide
year-end financial statements to their respective lenders within ninety
days of the close of the year-end. Management has received waivers on all
of these violations.
o U.S. Rubber was in violation of a covenant with SerVaas, Inc. at October
31, 2001. SerVaas, Inc. agreed to waive through November 1, 2002, all its
rights to accelerate the due date of amounts outstanding under the debt
Agreement and the Subordinated Secured Promissory Note as a default created
by U.S. Rubber's failure to make certain payments. In addition, SerVaas,
Inc. also agreed to defer payment of all amounts due under the debt
Agreement through November 1, 2001.
o Pyramid was in technical default of a loan covenant with Old National Bank
of Evansville, Indiana. Pyramid was required to provide various financial
information on a quarterly and annual basis. Through October 31, 2001,
Pyramid had not provided all requested financial information, on a timely
basis. Old National Bank agreed to waive its right to accelerate the due
date of payments under its loan through November 1, 2002.
Champion remains in default of both the senior and the subordinated debt
agreements, which have been classified as a current liability due to the
default, and is operating under a forbearance agreement through March 15, 2002.
FUNDS AVAILABILITY
On a consolidated basis, as of October 31, 2001, the Company had approximately
$529,000 of cash and cash equivalents. U.S. Rubber has available approximately
$60,000 from its revolving line of credit with Bank One, Indiana, N.A., and
Danzer Industries has available approximately $925,000 from its revolving line
of credit with Bank of America Commercial Finance Corporation ("BOACFC"), the
proceeds of which are available for the operations of that subsidiary. U.S.
Rubber may increase the availability under its existing revolving credit
facilities in order to meet any of its expanded inventory requirements.
United, Danzer, U.S. Rubber and Pyramid have generated net cash flow from
operations. The Company has funded Champion through inter-company advances which
were converted to capital, and related party finished goods financing through DW
Leasing through December 31, 2001, and through DC Investments, LLC controlled by
the chairman of the Company since January of 2002.
REFINANCING ACTIVITIES
In August 15, 2001, Danzer Industries negotiated and closed a new Credit
Agreement with Bank of America Commercial Finance Corporation ("BOACFC") whereby
BOACFC agreed to lend Danzer Industries $1,000,000 in a mortgage loan secured by
a lien on Danzer Industries' facility and a $1,000,000 Revolving Credit Facility
which will provide Danzer Industries with increased liquidity for an expected
increase in inventories. This new credit facility replaces the Wells Fargo
credit facility for the period reported.
Management is refinancing some of the currently outstanding debt:
o Negotiations have been ongoing with a new lender to refinance the primary
lender of U.S. Rubber at more favorable terms than the current terms.
Management anticipates the refinancing will be concluded by the third
fiscal quarter.
o The Company expects in the ordinary course of business to obtain an
extension or annual renewal of the term of the First Indiana Bank revolving
line of credit.
o The Company is undertaking to refinance the coaches transferred from DW
Leasing to a new wholly owned subsidiary of the Company (Obsidian Leasing
Company, Inc.) with DC Investments and its various existing lenders.
Management anticipates that this will be concluded by the third fiscal
quarter.
PARTNERS EQUITY TRANSACTIONS
Obsidian Capital Partners, LP, the major shareholder of the Company, is required
under the Plan of Reorganization to fund through the purchase of additional
preferred stock certain ongoing administrative expenses of the Company to
complete the Plan of Reorganization, complete all required current and prior
year audits to meet the regulatory filing requirements, and ensure all annual
and quarterly SEC filings are completed to enable the registration of the
preferred stock issued to Obsidian Capital Partners, LP. The amounts through
January 31, 2002 were approximately $645,000. Management anticipates this and
any additional items incurred will be converted to equity by May 15, 2002.
Obsidian Capital Partners, LP has indicated that it is willing to convert to
Series C Preferred Stock of the Company $1,222,000 of advances from Partners to
the Company. Management anticipates this transaction will be concluded by May
15, 2002.
GUARANTEES OF OCP
The Company has an agreement with Obsidian Capital Partners, LP that gives it
the right to mandate a capital contribution from Obsidian Capital Partners, LP
if the lenders to U.S. Rubber or United were to declare a default. In either of
those events, the Company has the right to enforce a capital contribution
agreement with Obsidian Capital Partners, LP up to $1,620,000 on U.S. Rubber and
$1,000,000 on United to fund the respective subsidiary's shortfall. Those
payments, if any, would be applied directly to reduce the respective
subsidiary's debt obligations to the lender.
U. S. RUBBER TRANSACTION
Management has reached agreement in principle with SerVaas, Inc. to terminate
the Company's obligations under the Agreement with SerVaas, Inc. for $700,000 in
cash and 30,000 shares of Series C Convertible Preferred Stock. DC Investments,
Inc., an entity controlled by Mr. Durham, has agreed in principle to loan
$700,000 to the Company and to purchase from SerVaas, Inc. the $1,750,000
principal amount Subordinated Note due SerVaas, Inc. which bears interest at 20%
per annum and to exchange that note for a $700,000 principal amount note of U.S.
Rubber bearing interest at 15% per annum paid currently and due, as to the
principal, in one installment in five years. The net effect of this will be to
reduce U.S. Rubber's liabilities by approximately $1,300,000. Management
anticipates this will be concluded in late February, 2002. The effect of this
transaction would be to increase the Company's equity and to improve its working
capital position.
CHAMPION TRANSACTION
The Board of Directors has agreed in principle to divest Champion to a group
consisting of Champion's management and Messrs. Durham and Whitesell pursuant to
the terms of a non-binding Letter of Intent, subject to an independent review of
fair value by the independent Board members of the Company. DC Investments, LLC
has agreed to contribute $660,000 to the Company in exchange for Series C
Preferred Stock. The Company will use those funds to purchase the loan of Bank
One to Champion in that amount and would contribute that note to Champion as
additional capital. In exchange for the assumption of the $1,250,000
subordinated debt of Champion and all accrued interest and either a release of
the Company's guarantee of that debt or an indemnification of the Company for
any loss to the Company, the management group would purchase the assets and
assume substantially all liabilities of Champion.
As of October 31, 2001, Champion is in violation of its financial statement
covenant under its Senior Credit facility with Bank One. Champion is working
under a forbearance agreement through March 15, 2002. After October 31, 2001,
Champion paid down the Bank One debt by $570,000 as consideration for this
agreement. Champion is also indebted to Markpoint Equity Fund IV under a
subordinated credit facility in the amount of $1,250,000. Champion has been in
violation of the funded debt to EBITDA negative covenant of the Markpoint Credit
Agreement since the inception of the loan. Management brought this violation to
Markpoint's attention prior to the close of the Acquisition and has obtained a
waiver of the violation each quarter. Markpoint has informed Champion it may not
grant waiver of this violation in the future. The Bank One debt and the
Markpoint debt have been reclassified as current liability due to these
violations.
The Company has taken actions to improve Champion's profitability subsequent to
year end including:
o Champion is renegotiating the lease on the facility where the manufacture
of trailers is conducted, reducing its rental space, rent expense, utility
expense, and related property costs significantly.
o Champion is completing four trailers for sale to racing teams competing in
the "NASCAR racing circuit", and one trailer for sale to a racing team in
the "IRL" circuit, the initial trailers sold by the Company in these new
markets. Champion believes new orders from this market will be forthcoming
in the next fiscal year. In addition, Champion backlog of trailer sales is
higher at October 31, 2001 than at any date since the purchase of Champion.
o Champion reduced the work force beginning February 1, 2002 by an annualized
amount of approximately $100,000.
o The payment of the debt due Bank One will result in an approximate annual
interest cost savings of $80,000.
In spite of these steps, the Board of Directors believes it is in the best
interests of the Company to divest Champion.
CASH FLOWS (EBITDA), AS RESTATED
The Company's net cash provided by operations, for the ten months ended October
31, 2001 was $818,000. This is comprised primarily of the non-cash depreciation
and amortization of $2,296,000, impairment loss of $2,305,000, accretion of
interest of $35, and increases in accounts payable of $934,000 offset by the net
loss of $(4,395,000) and decrease in Champion's customer deposits of $1,104,000.
Cash flow provided from financing activities, for the ten months ended October
31, 2001 was $17,196,000. This is comprised of borrowings of long-term debt of
$11,220,000, borrowings of short-term debt of $5,251,000, proceeds from capital
contributions and sale of stock of $2,473,000, offset by principal repayments of
long-term debt of $2,627,000.
Cash flow was used in investing activities for the ten months ended October 31,
2001 of $17,702,000. This is comprised of payments to purchase United
Expressline for $12,040,000, purchase of U.S. Rubber for $5,730,000, purchase of
property and equipment of $1,185,000 offset by the proceeds received from the
sale and leaseback of equipment at U.S. Rubber of $1,321,000.
The total increase in cash is summarized as follows:
Ten Months Ended
October 31, 2001
------------------------
Net cash provided by operations $ 818,000
Net cash used in investing activities (17,702,000)
Net cash provided by financing activities 17,196,000
Increase in Cash $ 312,000
EBITDA is a measure of the Company's ability to generate cash flow and should be
considered in addition to, but not as a substitute for, other measures of
financial performance reported in accordance with accounting principles
generally accepted in the United States of America.
EBITDA by business segment and reconciliation to net income or loss under
accounting principles generally accepted in the United States of America by
subsidiary for the applicable periods is as follows:
Ten-month Period Ended October 31, 2001
(in thousands)
---------------------------------------------------------------------------
Impairments
Depreciation Net
Interest Income Income
EBITDA Expense Taxes & Amortization (Loss)
-------------- ------------ ----------- ------------------ ----------------
Trailer and related transportation equipment manufacturing:
United (3 months' operations) $696 $335 $98 $ 202 $ 61
Danzer (4 months' operations) 187 33 -- 164 (10)
Champion (10 months' operations) (542) 288 -- 2,546 (3,376)
-------------- ------------ ----------- ------------------ ----------------
Total 341 656 98 2,912 (3,325)
Consolidating (335) 335
Butyl rubber reclaiming:
U.S. Rubber (10 months' operations) 1,133 658 (135) 905 (295)
Coach leasing:
Pyramid/DW Leasing (10 months' operations) 1,576 1,266 -- 785 (475)
Corporate (615) 20 -- -- (635)
-------------- ------------ ----------- ------------------ ----------------
Total Company $2,435 $ 2,600 $(372) $ 4,602 $(4,395)
============== ============ =========== ================== ================
Year Ended December 31, 2000
(in thousands)
------------------------------------------------------------------------
Impairments Net
Interest Income Depreciation Income
EBITDA Expense Taxes & Amortization (Loss)
------------ ------------ ----------- -------------------- -------------
Trailer and related transportation equipment manufacturing:
United $ -- $ -- $ -- $ -- $ --
Danzer -- -- -- -- --
Champion -- -- -- -- --
------------ ------------ ----------- -------------------- -------------
Total -- -- -- -- --
Butyl rubber reclaiming:
U.S. Rubber (10 months' operations) 1,094 442 50 554 48
Coach leasing:
Pyramid/DW Leasing -- -- -- -- --
Corporate -- -- -- -- --
------------ ------------ ----------- -------------------- -------------
Total Company $ 1,094 $ 442 $ 50 $ 554 $ 48
============ ============ =========== ==================== =============
RISK FACTORS
There are a number of risk factors related to the future results of the Company,
including those discussed in the following paragraphs.
LIQUIDITY
The Company cannot be certain that it will have sufficient liquidity available
under existing lines of credit. Four of the Company's subsidiaries were acquired
during the last fiscal year in highly leveraged transactions. Also, four of the
Company's subsidiaries have been in violation of certain requirements and
covenants in their debt agreements relating to maintenance of specified minimum
ratios and levels of earnings to funded debt and fixed charge coverage. The
Company cannot be certain whether it will be able to meet covenant requirements
contained in debt agreements. Although the Company has been able to obtain
waivers of previous violations, the Company cannot be certain that it will be
able to obtain waivers of such covenants if waivers are needed in the future.
One lender, Markpoint, has informed the Company that it may not grant any
additional waivers of certain covenant violations.
There is no assurance that lenders will continue to lend to the Company.
Lenders' criteria for loans change and, if there is a further general tightening
of credit standards, the Company may not qualify for credit. Further, if the
Company's financial performance deteriorates from the manner in which its
various operations have historically performed, the Company's lenders may
declare defaults and refuse to advance funds under revolving credit lines. Under
these circumstances the Company may not be able to obtain credit on any terms.
INTEGRATION OF OPERATIONS
The Company now consists of a business combination of Obsidian Enterprises, Inc.
and various recently purchased manufacturing entities of Obsidian Capital
Partners, L.P. The management resources to date have been spent on purchasing,
continuing operations at pre-acquisition capability after the purchase, and
integrating subsidiary operations with the Obsidian management. The date of
purchase of each entity by the current management is:
Operating Entity Date of Purchase
---------------- ----------------
U.S. Rubber Reclaiming, Inc. December 29, 2000
Pyramid Coach, Inc. December 20, 1999
Champion Trailer, Inc. May 2, 2000
Danzer Industries, Inc. June 21, 2001
United Expressline, Inc. July 31, 2001
The Company is still in the process of resolving issues relating to the
integration of the operations of these entities. The Company may not be
successful in integrating these businesses or the integration may take longer or
be more costly than currently anticipated.
MARKET RISK
The Company is exposed to market risk related to changes in interest rates on
its debt. Approximately 36% of the Company's primary debt bears interest at a
variable rate. An interest rate increase of one percentage point would increase
the Company's interest expense over a one-year period by approximately $134,000
at current debt levels.
ABILITY TO ATTRACT AND RETAIN KEY MANAGERS AND EMPLOYEES
The Company's ability to retain key subsidiary management and employees will be
a significant factor in the Company's success. The recent acquisitions of the
four subsidiary entities and the changes in the Company's management have made
it even more important for the Company to focus on retaining former managers and
employees. In addition, the Company must attract a chief financial officer and
continue to seek to obtain skilled managers and employees and to provide
effective incentives for all of the managers and employees of its subsidiary
companies.
COMPETITION
The Company faces strong competitors in its coach leasing segment and trailer
and related transportation equipment manufacturing segment. The Company's coach
leasing business competes with a number of other companies that lease luxury
coaches. The Company's success in the coach leasing segment is dependent upon
its ability to meet demand and match the quality and amenities sought after by
its target market at competitive prices. The Company's trailer and related
transportation equipment manufacturing segment competes with a number of
companies, including a number who are much larger than the Company and have
equal or greater technical and financial resources.
BUTYL RUBBER RECLAIMING SEGMENT
The Company's butyl rubber reclaiming segment is highly dependent upon the
availability of raw materials. The Company is facing increased competition for
raw materials from foreign manufacturers as the supply of the scrap butyl rubber
from inner tubes continues to decline. The success of this segment will depend
in large measure upon the Company's ability to successfully develop alternative
sources of raw materials. The demand for butyl rubber by some of the Company's
customers also is closely tied to the price of crude oil, with demand falling as
the price of crude oil falls.
COACH LEASING SEGMENT
The Company's coach leasing segment leases luxury coaches primarily to
performers in the entertainment industry. This segment is highly dependent upon
the state of the general economy and its effect on entertainment spending.
Consumer spending on entertainment tends to decline during recessionary periods
when disposable income is low. The availability of quality contract drivers is
another factor that affects the success of the coach leasing segment. Although
customers are responsible for engaging their own drivers, the Company assists
customers by suggesting drivers with whom the Company has had experience.
TRAILER AND RELATED TRANSPORTATION EQUIPMENT MANUFACTURING SEGMENT
A majority of the truck bodies manufactured by the Company are used in the
telecommunications industry. The success of the Company's trailer and related
transportation equipment manufacturing segment is dependent upon overall
economic conditions and in particular on the state of the telecommunications
industry. Slightly more than one half of the Company's revenue from the
manufacture of service truck bodies, which is part of the Company's trailer and
related transportation equipment manufacturing segment, is derived from a single
customer. The Company's success in this segment is dependent to a large degree
upon the continued financial health of this one customer and the continued
strength of the Company's relationship with this customer. The loss of this or
another significant customer could have a material adverse effect on this
segment of the Company's business.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Obsidian Enterprises, Inc.
Indianapolis, Indiana
We have audited the accompanying consolidated balance sheets of Obsidian
Enterprises, Inc. and Subsidiaries as of October 31, 2001 and December 31, 2000,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the period ended October 31, 2001 and the years ended December
31, 2000 and 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Obsidian
Enterprises, Inc. and Subsidiaries as of October 31, 2001 and December 31, 2000,
and the results of their operations and their cash flows for the period ended
October 31, 2001 and the years ended December 31, 2000 and 1999 in conformity
with accounting principles generally accepted in the United States of America.
Our audit of the consolidated financial statements of Obsidian Enterprises, Inc.
and Subsidiaries included Schedule II, contained herein, for the period ended
October 31, 2001 and the years ended December 31, 2000 and 1999. In our opinion,
such schedule presents fairly the information required to be set forth therein,
in conformity with accounting principles generally accepted in the United States
of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered losses from operations in 2001,
its current liabilities exceed its current assets, and it is in violation of
certain of its loan covenants. This raises substantial doubt about the Company's
ability to continue as a going concern. Realization of assets and satisfaction
of liabilities in the ordinary course of business is dependent upon the
Company's ability to generate sufficient cash flow to meet its obligations on a
timely basis. The Company also must comply with the terms of its debt financing
agreements and continue to receive capital contributions from its owners.
Management's plans in regard to these matters are also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
As described in Note 3 to the financial statements, the previously issued 2001
financial statements have been restated for errors in the application of
accounting principles.
/s/ McGladrey & Pullen, LLP
Elkhart, Indiana
February 13, 2002, except for Note 3,
as to which the date is August 15, 2003
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
October 31, December 31,
2001 2000
----------------------------------
(as restated,
see Note 3)
ASSETS
Current assets:
Cash and cash equivalents $ 529 $ 217
Marketable securities 223 --
Accounts receivable, net of allowance for doubtful accounts
of $90 for 2001 and $0 for 2000 (Note 8) 3,744 1,746
Accounts receivable, related parties (Notes 2 and 16) 217 --
Notes receivable, related party, current portion (Notes 5 and 16) -- 1,098
Inventories, net (Notes 6 and 8) 6,694 747
Prepaid expenses and other assets 602 336
Deferred income tax assets (Note 14) 673 532
----------------------------------
Total current assets 12,682 4,676
Property, plant and equipment, net (Notes 7 and 8) 24,232 3,182
Other assets:
Notes receivable, related party, net of current portion (Notes 5 and 16) -- 1,770
Intangible assets (Notes 2 and 4):
Goodwill not subject to amortization 5,829 --
Goodwill, less accumulated amortization of $76 3,381 --
Noncompete agreements, less accumulated amortization of $74 912 --
Trade name and customer relations, less accumulated
amortization of $125 802 --
Deferred debt costs, less accumulated amortization
of $71 in 2001 and $70 in 2000 433 5
Other (Notes 4 and 9) 579 --
----------------------------------
$ 48,850 $ 9,633
==================================
The accompanying notes are an integral part of the
consolidated financial statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
October 31, December 31,
2001 2000
----------------------------------
(as restated,
see Note 3)
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt (Note 8) $ 9,233 $ 3,135
Accounts payable, trade 3,620 509
Accounts payable, related parties (Note 16) 925 --
Accrued expenses 1,709 168
Customer deposits 679 --
----------------------------------
Total current liabilities 16,166 3,812
Long-term debt, net of current portion (Note 8) 26,076 711
Deferred income tax liabilities (Note 14) 1,672 171
Accounts payable, related parties (Note 16) 2,170 --
Commitments and Contingencies (Note 17)
Mandatory redeemable preferred stock, Class of Series C Preferred stock:
386,206 shares outstanding (Note 11) 1,435 --
Stockholders' equity (Note 12):
Common stock, par value $.0001 per share; 40,000,000 shares authorized in
2001; 20,000,000 in 2000; 36,007,855 shares outstanding in 2001 and
17,760,015 shares outstanding in 2000 3 1
Preferred stock, 5,000,000 shares authorized; Class of Series C convertible
preferred stock, par value $.001, 4,600,000 authorized and 3,739,169 shares
issued and outstanding in 2001, no shares issued and outstanding in
2000, 400,000 shares of undesignated Preferred Stock authorized 4 --
Additional paid-in capital 5,682 --
Accumulated other comprehensive income 37 --
Retained earnings (accumulated deficit) (4,395) 4,938
----------------------------------
Total stockholders' equity 1,331 4,939
----------------------------------
$ 48,850 $ 9,633
==================================
The accompanying notes are an integral part of the
consolidated financial statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share and share data)
Ten Months Ended
October 31, Year Ended December 31,
-------------------------------------
2001 2000 1999
-------------------------------------------------------
(as restated,
see Note 3)
Net sales $ 28,055 $ 12,583 $ 11,439
Cost of sales 22,778 11,390 10,084
-------------------------------------------------------
GROSS PROFIT 5,277 1,193 1,355
Selling, general and administrative expenses (5,121) (1,009) (942)
Loss on asset impairment (Notes 2 and 15) (2,305) -- --
-------------------------------------------------------
Income (loss) from operations (2,149) 184 413
Other income (expense):
Interest expense (Note 8) (2,600) (442) (497)
Interest income (Note 16) -- 356 424
Other expense (18) -- --
-------------------------------------------------------
Income (loss) before income taxes (4,767) 98 340
Income tax (expense) benefit (Note 14) 372 (50) (124)
-------------------------------------------------------
Net income (loss) $ (4,395) $ 48 $ 216
=======================================================
Basic and diluted earnings (loss) per share $ (.17) $ -- $ --
=======================================================
Weighted average common and common equivalent shares
outstanding basic and diluted: 25,830,856 -- --
=======================================================
The accompanying notes are an integral part of the
consolidated financial statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
(in thousands)
Accumulated
Additional Other Retained
Comprehensive Common Stock Preferred Stock Paid-in ComprehensiveEarnings
----------------------------------------
Income (Loss) Shares Amount Shares Amount Capital Income (Deficit) Total
------------------------------------------------------------------------------------------------
(as restated, (as restated, see Note 3)
see Note 3)
Balance at December 31,
1998, adjusted for Danzer
Corporation registered $
common shares $ -- 15,870,272 $ 1 -- $-- -- $-- $4,674 $ 4,675
Issuance of stock under
incentive plan and Parent
note conversion -- 141,797 -- -- -- -- -- -- --
1999 net income -- -- -- -- -- -- -- 216 216
------------------------------------------------------------------------------------------------
Balance at December 31, 1999 -- 17,588,348 1 -- -- -- -- 4,890 4,891
Issuance of stock under
incentive plan and Parent
note conversion -- 1,747,946 -- -- -- -- -- -- --
2000 net income -- -- -- -- -- -- -- 48 48
------------------------------------------------------------------------------------------------
Balance at December 31, 2000 -- 17,760,015 1 -- -- -- -- 4,938 4,939
Conversion of debt to
common stock -- 1,750,000 -- -- -- 355 -- -- 355
To record the effect of the
reverse merger June 21,
2001 (Note 4) -- -- 1 1,970,962 2 3,760 (103) (4,938) (1,278)
Conversion of Series C
Preferred Stock to common
stock -- 16,497,840 1 (824,892) (1) -- -- -- --
Issuance of 2,593,099
shares of Series C
Convertible Preferred
Stock associated with the
acquisition of United and
capital contribution (Note
4) -- -- -- 2,593,099 3 1,497 -- -- 1,500
Unrealized gain on
available-for-sale
marketable securities 140 -- -- -- -- -- 140 -- 140
Fair value adjustment on
redeemable preferred stock
(Note 11) -- -- -- -- -- 70 -- -- 70
2001 net loss (4,395) -- -- -- -- -- -- (4,395) (4,395)
------------------------------------------------------------------------------------------------
Total comprehensive loss $ (4,255)
===============
$
Balance at October 31, 2001 36,007,855 $3 $3,739,169 $ 4 $ 5,682 $ 37 (4,395) $ 1,331
=================================================================================
The accompanying notes are an integral part of the
consolidated financial statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Ten Months
Ended
October 31, Year Ended December 31,
---------------------------------
2001 2000 1999
------------------------------------------------
(as restated,
see Note 3)
Cash flow from operating activities:
Net income (loss) $ (4,395) $ 48 $ 216
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 2,296 554 612
(Gain) on sale of equipment (4) -- --
Impairment loss 2,305 -- --
Loss on sale of marketable securities 81 -- --
Accretion of interest 35 -- --
Deferred income taxes (408) 216 --
Changes in operating assets and liabilities net of effect of
acquisitions:
Accounts receivable, net 643 (414) 139
Inventories 129 641 (96)
Other assets 4 (284) 223
Accounts payable, trade 934 -- (57)
Accrued expenses 302 1 8
Customer deposits (1,104) -- --
------------------------------------------------
Net cash provided by operating activities 818 762 1,045
------------------------------------------------
Cash flows from investing activities:
Capital expenditures (1,185) (1,052) (398)
Proceeds from sale of equipment 1,321 -- --
Repayment of affiliated company payable -- 2,208 224
Acquisition-related closing costs (148) -- --
Purchase of marketable equity securities (213) -- --
Cash received in reverse merger and other acquisitions 98 -- --
Cash payments in connection with the purchase of
U.S. Rubber, net of cash acquired (5,730) -- --
Cash payments in connection with the purchase of assets
of United, net of cash acquired (12,040) -- --
Proceeds from sale of marketable equity securities 195 -- --
------------------------------------------------
Net cash provided by (used in) investing activities (17,702) 1,156 (174)
------------------------------------------------
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Ten Months
Ended
October 31, Year Ended December 31,
---------------------------------
2001 2000 1999
------------------------------------------------
(as restated,
see Note 3)
Cash flows from financing activities:
Borrowings from related parties 984 -- --
Net borrowings on lines of credit 5,251 -- --
Borrowings on long-term debt 11,220 -- --
Principal repayments on long-term debt (2,627) (2,186) (458)
Proceeds from capital contributions and
sale of common stock 2,473 -- --
Debt issuance costs (105) -- --
------------------------------------------------
Net cash provided by (used in) financing activities 17,196 (2,186) (458)
------------------------------------------------
Increase (decrease) in cash 312 (268) (413)
Cash and cash equivalents, beginning of year 217 485 72
------------------------------------------------
Cash and cash equivalents, end of year $ 529 $ 217 $ 485
================================================
Interest paid $ 2,241 $ 485 $ 459
================================================
Interest received $ -- $ 356 $ 460
================================================
Taxes paid $ 44 $ 8 $ 86
================================================
Noncash:
Equipment purchased with debt or capital lease $ 1,059 $ 95 $ 27
Conversion of contributed amounts to equity $ 355 $ -- $ --
Seller note on acquisition of United Expressline $ 1,500 $ -- $ --
Seller note on acquisition of U.S. Rubber $ 2,573 $ -- $ --
Fair value change on mandatory redeemable preferred stock $ 70 $ -- $ --
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
1. DESCRIPTION OF BUSINESS AND CHANGE OF NAME
Danzer Corporation, formerly named Global Environmental Corp., was incorporated
on October 6, 1987. Effective August 1, 1988, the Company acquired all of the
issued and outstanding common shares of Global Environmental Holdings, Inc.
("Global Holdings"). On October 7, 1999, the Company changed its name from
Global Environmental Corp. to Danzer Corporation.
Danzer Corporation was reorganized through an Acquisition and Plan of
Reorganization with U.S. Rubber Reclaiming, Inc. and Related Entities ("U.S.
Rubber Companies"), which was consummated on June 21, 2001 (the "Effective
Date"). In addition, Danzer Corporation changed its name to Obsidian
Enterprises, Inc. However, the operating company, Danzer Industries, Inc.,
retained its name. Hereafter, the names Danzer, Danzer Corporation, and Obsidian
Enterprises, Inc. are used interchangeably. The operating company will continue
to be referred to as Danzer Industries, Inc. The Acquisition and Plan of
Reorganization of Danzer Corporation with U.S. Rubber Companies (see Note 4, the
"Acquisition and Plan of Reorganization") was accounted for as a reverse
acquisition as the shareholders of the U.S. Rubber Companies owned a majority of
the outstanding stock of Danzer subsequent to the Acquisition and Plan of
Reorganization.
For accounting purposes, U.S. Rubber Reclaiming, Inc. is deemed to have acquired
Danzer. Accordingly, the fiscal 2000 and 1999 financial information presented
herein represents only the financial results of U.S. Rubber Reclaiming, Inc.
Pursuant to the Plan of Acquisition and Reorganization described further in Note
4, United Expressline, Inc. was acquired July 31, 2001.
The resulting entities, considered accounting subsidiaries of U.S. Rubber
Reclaiming, Inc. (the accounting acquirer) and legal subsidiaries of Obsidian
Enterprises, Inc. (formerly Danzer) after the Acquisition and Plan of
Reorganization, are as follows:
U.S. Rubber Reclaiming, Inc. ("U.S. Rubber", the accounting acquirer), which is
engaged in reclaiming scrap butyl rubber into butyl reclaim for resale to
manufacturers of rubber products.
Obsidian Enterprises, Inc. (formerly Danzer, the legal acquirer), a holding
company.
Danzer Industries, Inc. ("Danzer Industries"), which is principally engaged in
the design, manufacture and sale of truck bodies.
Pyramid Coach, Inc. ("Pyramid"), which is engaged in the leasing of coaches,
designed and fitted out for use for travel by country, rock bands and other
business enterprises, primarily on weekly to monthly leases. The financial
statements of Pyramid are presented on a combined basis. The combined financial
statements of Pyramid also include the assets, liabilities, equity and results
of operations of DW Leasing, LLC ("DW Leasing"). DW Leasing is controlled by
individuals which are also controlling shareholders of Obsidian Enterprises,
Inc. and, accordingly, Pyramid. DW Leasing also owns all coaches operated by
Pyramid. All intercompany transactions are eliminated in combination of this
entity.
Champion Trailer, Inc. ("Champion"), which manufactures and sells transport
trailers to be used primarily in the auto racing industry.
United Expressline, Inc. ("United") manufactures and sells general use cargo
trailers and specialty trailers used in the racing industry and for other
special purposes.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION:
The accompanying consolidated financial statements present the accounts of
Obsidian Enterprises, Inc. and its wholly owned subsidiaries described in Note
1, all of which are treated for accounting purposes as purchases in a reverse
merger more fully described in Note 4. The entities are collectively referred to
herein as the "Company". All significant intercompany transactions and balances
have been eliminated in consolidation. The accompanying financial statements
include the operations of U.S. Rubber, Champion, Pyramid and a related entity
(DW Leasing) for the ten-month period ended October 31, 2001. January 1, 2001 is
the beginning of the calendar year of the accounting acquirer U.S. Rubber. U.S.
Rubber changed its fiscal year end to adopt Danzer's (legal acquirer and
previous registrant) year end. The financial statements include the operating
results of Obsidian Enterprises, Inc. (formerly Danzer Corporation) and Danzer
Industries, its wholly owned subsidiary, from June 21, 2001 (date of
acquisition) through October 31, 2001. In addition, they include the results of
United from July 31, 2001 (date of acquisition) through October 31, 2001.
BASIS OF PRESENTATION:
The Company's October 31, 2001 consolidated financial statements have been
presented on the basis that it is a going concern which contemplates the
realization of assets and satisfaction of liabilities in the normal course of
business. The Company incurred a loss from operations in 2001 of $2,149,000 and
a net loss of $4,395,000, which included an asset impairment charge of
$2,305,000. The loss has weakened the Company's financial condition and
contributed to its failure to meet certain financial covenants required by the
lenders. As a result of these covenant violations, $2,570,000 of long-term debt
has been reclassified as a current liability as of October 31, 2001. A
significant portion of the Company's assets is pledged as collateral on these
loans and foreclosure by the bank would seriously impair the Company's
existence. In addition, these losses and the reclassification of long-term debt
have contributed to a total deficit in working capital of $3,484,000 at October
31, 2001.
In view of these matters, realization of the assets and satisfaction of the
liabilities in the ordinary course of business is dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely basis, comply
with the terms of its debt financing agreements, obtain refinancing of certain
obligations, and continue to receive capital contributions from its majority
shareholder.
Management, as a part of its plan towards resolving these issues and generating
revenue and cash flow, has taken the actions subsequent to year end as described
below. Although management believes these actions will improve operations and
liquidity, there can be no assurance that such actions will sufficiently improve
operations or liquidity, or occur on terms acceptable to the Company.
o The Company, with Board of Directors approval, has agreed in principle to
divest Champion to a group consisting of the Chairman of the Board of the
Company, the President and the management group of Champion. The terms of
the nonbinding Letter of Intent are subject to an independent review of
fair value by the independent Board members of the Company. DC Investments,
LLC has agreed to contribute $660,000 to the Company in exchange for Series
C Preferred Stock. The Company will use those funds to purchase the loan of
Bank One to Champion in that amount and would contribute that note to
Champion as additional capital. In exchange for the assumption of the
$1,250,000 subordinated debt of Champion and all
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
accrued interest and either a release of the Company's guarantee of that
debt or an indemnification of the Company for any loss to the Company, the
management group would purchase the assets and assume substantially all
liabilities of Champion. This proposed sale will result in the Company
disposing of a subsidiary that comprised 77% of the Company's net loss for
the ten-month period ended October 31, 2001.
o DC Investments, controlled by the Chairman of the Board, as approved by the
Company Board of Directors, has made a loan in the amount of $570,000 to
pay down a portion of the Champion debt that will be converted to equity
after final review by the Board.
o Obsidian Capital Partners, LP ("OCP"), majority owner of the Company, is
negotiating with the Board of Directors to convert to capital $1,222,000 of
loans made at the date of the Acquisition and Plan of Reorganization.
o Negotiations have been ongoing with a new lender to refinance the primary
lender of U.S. Rubber at more favorable terms than the current terms.
Management anticipates the refinancing will be concluded by the third
fiscal quarter. Management and an affiliated entity subsequent to year end
have negotiated with the subordinated debt holder of U.S. Rubber to pay off
the debt and reduce debt amounts by approximately $1,300,000. Such
agreement is scheduled to close in early 2002.
o The Company is undertaking to refinance the coaches transferred from DW
Leasing to a new wholly owned subsidiary of the Company (Obsidian Leasing
Company, Inc.) subsequent to year end with existing lenders and a related
party (DC Investments, LLC) controlled by the Chairman of the Company.
Management anticipates that this will be concluded by the third fiscal
quarter. See Note 18.
o OCP has entered into agreements related to the debt of U.S. Rubber and
United. Specifically, in the event of and in accordance with the default
provisions, Obsidian is obligated to make capital contributions to these
subsidiaries of $1,000,000 and $1,600,000, respectively. In addition,
Partners has committed to fund through the purchase of additional preferred
stock the costs of all legal, accounting and related costs to complete the
Plan of Reorganization and the costs to meet all regulatory requirements to
allow continued trading of Company stock by shareholders.
REVENUE RECOGNITION:
Sales are recorded when title passes to the customer (FOB shipping point) or
when services are performed in accordance with agreements with customers. The
Company accumulates costs of trailers in work-in-process inventory until
completion. The Company recognizes repair revenue when services are provided to
the customer. Shipping and handling charges billed to the customers are included
in net sales. Shipping and handling costs incurred by the Company are included
in cost of sales.
The Company also engages in used trailer sales transactions, in which the
Company collects a commission for brokering activities. The Company does not
take title to these trailers. Accordingly, commission revenues are recorded as
cash is received by the Company.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
For operating leases, income is recognized on a straight-line basis over the
lease term. Recognition of income is suspended when management determines that
collection of future income is not probable (generally after 90 days past due).
Recognition is resumed if the receivable becomes contractually current and the
collection of amounts is again considered probable. Operating lease equipment is
carried at cost less accumulated depreciation and is depreciated to estimated
residual value using the straight-line method over the lease term or projected
economic life of the asset.
In the fourth quarter of 2000, effective as of January 1, 2000, the Company
adopted Staff Accounting Bulletin 101, Revenue Recognition in Financial
Statements (SAB 101). The adoption of SAB 101 did not have a significant impact
upon adoption at January 1, 2000, any quarterly reporting period during 2000, or
at December 31, 2000.
FAIR VALUE OF FINANCIAL INVESTMENTS:
The carrying amounts of cash and cash equivalents, receivables, accounts
payable, and accrued liabilities approximate fair value because of the short
maturity of these instruments. The carrying amounts of long-term receivables
approximates fair value as the effective rates for these instruments are
comparable to market rates at year end. The carrying amount of investments
approximates fair market value. The carrying amount of debt at October 31, 2001
approximates fair value, as a result of the current interest rates paid on the
Company's borrowings being at market.
MARKETABLE SECURITIES:
The Company classifies its marketable securities as available for sale. The
securities consist of equity securities, which are stated at fair value, with
net unrealized gains or losses on the securities recorded as accumulated other
comprehensive income (loss) in stockholders' equity. Realized gains and losses
are included in earnings and are derived using the specific identification
method for determining the cost of the securities.
PROPERTY, PLANT AND EQUIPMENT:
Building, equipment, furniture and fixtures are recorded at historical cost with
depreciation taken using primarily the straight-line method over their estimated
useful lives. Vehicles under capital lease of $291,290 are stated at the lower
of fair market value or net present value of the minimum lease payments at the
date of lease. Amortization of equipment under capital lease is included in
depreciation expense. Life ranges for property and equipment are as follows:
Buildings and improvements 30 - 39 years
Plant, machinery and equipment 5 - 7 years
Furniture and fixtures 5 - 7 years
Coach fleet and vehicles 5 - 15 years
CONCENTRATION OF CREDIT RISK:
The Company maintains cash balances at a bank, which at various times throughout
the year exceeded the Federal Deposit Insurance Corporation (FDIC) limit.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of trade receivables. The Company's customers
are not concentrated in any one specific geographic region. The credit risk
associated with trade receivables within this specific industry may be affected
by changes in economic or other conditions and may, accordingly, impact the
Company's overall credit risk. The Company reviews a customer's credit history
before extending credit. Allowances for doubtful accounts are established based
on specific customer risk, historical trends and other information. Also see
major customers described below.
Certain of the Company's employees are currently represented by the United
Brotherhood of Carpenters and Joiners of America, Local Union No. 340, whose
contract is in effect to February 2003. The contract contains provisions that
affect compensation to be paid to employees included in the union.
GOODWILL, INTANGIBLE ASSETS AND DEFERRED COSTS:
Goodwill, net was $9,210 thousand at October 31, 2001. Accumulated amortization
amounted to $76 thousand at October 31, 2001. In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible
Assets, goodwill associated with acquisitions consummated after June 30, 2001 in
the amount of $5,829 is not being amortized. All other goodwill is being
amortized on a straight-line basis over 15 years through October 31, 2001. See
Accounting Pronouncements within Note 2 for more information on SFAS No. 142.
Other intangible assets, net were $1,714 thousand at October 31, 2001. These
amounts include trade names, customer relations and backlogs and other items,
which are being amortized on a straight-line basis over lives ranging from 3
months to 15 years. At October 31, 2001, accumulated amortization amounted to
$199 thousand.
Deferred debt issuance costs are amortized over the term of the related debt,
primarily four to five years.
Goodwill and other intangible amortization expense for the ten months ended
October 31, 2001 was $216 and $231 thousand, respectively. Accumulated
amortization on goodwill and other intangible assets of Champion in the amount
of $172 thousand was written off with the impairment discussed in Note 15.
INCOME TAXES:
The Company accounts for income taxes in accordance with Statement of Accounting
Standards No. 109, Accounting for Income Taxes, (SFAS 109), as required. Under
SFAS 109, deferred tax assets and liabilities are recorded for any temporary
differences between the financial statement and tax bases of assets and
liabilities, using the enacted tax rates and laws expected to be in effect when
the taxes are actually paid or received. (See Note 14.)
USE OF ESTIMATES:
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect certain reported
amounts and disclosures. Actual results may differ from those estimates.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
CASH EQUIVALENTS:
For purposes of the statement of cash flows presentation, cash equivalents are
unrestricted, highly liquid short-term cash investments generally with a
maturity of three months or less.
IMPAIRMENT OF LONG-LIVED ASSETS:
The Company evaluates the carrying value of long-lived assets whenever
significant events or changes in circumstances indicate the carrying value of
these assets may be impaired. The Company evaluates potential impairment of
long-lived assets by comparing the carrying value of the assets to the expected
future cash flows resulting from the use of the assets. (See Note 15.)
MAJOR CUSTOMERS:
The following is a list of the Company's customers that represent 10% or more of
consolidated net sales:
Ten Months
Ended
October 31, Year Ended December 31,
-----------------------------------
2001 2000 1999
----------------------------------------------------
Butyl rubber sales:
Customer (1) 13% 34% 34%
Customer (2) 8% 22% 21%
EARNINGS PER SHARE, AS RESTATED, SEE NOTE 3:
Basic per-share amounts are computed, generally, by dividing net income or loss
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.
No common shares of the legal acquirer were issued in connection with the
acquisition which was accounted for as a reverse merger. Accordingly, there were
no common shares outstanding for the years ended December 31, 2000 and 1999.
Basic and diluted earnings (loss) per share have been computed as follows:
Ten Months
Ended Year Ended
------------------ --------------------------------------
October 31, 2001 December 31, 2000 December 31, 1999
------------------ ------------------- ------------------
Income (loss) before change in fair value of mandatory
redeemable preferred stock $ (4,395) $ 48 $ 216
Change in fair value of mandatory redeemable preferred
stock 70 -- --
------------------ ------------------- ------------------
Net income (loss) attributable to common shareholders $ (4,325) $ 48 $ 216
================== =================== ==================
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Weighted average common and common equivalent shares
outstanding, basic and diluted 25,830,856 -- --
Net income (loss) per share, basic and diluted $(0.17) $ -- $--
The Company's Series C Preferred Stock, which has all the rights and privileges
of the Company's common stock, is convertible at a rate of 20 to 1. The
inclusion of these potential common shares in the calculation of loss per share
would have an antidilutive effect. However, pursuant to the Acquisition
Agreement and Plan of Reorganization entered into in connection with the
reorganization discussed in Note 1, 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 Preferred Stock was converted to common stock. For the ten months ended
October 31, 2001, the Series C Preferred Stock has been reflected on a weighted
average basis outstanding as common shares of 47,978,934.
Ten Months Ended Year Ended
--------------------------------------
October 31, 2001 December 31, 2000 December 31, 1999
------------------- ------------------- ------------------
Pro forma weighted average common shares outstanding,
basic and diluted 73,809,790 39,419,240 39,419,240
=================== =================== ==================
Pro forma net loss per share, basic and diluted,
attributable to common shareholders $ (.06) $ (.00 $ (.00)
=================== =================== ==================
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.
As described in Note 8, at October 31, 2001, the Company has a note payable
agreement which is convertible by the holder to common stock totaling 5,000,000
shares at a conversion rate of $0.10 per share at October 31, 2001. In addition,
and as described in Note 12, the Company has options and warrants outstanding to
purchase a total of 1,047,500 and 200,000 shares of common stock, respectively,
at a weighted average exercise price of $0.09 and $0.25, respectively. However,
because the Company incurred a loss for the period ended October 31, 2001, the
inclusion of those potential common shares in the calculation of diluted loss
per share would have an antidilutive effect. In addition, exercise of stock
options and warrants as of December 31, 2001 and 2000 would be antidilutive.
COMPREHENSIVE INCOME:
SFAS No. 130, Reporting Comprehensive Income, establishes standards for
reporting and display of comprehensive income and its components in financial
statements. It requires that all
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. Comprehensive
income consists of net earnings, the net unrealized gains or losses on
available-for-sale marketable securities and is presented in the consolidated
statement of stockholders' equity.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, Accounting and Reporting for
Derivative Instruments. This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives), and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. This statement was amended by SFAS No. 137 in June 1999. The
adoption of these statements did not materially impact the Company.
In June 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No.
142, Goodwill and Other Intangible Assets. SFAS No. 141 requires all business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method. In addition, companies are required to review goodwill and
intangible assets reported in connection with prior acquisitions, possibly
disaggregate and report separately previously identified intangible assets and
possibly reclassify certain intangible assets into goodwill. SFAS No. 142
establishes new guidelines for accounting for goodwill and other intangible
assets. In accordance with SFAS No. 142, goodwill associated with acquisitions
consummated after June 30, 2001 is not amortized. The Company implemented the
remaining provisions of SFAS No. 142 on November 1, 2001. Since adoption,
existing goodwill is no longer amortized but instead will be assessed for
impairment at least annually. The adoption of this pronouncement will result in
$5,829,000 of goodwill not being amortized and the elimination of approximately
$225,000 of amortization annually on another $3,381,000 of goodwill previously
being amortized.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 addresses accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. This statement is effective for fiscal years beginning
after June 15, 2002. The Company is currently assessing the impact of this new
standard.
In July 2001, the FASB issued SFAS No. 144, Impairment or Disposal of Long-Lived
Assets, which is effective for fiscal years beginning after December 15, 2001.
The provisions of this statement provide a single accounting model for
impairment of long-lived assets. The Company does not believe that the adoption
of this pronouncement will have a material effect on its financial statements.
3. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
In December 2002, the Company became aware of an error related to the accounting
for the redeemable preferred stock issued in connection with subordinated debt
pertaining to the United acquisition on July 31, 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 preferred stock as it
has not yet been converted to common shares and thus is
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
3. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS, CONTINUED
antidilutive. The Company is restating its previously issued financial
statements for the ten months ended October 31, 2001 for these errors.
Below is a comparison of previously reported and restated balances included in
the Consolidated Balance Sheet and Statement of Operations as of and for the ten
months ended October 31, 2001.
Previously Change As Restated
Reported
------------------- ------------------ ------------------
Statement of Operations:
Interest expense $ 2,565 $ 35 $ 2,600
Loss before income taxes (4,732) (35) (4,767)
Net loss (4,360) (35) (4,395)
Weighted average common and common equivalent shares
outstanding basic and diluted $ 63,367,140 $(37,536,284) $ 25,830,856
Net loss per share (.07) (.10) (.17)
Balance Sheet:
Net deferred tax assets 538 14 552
Deferred tax valuation reserve (1,537) (14) (1,551)
Long-term debt 27,546 (1,470) 26,076
Mandatory redeemable preferred stock -- 1,435 1,435
Additional paid-in capital 5,612 70 5,682
Accumulated deficit (4,360) (35) (4,395)
4. ACQUISITIONS AND PLAN OF REORGANIZATION
On June 21, 2001 ("Acquisition Date"), a change of control of the Registrant
occurred through an Acquisition Agreement and Plan of Reorganization dated June
21, 2001 (the "Reorganization Agreement") by and among Danzer, Danzer
Industries, Inc., a wholly owned subsidiary of Danzer, and OCP, Timothy S.
Durham (the newly elected Chairman of the Board of Danzer), and other individual
owners of Pyramid and Champion. On the Acquisition Date, Danzer acquired: all of
the outstanding capital stock of Pyramid in exchange for 810,099 shares of
Danzer Series C Convertible Preferred Stock ("Danzer Preferred"); all of the
outstanding capital stock of Champion for 135,712 shares of Danzer Preferred and
all of the outstanding capital stock of U.S. Rubber for 1,025,151 shares of
Danzer Preferred. On July 31, 2001, Danzer acquired all of the outstanding
capital stock of United Acquisition, Inc. ("UAI"), the holding company formed to
acquire assets of United, from OCP for 2,593,099 shares of Danzer Preferred.
Pursuant to the Reorganization Agreement, Danzer issued 4,564,061 shares of its
preferred stock to OCP, Timothy Durham, and other individual owners of Pyramid
and Champion ("OCP Partners"). The Preferred Shares exchanged are Series C
Convertible Preferred Stock, designated $.001 par value per share, with voting
rights equal to common shareholders based upon the Preferred Shares conversion
rights of exchange of 20 common shares for each 1 preferred share owned. The
holders of the Danzer Preferred vote as a single class with the
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
4. ACQUISITIONS AND PLAN OF REORGANIZATION, CONTINUED
holders of Danzer's common stock. After the series of transactions were
completed on July 31, 2001, the OCP Partners owned 75.42% of the total voting,
convertible capital stock (Preferred) of Danzer. The preacquisiton Danzer
shareholders and their successors own the remaining capital stock representing
24.58% of the total voting capital stock (Common). Since the U.S. Rubber
Companies are so much larger than Danzer, and the existing U.S. Rubber
shareholders obtained a majority interest in the stock of Danzer, they have been
treated, for accounting purposes, as the acquirer in the Reorganization (reverse
merger). Although for accounting purposes, U.S. Rubber has become the
registrant, for all other purposes, U.S. Rubber, Pyramid and Champion legally
became subsidiaries of Danzer on June 21, 2001. For purposes of this filing, the
registrant's name continues to be Danzer, subsequently changed to Obsidian
Enterprises, Inc., and the U.S. Rubber Companies will change their fiscal year
to the fiscal year (October 31) used by Danzer prior to the Reorganization.
Therefore, the name Obsidian Enterprises and Danzer Corporation are one and the
same as used in this filing and the financial statements attached as exhibits.
Pursuant to the Acquisition Agreement and Plan of Reorganization (the
"Acquisition Agreement") discussed above, UAI was created. On July 31, 2001,
OCP, through UAI, acquired substantially all of the assets of United, an
Indiana-based manufacturer of enclosed cargo and specialty trailers, for
approximately $15,358,000. The purchase price and purchase accounting has been
allocated to the assets and liabilities of United based on their fair values.
OCP exchanged 100% of its shares of UAI for shares of Series C Convertible
Preferred Stock of Danzer ("Series C Preferred Stock"). The consideration was
negotiated in arm's length discussions between the parties. As a result, UAI is
now a wholly owned subsidiary of Danzer. Danzer intends to continue the
operations of UAI under the name of "United Expressline, Inc."
In connection with the Acquisition Agreement described above, on June 21, 2001,
the parties completed the first closing whereby OCP and affiliates exchanged all
of the shares of Champion, Pyramid, and U.S. Rubber to Danzer for 1,970,962
shares of Series C Preferred Stock with voting rights, which is a controlling
interest in Danzer. At the second closing on July 31, 2001, Danzer issued an
additional 2,593,099 shares of Series C Preferred Stock to OCP in exchange for
100% of the shares of UAI.
The Reorganization (reverse merger) with Danzer, and subsequent acquisition of
United, were accounted for under the purchase method of accounting. U.S. Rubber,
the largest company owned by OCP Partners, was considered the acquirer for
accounting purposes and recorded
Danzer's assets and liabilities based upon their estimated fair values, under
the purchase method of accounting for business combinations. The operating
results of Danzer have been included in the accompanying consolidated financial
statements from the date of acquisition. Under the purchase method of
accounting, the acquired assets and assumed liabilities have been recorded at
their estimated fair values at the date of the acquisition.
The acquisition of Champion and Pyramid were also accounted for under the
purchase method of accounting; however, due to the related-party relationships
of the previous owners to the Company, the assets were recorded at net book
value similar to pooling-of-interest accounting, referred to as reorganization
of entities under common control. Accordingly, no additional goodwill was
recognized beyond that recorded during the original acquisition from unrelated
third parties.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
4. ACQUISITIONS AND PLAN OF REORGANIZATION, CONTINUED
Champion and Pyramid, originally acquired January 1, 2001 and part of the Plan
of Reorganization of June 21, 2001 as discussed above, were previously owned by
individuals who are also the members and managing directors of Obsidian Capital
Company, LLC ("OCC"), the General Partner of OCP. Purchase accounting and a
goodwill allocation of $2.6 million were recorded on Champion when the managing
members of the OCC and others acquired those entities from unrelated third
parties.
ACQUISITION OF DANZER CORPORATION AND SUBSIDIARY:
The purchase price and purchase accounting was allocated to the assets and
liabilities of Danzer based on their fair values. The purchase price was based
on the value of Danzer's equity of $3,257,539 plus acquisition costs of
$963,919.
The valuation allocation to tangible assets included $2,300,000 and $1,536,000
of net liabilities assumed. The excess of the purchase price over the fair value
of the identifiable tangible and intangible net assets of $3,456,539 was
allocated to goodwill. Of this amount, $650 was allocated to Danzer and $2,807
was allocated to Danzer Industries, its subsidiary.
The following schedule is a description of acquisition costs of Danzer and
Danzer Industries and the purchase price allocation (in thousands):
Purchase price:
Preferred stock $ 3,257
Acquisition costs, including amounts to
related parties (see Note 16) 964
------------------
Total purchase price $ 4,221
==================
Purchase price allocations:
Tangible net assets acquired $ 764
Goodwill acquired 3,457
------------------
Total allocation of purchase price $ 4,221
==================
ACQUISITION OF UNITED EXPRESSLINE, INC.:
The identifiable intangibles of United include existing brand name, noncompete,
and the customer base. The valuation of intangibles included $821,592 for brand
name, $886,058 for noncompete, and $104,958 for the customer base. The excess of
the purchase price of $15,358,000 over the fair value of the identifiable
tangible and intangible net assets of $5,820,972 has been allocated to goodwill.
The value assigned to tangible assets totaled $7,563,000.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
4. ACQUISITIONS AND PLAN OF REORGANIZATION, CONTINUED
The following schedule is a description of acquisition costs of United and the
purchase price allocation (in thousands):
Purchase Price:
Cash to seller $ 11,050
Seller note 1,500
Liabilities assumed 1,670
Acquisition costs, including amounts to related
parties (see Note 16) 1,138
-------------------
Total Purchase Price $ 15,358
===================
Purchase Price Allocation:
Current assets, including accounts
receivable and inventory $ 5,559
Land, property and equipment 2,004
Goodwill 5,829
Intangible assets 1,813
Other assets 153
-------------------
Total Purchase Price Allocation $ 15,358
===================
PRO FORMA INFORMATION, AS RESTATED:
The unaudited condensed consolidated results of operations on a pro forma basis
as if the reorganization had occurred as of the beginning of the periods
projected are as follows (in thousands, except per share data):
The unaudited condensed consolidated results of operations shown below are
presented on a pro forma basis and represent the results of Danzer, Danzer
Industries, U.S. Rubber, Champion, Pyramid and DW Leasing on a combined basis.
In addition, United is treated as if the business combinations of these entities
occurred at the beginning of the periods presented. The schedule below includes
all depreciation, amortization and nonrecurring charges for all entities for the
periods shown.
Ten Months Ended Year Ended December
October 31, 31,
2001 2000
------------------------------------------
Net sales $ 53,195 $ 63,228
Net loss $ (3,990) $ (687)
Net loss per share - basic and diluted $ (.15) $ (.04)
The pro forma financial information is presented for informational purposes only
and is not indicative of the operating results that would have occurred had the
Reorganization been consummated as of the above dates, nor are they necessarily
indicative of future operating results.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
5. NOTES RECEIVABLE
U.S. Rubber had notes receivable amounting to $2,868 thousand from its former
owner and the owner's affiliates. These notes were repaid in conjunction with
the Acquisition and Reorganization of Danzer and U.S. Rubber. Also see Note 16.
6. INVENTORIES
Inventories are stated at the lower-of-cost (first-in, first-out method) or
market and are comprised of the following components (in thousands):
October 31,
2001 December 31, 2000
------------------ -------------------
Raw materials $ 3,734 $ 1,649
Work-in-process 1,471 -
Finished goods 2,322 435
Valuation reserve (833) (1,338)
------------------ -------------------
Total $ 6,694 $ 747
================== ===================
The Company provides valuation reserves for inventory considered obsolete or not
currently available for use in production. Inventory reserves at U.S. Rubber are
related to excess scrap butyl rubber not currently available for use without
further processing; therefore, it has minimal value. Changes in the valuation
reserve are as follows (in thousands):
U.S. Rubber United Total
------------------ ------------------ ------------------
Balance at January 1, 2000 $ (1,818) $ -- $ (1,818)
Provision for losses, 2000 (120) -- (120)
Write-off of inventory, 2000 600 -- 600
------------------ ------------------ ------------------
Balance at December 31, 2000 $ (1,338) $ -- $ (1,338)
Provision for losses, 2001 (60) (13) (73)
Write-off of inventory, 2001 578 -- 578
------------------ ------------------ ------------------
Balance at October 31, 2001 $ (820) $ (13) $ (833)
================== ================== ==================
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized by major classification as follows
(in thousands):
October 31, December 31, 2000
2001
------------------ -------------------
Land and improvements $ 488 $ 37
Buildings and improvements 3,701 1,076
Plant machinery and equipment 8,756 7,297
Furniture and fixtures 376 48
Coach fleet and vehicles 13,407 --
------------------ -------------------
Total 26,728 8,459
Less accumulated depreciation 2,496 5,276
------------------ -------------------
Net property, plant and equipment $ 24,232 $ 3,182
================== ===================
Depreciation expense of property, plant and equipment for the ten months ended
October 31, 2001 and the years ended December 31, 2000 and 1999 included in
continuing operations was $1,844,000, $547,739, and $604,759, respectively.
8. FINANCING ARRANGEMENTS
In connection with the Acquisitions described in Notes 1 and 2 and to provide
working capital, the Company has incurred the following debt as of October 31,
2001 and December 31, 2000, as restated, see Note 3:
Debt Amount (in thousands)
-------------------------------------
October 31, December 31,
2001 2000**
------------------ ------------------
U.S. Rubber
Line of credit due, bearing interest at the prime rate plus .75% (6.25% at
October 31, 2001), borrowings not to exceed the greater of $3,000,000 or the
borrowing base (80% of eligible accounts receivable and 50% of eligible
inventories), collateralized by substantially all assets of U.S. Rubber* $ 1,732 $ 2,740
Note payable to a bank, interest payable monthly at prime rate plus 1% (6.5% at
October 31, 2001), monthly principal payments of $2,395 beginning January
2002, collateralized by substantially all assets of U.S. Rubber 200 200
Note payable to a bank, due November 30, 2005, monthly principal payments of
$34,725, balloon payment and accrued interest due at maturity, accruing
interest at the prime rate plus 1% (6.5% at October 31, 2001), to be used to
finance the acquisition and capital expenditures, collateralized by
substantially all assets of U.S. Rubber* 2,187 --
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
8. FINANCING ARRANGEMENTS, CONTINUED
Debt Amount (in thousands)
-------------------------------------
October 31, December 31,
2001 2000**
------------------ ------------------
As part of the original acquisition described in Note 4, the Company issued a
note payable to former owner (SerVaas, Inc.) in the amount of $1,750,000. The
note requires interest payable monthly at fourteen percent (14%) from the date
of this note until March 31, 2001 and at a rate of twenty percent (20%)
thereafter. The former owner agreed to defer interest and principal payments
through May of 2001. The amounts accrued during this period will become part of
the balloon payment due December 28, 2005. The note is collateralized by a
Stock Pledge Agreement given by OCP. In addition, this note is subordinated to
the lines of credit and note payable described
above.* 1,750 --
Note payable to former owner, total payments of $929,600, with interest
imputed at 12%. Due in monthly installments of $38,733. Subordinate to bank
debt and collateralized by inventory. Matures December 2001. 730 --
Note payable to a bank, due November 30, 2005, monthly principal payments of
$2,778, balloon payment and accrued interest due at maturity, accruing interest
at the prime rate plus 1% (6.5% at October 31, 2001), to be used to finance the
acquisition, collateralized by substantially all assets of U.S.
Rubber* 474 806
Other 88 100
------------------ ------------------
Subtotal U.S. Rubber 7,161 3,846
------------------ ------------------
* U.S. Rubber was in technical default of various loan covenants with its
primary and subordinated lender at October 31, 2001. The Company has
entered into an amendment to the credit agreement with the primary which
includes waiver of the covenant violations. The amendment is further
described in Note 18. The Company also obtained a waiver through November
2002 from the subordinated lender.
** The debt balances for December 31, 2000 reflect only those of U.S. Rubber.
While the other companies listed for October 31, 2001 did have 2000 debt
balances, U.S. Rubber becomes the accounting acquirer in a reverse merger.
Debt balances for December 31, 2000 and prior years are presented in the
financial statements of acquired businesses.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
8. FINANCING ARRANGEMENTS, CONTINUED
-------------------------------------
Debt Amount (in thousands)
-------------------------------------
October 31, December 31,
2001 2000**
------------------ ------------------
------------------ ------------------
Champion
Bank One, N.A. Facility 1--Line of Credit, maximum borrowing equal to $200,000,
interest payable monthly at prime plus 1/2% (6% at October 31, 2001) due March
15, 2002, collateralized by substantially all assets of Champion
and guaranteed by Messrs. Durham and Whitesell* $ 200 $ --
Bank One, N.A. Facility 2--term loan, note payable $650,000, requires monthly
principal installments of $7,738 plus interest at prime plus 3/4% (6 1/4% at
October 31, 2001), matures June 2005, collateralized by substantially all
assets of Champion and guaranteed by Messrs. Durham and Whitesell* 526 --
Bank One, N.A. Facility 3 - term loan, note payable $1,118,000, requires monthly
principal installments of $31,056 plus interest at prime matures 1 1/2% (7% at
October 31, 2000), matures June 2003, paid off on January 8, 2002,
collateralized by substantially all assets of Champion and guaranteed by
Messrs. Durham and Whitesell* 621 --
Note payable to The Markpoint Company, $1,250,000, interest payable monthly at
13 1/2%, commencing June 1, 2000, balloon payment of outstanding principal
balance due May 2005, collateralized by substantially all assets of Champion
and subordinate to senior bank debt described above* 1,250 --
Other 15 --
------------------ ------------------
Subtotal Champion 2,612 --
------------------ ------------------
* Champion was in technical default of all of its debt. The Company has not
been able to obtain waivers from the lenders. Accordingly, all debt has
been classified as current.
** The debt balances for December 31, 2000 reflect only those of U.S. Rubber.
While the other companies listed for October 31, 2001 did have 2000 debt
balances, U.S. Rubber becomes the accounting acquirer in a reverse merger.
Debt balances for December 31, 2000 and prior years are presented in the
financial statements of acquired businesses.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
8. FINANCING ARRANGEMENTS, CONTINUED
Debt Amount (in thousands)
-------------------------------------
October 31, December 31,
2001 2000**
------------------ ------------------
Pyramid and DW Leasing
Ford Motor Credit installment loan, $39,104 repayable in monthly installments of
$667 including interest at .9% through October 2005, first lien on asset
(purchase asset) $ 31 $ --
Various installment loans, $15,483,033 repayable in monthly installments
totaling $203,402 including interest ranging from 8.5% to 13.1% through
November 2007 and applicable balloon payments thereafter through December 2007,
first lien on assets financed (finance acquisition and asset purchases).
Substantially all borrowings guaranteed by the members of DW
Leasing.* 12,929 --
-------------------------------------
Former shareholders of Pyramid and related companies installment loans, 928 --
$927,500 repayable in monthly installments of interest at 9% through
December 2003 with a balloon payment in January 2004, collateralized by
Security Agreements for Pyramid, DW Leasing and the members of DW Leasing
(finance acquisition)
------------------ ------------------
Subtotal Pyramid and DW Leasing 13,888 --
------------------ ------------------
* Pyramid was in technical defaults of several loan covenants with two of its
primary lenders. Debt totaling $6,000,000 was subject to these defaults.
The Company has obtained bank waivers through November 2002 for a portion
of this amount. Amounts classified as current due to defaults that have not
been waived are $639 thousand.
** The debt balances for December 31, 2000 reflect only those of U.S. Rubber.
While the other companies listed for October 31, 2001 did have 2000 debt
balances, U.S. Rubber becomes the accounting acquirer in a reverse merger.
Debt balances for December 31, 2000 and prior years are presented in the
financial statements of acquired businesses.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
8. FINANCING ARRANGMENTS, CONTINUED
Debt Amount (in thousands)
-------------------------------------
October 31, December 31,
2001 2000**
------------------ ------------------
Danzer Industries
Bank of America line of credit, maximum borrowing equal to $1,000,000, with a
base of 80% of eligible accounts receivable; plus 50% of raw material,
work-in-process and finished goods inventory. Interest payable monthly at the
LIBOR Daily Floating Rate plus 3.2% (5.5% at October 31, 2001), due March 31,
2002, collateralized by substantially all assets of Danzer
Industries and guaranteed by Obsidian Enterprises, Inc.* $ 75 $ --
Bank of America loan--note payable $1,000,000, requires monthly principal
installments of $5,555 plus interest at the LIBOR Daily Floating Rate plus 3.2%
(5.5% at October 31, 2001), due August 15, 2006. Collateralized by
substantially all assets of Danzer Industries and guaranteed by Obsidian
Enterprises, Inc.* 983 --
Equipment loans payable--monthly payments currently aggregating $2,443
including interest of 8.90% to 11.25% through September 2006. Collateralized
by equipment financed. 53 --
Term loans payable to US Amada, Ltd. Monthly payments currently aggregating
$12,668 including interest at 10%, loans due January 2003, collateralized by
equipment financed 285 --
Other 10 --
------------------ ------------------
Subtotal Danzer Industries 1,406 --
------------------ ------------------
* Danzer Industries was in default of its credit agreement for failure to
provide audited financial statements within 90 days of fiscal year end. The
Company has obtained an additional 45-day extension from the lender and
anticipates providing audited statements within the extension period.
** The debt balances for December 31, 2000 reflect only those of U.S. Rubber.
While the other companies listed for October 31, 2001 did have 2000 debt
balances, U.S. Rubber becomes the accounting acquirer in a reverse merger.
Debt balances for December 31, 2000 and prior years are presented in the
financial statements of acquired businesses.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
8. FINANCING ARRANGMENTS, CONTINUED
Debt Amount (in thousands)
-------------------------------------
October 31, December 31,
2001 2000**
------------------ ------------------
United
First Indiana Bank Revolving Line of Credit, maximum borrowing equal to
$3,500,000, with a base of 80% of eligible accounts receivable; plus 50% of raw
material, work-in-process and finished goods inventory. Interest payable
monthly at prime plus .75% (6.25% at October 31, 2001) due July 1, 2002,
collateralized by substantially all assets of United and guaranteed by
Obsidian Enterprises, Inc.* $ 3,111 $ --
First Indiana Term Loan I--note payable $291,000, requires monthly principal
installments of $4,850 plus interest at prime plus 1% (6.50% at October 31,
2001), due July 1, 2006, collateralized by substantially all assets of
United and guaranteed by Obsidian Enterprises, Inc.* 281 --
First Indiana Term Loan II--note payable $1,116,000, requires monthly principal
installments of $6,200 plus interest at prime plus 1% (6.50% at October 31,
2001), due July 1, 2006, collateralized by substantially all
assets of United and guaranteed by Obsidian Enterprises, Inc.* 1,104 --
First Indiana Term Loan III--note payable $1,750,000, requires monthly principal
installments of $72,917 plus interest at prime plus 2% (7.50% at October 31,
2001), due July 1, 2003, collateralized by substantially all
assets of United and guaranteed by Obsidian Enterprises, Inc.* 1,604 --
Subordinated note payable to Huntington Capital Investment Company, $3,500,000,
interest payable quarterly at 14% per annum, balloon payment of outstanding
principal balance due July 26, 2006, less unamortized discount ($1,470 at
October 31, 2001). Unsecured and subordinate to First Indiana
debt. 2,030 --
Note payable to former shareholder $1,500,000, interest payable monthly at 9%
per annum, balloon payment of outstanding principal balance due July 27,
2006. Unsecured and subordinate to First Indiana and Huntington debt. 1,500 --
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
8. FINANCING ARRANGMENTS, CONTINUED
Debt Amount (in thousands)
-------------------------------------
October 31, December 31,
2001 2000**
------------------ ------------------
United, Continued
Note payable to Renaissance (formerly parent Danzer Corporation), interest
payable monthly at 8% per annum, with monthly principal payments beginning July
2004 at a rate of $10 for each $1,000 of outstanding principal, due July 2008.
Convertible at the option of the holder to common stock of Obsidian Enterprises
at a conversion price of $.10 per share. The loan agreement also restricts
dividend payments without the prior consent of the
lender. 500 --
Other 112 --
------------------ ------------------
Subtotal United 10,242 --
------------------ ------------------
*United Expressline is in technical default of loan covenants with one of its
primary lenders. The Company has obtained bank waivers from the lender through
January 2002, at which time, the defaults were cured.
------------------ ------------------
Total all companies 35,309 3,846
Less current portion 9,233 3,135
------------------ ------------------
$ 26,076 $ 711
================== ==================
** The debt balances for December 31, 2000 reflect only those of U.S. Rubber.
While the other companies listed for October 31, 2001 did have 2000 debt
balances, U.S. Rubber becomes the accounting acquirer in a reverse merger.
Debt balances for December 31, 2000 and prior years are presented in the
financial statements of acquired businesses.
The Company was in violation of three negative covenants and failure of the
Company to submit audited financial statements within 90 days of year end with
Renaissance US Growth & Income Trust PLC and FBSUS Special Opportunities Trust
PLC, the holders of debentures that completed the financing of United. The
Company has received a waiver of all of these violations through November 1,
2002.
Various subsidiary companies were in violation of requirements to provide
year-end financial statements to various lenders within 90 days of the close of
the year end. Management has received waivers on all of these covenants.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
8. FINANCING ARRANGMENTS, CONTINUED
The Company has an agreement with OCP that gives it the right to mandate a
capital contribution from OCP if the lenders to U.S. Rubber and United were to
declare a default. In that event, the Company has the right to enforce a capital
contribution agreement with OCP up to $1,620,000 on U.S. Rubber and $1,000,000
on United to fund the respective subsidiary's shortfall. Those payments, if any,
would be applied directly to reduce the respective subsidiary's debt obligations
to the lender.
Following are the maturities of long-term debt for each of the next five years
and thereafter (in thousands):
2002 $ 9,233***
2003 8,495
2004 1,370
2005 3,140
2006 8,462
Thereafter 4,609
------------------
$ 35,309
==================
*** The current portion of long-term debt includes $2,570,000 of amounts in
default and classified as current.
9. LEASING ARRANGEMENTS
In 2001, U.S. Rubber entered into a sales-leaseback arrangement. Under the
arrangement, U.S. Rubber sold equipment and leased it back for a period of five
years. The leaseback has been accounted for as an operating lease. The loss of
$218,236 realized in the transaction has been deferred and will be amortized to
income in proportion to rental expense over the term of the lease.
The Company has various operating lease commitments, principally related to
machinery and equipment, office equipment, and facilities. The approximate
future minimum annual rentals for the years under the terms of these leases,
which expire on various dates through the year ending October 31, 2008, are as
follows (in thousands):
Year Ending October 31,
2002 $ 727
2003 980
2004 67
2005 32
2006 21
Thereafter 27
-------------------
$ 1,854
===================
Rental expense under operating leases for the ten months ended October 31, 2001,
in thousands, was $514 and for the years ended December 31, 2000 and 1999 was
$130 and $136, respectively.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
10. EMPLOYEE BENEFIT PLANS
Danzer Industries has a contributory defined benefit pension plan covering all
eligible employees who have elected to participate in the plan. It is the
Company's policy to fund pension costs as determined by the plan's actuary. The
weighted average discount rate and expected rate of return on long-term assets
used in determining the actuarial present value of the projected benefit
obligation were 7% for the plan year ended December 31, 2000. The actuarial
information included below, which is as of January 1, 2001, is for the plan's
fiscal year ended December 31, 2000, and is the most recent available
information.
Pension expense for the ten-month period ended October 31, 2001 is expected to
approximate the year ended December 31, 2000, which was as follows (in
thousands):
December 31, 2000
--------------------
Benefits earned (service cost) $ 3
Actual return on plan assets 22
Other items (43)
Interest expense 22
--------------------
Total pension expense $ 4
====================
A summary of the status of the plan as of December 31, 2000 is as follows (in
thousands):
December 31, 2000
-------------------
Projected benefit obligation:
Vested $ (345)
Nonvested --
-------------------
(345)
Plan assets at fair value 287
-------------------
Funded status (58)
Unrecognized net actuarial loss (9)
Unrecognized net (asset) obligation 47
-------------------
Accrued pension cost $ (20)
===================
The Company, through certain of its subsidiaries, also has defined contribution
401(k) plans which permit voluntary contributions up to 20% of compensation and
which provide Company-matching contributions of up to 10% of employee
contributions not to exceed 6% of employee compensation. 401(k) plan expense for
the ten-month period ended October 31, 2001 was approximately $35 and $25 and
$28 thousand for the years ended December 31, 2000 and 1999, respectively.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
11. MANDATORY REDEEMABLE PREFERRED STOCK
In conjunction with the United acquisition described in Note 4, the Company
issued 386,206 shares of Series C Preferred Stock to Huntington Capital
Investment Corporation ("Huntington"), the senior subordinated lender of United.
The note purchase agreement included a provision giving Huntington the option to
require the Company to repurchase the Series C Preferred Stock. Under the terms
of the agreement, Huntington has the option of requiring the Company to
repurchase these shares at 90% of market value at the date of redemption upon
the earlier of: a) fifth anniversary of issuance of such shares, b) default
under the subordinated debt agreement, c) other factors related to a sale of
substantially all assets of the Company as defined in the agreement.
A portion of the note purchase agreement proceeds of $3,500 was allocated to the
stock issued based on the thirty day average closing value of the Company's
common stock prior to the transaction. As the redemption value is variable, the
Company recognizes changes in the estimated fair value each quarter. Changes in
fair value are adjusted through additional paid in capital. At October 31, 2001,
the estimated redemption requirement is $1,435 to be paid July, 2006.
12. STOCKHOLDERS' EQUITY
PREFERRED STOCK:
The original capital structure of Danzer Corporation prior to the merger was
comprised of the following: 5,000,000 authorized shares of $.001 par value
preferred stock; 10,500 shares authorized of the Class of 10% Cumulative Senior
Preferred Stock (Series A) with no shares issued or outstanding as 7,650 shares
were retired; (Series B) Cumulative Convertible Senior Preferred Stock with
16,000 shares authorized and no shares issued or outstanding as 16,000 shares
were retired. In addition, the Company had 20,000,000 authorized shares of
common stock with 17,760,015 shares outstanding at December 31, 2000.
In June 2001, Danzer issued an aggregate of 1,750,000 shares of Danzer
unregistered common stock in connection with the exchange of $355,000 of debt.
On June 21, 2001, Danzer amended its articles of incorporation to authorize up
to 4,500,000 shares of Series C Convertible Preferred Stock. In conjunction with
the merger and acquisitions (described in Note 4) of June 21, the Company issued
1,970,962 of Series C Preferred Stock. The shareholders of Pyramid and Champion
then converted 824,892 shares of preferred stock to 16,497,840 of common stock.
In addition, on July 5, 2001, the Company increased the authorized shares of
common stock by 20,000,000 to 40,000,000. On July 31, 2001, the Company issued
2,593,099 shares of additional convertible preferred stock related to the United
acquisition.
The convertible preferred stock is convertible at the option of the holder at
any time, unless previously redeemed, into shares of common stock of the Company
at an initial conversion rate of 20 shares of common stock for each share of
convertible stock. However, the convertible preferred stock may not be converted
prior to the corporation filing a registration statement of such shares. Holders
of the convertible preferred stock have voting rights which entitle them to cast
on each matter submitted to a vote of the stockholders of the Corporation the
number of votes equal to the number of shares of common stock into which such
shares of Series C Preferred could be converted.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
12. STOCKHOLDERS' EQUITY, CONTINUED
These shares were offered and sold in transactions which were exempt from
Securities Act registration under Section 4(2) of the Securities Act, relating
to sales by an issuer not involving a public offering. No underwriters were
involved in the sale of these shares. The Corporation will use its best efforts
to file, as soon as reasonable practicable following the date of issuance of the
Series C Preferred, a registration statement ("Registration Statement") on Form
S-4, pursuant to the rules of the Securities and Exchange Commission ("SEC")
and, if not, on such other form promulgated by the SEC for which the Corporation
then qualifies, which is available to Corporation, and which counsel for the
Corporation shall deem appropriate for the registration under the Securities Act
of 1933.
On October 4, 2001, the Company changed its name from Danzer Corporation to
Obsidian Enterprises, Inc. In addition, 5,000,000 shares of Preferred Stock were
authorized with the domestication of Obsidian in Delaware. On October 9, 2001,
the Company filed designation of preferences, rights and limitations of
4,600,000 shares of Series C Preferred Stock. This transaction results in
400,000 shares of authorized but undesignated preferred stock and cancellation
of the Series A and B shares.
As a result of the reverse merger, U.S. Rubber becomes the accounting acquirer
and accordingly, under purchase accounting, becomes the Registrant. Therefore,
the 2000 and 1999 financial statements become those of U.S. Rubber. However,
under purchase accounting for a reverse merger, the stockholders' equity section
of the Registrant (formerly Danzer Corporation) becomes the equity of the merged
entity. Accordingly, the statement of changes in stockholders' equity reflects
that purchase accounting.
STOCK OPTIONS:
On May 7, 1990, Danzer's stockholders approved a stock option plan to issue both
"qualified" and "nonqualified" stock options. Under the plan, 800,000 options to
purchase shares of the Company's common stock may be issued at the discretion of
the Company's Board of Directors. The option price per share is determined by
the Company's Board of Directors, but in no case will the price be less than 85%
of the fair value of the common stock on the date of grant. Options under the
plan will have a term of not more than ten years with accelerated termination
upon the occurrence of certain events.
In April 1998, Danzer granted 600,000 stock options, exercisable at $.10 per
share, to its president. The options vest over two years and expire in April
2004. None of these options have been exercised as of October 31, 2001.
In September 1998, Danzer adopted a qualified incentive stock option plan under
Section 422 of the Internal Revenue Code. Options granted under the plan will be
granted at prices not less than fair value of the Company's stock at the date of
grant, have a term not more than ten years and have other restrictions as
determined by statute.
In September 1998, Danzer granted a total of 604,500 stock options, exercisable
at $.10 per share, to certain employees. The options expire November 2001. As a
result of voluntary termination, 75,000 options expired in 1999 and 192,000
options expired in 2000. None of these options were exercised as of October 31,
2001.
On July 24, 2001, the Board adopted, and on October 5, 2001, the Company's
stockholders approved, the 2001 Long Term Incentive Plan (the "2001 Plan"). The
2001 Plan authorizes the granting to the Company's directors, key employees,
advisors and consultants of options
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
12. STOCKHOLDERS' EQUITY, CONTINUED
intended to qualify as Incentive Options within the meaning of Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code"), options that do not
so qualify ("Non-Statutory Options"), restricted stock and Other Stock-Based
Awards that are not Incentive Options or Non-Statutory Options. The awards are
payable in Common Stock and are based on the formula which measures performance
of the company. There was no performance award expense in 2001. No options under
this plan were granted to any employees. Options are exercisable for up to 10
years from the date of grant.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation.
Accordingly, no compensation expense has been recognized for the stock option
plans. Had compensation expense for the Company's stock option plans been
determined based on the fair value at the grant date for awards consistent with
the provisions of SFAS No. 123, the Company's net income (loss) for the period
ended October 31, 2001 and the years ended December 31, 2000 and 1999 would have
been (in thousands) $(4,360), $3, and $198, respectively. Basic and diluted net
income (loss) per share as reported would not have changed in any period
presented had such compensation expense been recorded.
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 (no options were granted during the
period ended October 31, 2001), respectively: risk-free interest rates of 6.4
and 5.5 percent; dividend yield of 0 percent in both years; expected lives of 5
years; and volatility of 978 and 170 percent. The estimated weighted average
fair value of options granted during 2000 and 1999 were $0.10 and $0.05 per
share, respectively.
Following is a summary of transactions of granted shares under option for the
period ended October 31, 2001 and years ended December 31, 2000 and 1999:
2001 2000 1999
------------------------------- ----------------------------- ------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------------- --------------- -------------- -------------- --------------- --------------
Outstanding, beginning
of year 1,137,500 .09 1,029,500 .09 1,077,128 .09
Issued during the year -- -- 450,000 .10 200,000 .05
Canceled during the year (90,000) .10 192,000 .09 75,000 .09
Exercised during the year -- -- 150,000 .10 72,628 .10
--------------- --------------- -------------- -------------- --------------- --------------
Outstanding, end of year 1,047,500 .09 1,137,500 .09 1,129,500 .09
=============== =============== ============== ============== =============== ==============
Eligible, end of year
for exercise 1,047,500* .09 1,137,500 .09 1,029,500 .09
=============== =============== ============== ============== =============== ==============
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
12. STOCKHOLDERS' EQUITY, CONTINUED
A further summary about fixed options outstanding at October 31, 2001 is as
follows:
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Outstanding Life Price Exercisable Price
---------------- ---------------- ------------- ---------------- -------------
Exercise price of $.10 847,500* 1.6 yr. .10 847,500 .10
================ ================ ============= ================ =============
Exercise price of $.05 200,000 1.2 yr. .05 200,000 .05
================ ================ ============= ================ =============
* 247,500 of the options listed above expire on November 1, 2001. In
addition, in accordance with the Plan of Reorganization and Merger and the
related "Letter agreements", the above options cannot be exercised until
the Company amends its articles of incorporation to authorize shares of
approximately 120,000,000 and has registered such shares.
STOCK WARRANTS:
Danzer issued warrants to purchase common stock to several parties. The
following table summarizes the outstanding warrants for the ten-month period
ended October 31, 2001 and the year ended December 31, 2000:
Outstanding Warrants Exercise Price Warrants Issued Outstanding
(Expired) in Warrants
December 31, 2000 Period October 31, 2001
----------------------- ---------------- ------------------ ---------------------
Former president, upon resignation
in March 1998, expired in March
2001 100,000 $.25 (100,000) --
Financing agreement, effective
August 1997, terminated June 21, $.25 subject
2001 650,000 to adjustment (650,000) --
On June 21, 2001, Duncan-Smith Co. terminated warrant for 650,000 common shares
and was issued new warrant for 10,000 shares Series C Preferred exercisable at
$2.00 per
share, expiring August 31, 2002 -- $2.00 200,000 200,000
Markpoint financing agreement
expiring May 2008 associated with
Champion** Zero** $.01 -- Zero**
** The number of warrants available under the agreement with Markpoint is
based on twenty-five percent of the fair market value of Champion to be
determined based on a formula including a multiple of EBITDA. No warrants
are currently available under this agreement based on the operating results
and stockholder's deficit of Champion.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
12. STOCKHOLDERS' EQUITY, CONTINUED
CONVERTIBLE DEBT:
As described in Note 7, at October 31, 2001, the Company has a note payable
agreement which is convertible by the holder to common stock totaling 5,000,000
shares at a conversion rate of $0.10 per share at October 31, 2001.
13. BUSINESS SEGMENT DATA AND GEOGRAPHIC DATA
The Company operates in three industry segments comprised of trailer and related
transportation equipment manufacturing; coach leasing; and butyl rubber
reclaiming. All sales are in North and South America primarily in the United
States, Canada and Brazil. Selected information by segment follows (in
thousands):
Ten Months Ended October 31, 2001
------------------------------------------------------------------------------
Trailer Butyl Rubber
Manufacturing Coach Leasing Reclaiming Total
------------------------------------------------------------------------------
Sales:
Domestic $ 13,466 $ 4,165 $ 9,253 $ 26,884
Foreign 550 -- 621 1,171
------------------------------------------------------------------------------
Total $ 14,016 $ 4,165 $ 9,874 $ 28,055
Cost of goods sold $ 12,276 $ 1,618 $ 8,884 $ 22,778
Income (loss) before taxes $ (3,509) $ (570) $ (653) $ (4,732)
Identifiable assets $ 25,315 $ 13,330 $ 10,205 $ 48,850
Depreciation and amortization expense $ 606 $ 785 $ 905 $ 2,296
Obsidian Enterprises, Inc. (legal parent) allocates selling, general and
administrative expenses to the respective companies primarily based on a
percentage of sales.
For the calendar years ended December 31, 2000 and 1999, the Company operated in
only one segment (butyl rubber reclaiming), which was the segment of the
accounting acquirer U.S. Rubber. U.S. Rubber had foreign sales of $943,325 for
2000.
14. INCOME TAXES
The Company files a consolidated federal tax return. The parent and each
subsidiary record their share of the consolidated federal tax expense on a
separate-return basis. Any additional income tax expense on recovery realized as
a result of filing a consolidated tax return is recorded in consolidation. The
Company and each subsidiary file separate state income tax returns. The Company
accounts for income taxes in compliance with SFAS No. 109, Accounting for Income
Taxes. Under SFAS No. 109, deferred tax assets and liabilities are recorded for
any temporary differences between the financial statement and tax bases of
assets and liabilities, using the enacted tax rates and laws expected to be in
effect when the taxes are actually paid or recovered.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
14. INCOME TAXES, CONTINUED
The provision for (expenses) benefit for income taxes consists of the following
(in thousands):
2001 2000 1999
------------------------------------------------
Current:
Federal $ -- $ 152 $ (112)
State (36) 14 (12)
------------------------------------------------
(36) 166 (124)
------------------------------------------------
Deferred:
Federal 350 (187) --
State 58 (29) --
------------------------------------------------
408 (216) --
------------------------------------------------
Total $ 372 $ (50) $ (124)
================================================
A reconciliation of income tax benefit (expense) at U.S. statutory rates to
actual income tax benefit (expense) is as follows (in thousands):
2001 2000 1999
------------------------------------------------
Benefit (tax) at statutory rate (34%) $ 1,609 $ (33) $ (110)
Effect of nontaxable combined entity (166) -- --
State income tax (36) (5) (17)
Goodwill amortization (26) -- --
Increase in valuation reserve (1,024) -- --
Other 15 (12) 3
------------------------------------------------
$ 372 $ (50) $ (124)
================================================
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
14. INCOME TAXES, CONTINUED
Deferred income taxes represent the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and for income tax purposes. Significant components of the Company's
deferred tax assets and liabilities are as follows (in thousands):
2001 2000 1999
------------------------------------------------
Deferred tax assets (liabilities):
Accounts receivable $ 32 $ -- $ --
Inventories 472 517 693
Accrued expenses 117 15 15
Intangibles 791 -- --
Operating loss carryforwards 1,474 -- --
Property and equipment (2,267) (171) (131)
Loss on sale-leaseback (81) -- --
Other 14 -- --
------------------------------------------------
552 361 577
Less valuation reserves (1,551) -- --
------------------------------------------------
Deferred tax assets (liabilities), net $ (999) $ 361 $ 577
================================================
Included in the accompanying balance sheet under the following (in thousands):
2001 2000 1999
------------------------------------------------
Deferred tax assets $ 673 $ 532 $ 708
Deferred tax liabilities (1,672) (171) (131)
------------------------------------------------
$ (999) $ 361 $ 577
================================================
The amount of federal tax net operating loss carryforwards available at October
31, 2001 was $3,600,000. The majority of these loss carryforwards were generated
by certain subsidiaries prior to the reverse merger transaction in June 2001 and
have expiration dates through the year 2021. The use of preacquisition operating
losses is subject to limitations imposed by the Internal Revenue Code.
Utilization of these loss carryforwards is impacted by such limitations.
Accordingly, the deferred tax assets related to premerger operating losses have
been reserved with a valuation allowance to the extent they are not offset by
deferred liabilities.
Federal tax net operating loss carryforwards and expiration dates as of October
31, 2001 are as follows:
Premerger Expiration Dates Postmerger Expiration Dates
---------
---------------- ----------------------- ---------------- ------------------
Obsidian Enterprises $ -- $ 297 2021
Danzer Industries 1,986 2008 through 2018 -- --
Pyramid 126 2020 -- --
Champion 789 2021 402 2021
---------------- ----------------
$ 2,901 $ 699
================ ================
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
14. INCOME TAXES, CONTINUED
Cash payments of income taxes for the ten months ended October 31, 2001 and for
the years 2000 and 1999 were $44, $8, and $86 thousand, respectively.
15. CHARGES FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews the recoverability of the carrying value of long-lived
assets, primarily property, plant and equipment and related goodwill and other
intangible assets, for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be fully recoverable.
Impairment losses are recognized when the fair value is less than the asset's
carrying value. When indicators of impairment are present, the carrying values
of the assets are evaluated in relation to the operating performance and future
undiscounted cash flows of the underlying business. The net book value of the
underlying assets is adjusted to fair value if the sum of expected future
undiscounted cash flows is less than book value. Fair values are based on quoted
market prices and assumptions concerning the amount and timing of estimated
future cash flows and assumed discount rates, reflecting varying degrees of
perceived risk.
During October 2001, the Company completed an evaluation of the recoverability
of the assets (primarily goodwill) of Champion. Certain events occurred during
the period ended October 31, 2001 which caused the full recoverability of those
assets to be brought into question. When this operation was acquired, management
anticipated that this operation would continue to generate certain revenues,
namely repair revenues, at historically consistent levels. This was not the
case. It appears as though the customer relationships of this business were
based on relationships with the former owner and as such have been difficult to
maintain after the acquisition of Champion. Further eroding the performance of
Champion have been lower overall sales demand and difficulties in achieving
manufacturing efficiencies. As a result of these events that occurred after the
acquisition, it became clear that the investment in Champion had become severely
impaired. Accordingly, during fiscal 2001, Champion recorded charges of $2,305
thousand related to the impairment of goodwill. This charge was based on the
estimated fair value of the long-lived assets of Champion.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
16. RELATED PARTIES
The Company makes advances, receives loans and conducts other business
transactions with affiliates resulting in the following amounts for the periods
ended (in thousands):
October 31, December 31,
2001 2000
------------------ ------------------
Balance sheet:
Current assets:
Accounts receivable, Obsidian Capital Company (OCC) $ 217 $ --
Notes receivable, former parent of U.S. Rubber -- 1,098
Long-term portion:
Notes receivable, former parent of U.S. Rubber -- 1,770
Investment banking fees, purchase accounting* 1,960 --
------------------ ------------------
Total assets $ 2,177 $ 2,868
================== ==================
Current liabilities:
Accounts payable, Obsidian Capital Company (OCC) $ 625 $ --
Accounts payable, stockholders 300 --
Long-term portion: -- --
Accounts payable, Obsidian Capital Partners (OCP) 2,170 --
------------------ ------------------
Total liabilities $ 3,095 $ --
================== ==================
Income statement:
Rent expense, Obsidian Capital Company (OCC) $ 15 $ --
Interest income, related to note above -- 356
================== ==================
Related-party amounts classified as current reflect those portions of the total
receivable or payable that were currently due in accordance with the terms, or
were collected or paid subsequent to year end. Amounts classified as long term
represent amounts not currently due or amounts that are expected to be converted
to equity subsequent to year end. Also see Note 18.
The Company was obligated to the stockholders and certain employees (that were
formerly stockholders of subsidiary companies) under note payable agreements
acquired as part of the acquisitions. The details of these notes payable are
included in Note 8.
* Subsidiaries of the Company paid Obsidian Capital Company, an entity
controlled by Mr. Durham (Chairman of the Company), investment banking fees
associated with the acquisitions and related financing on the Danzer and
U.S. Rubber merger and the United acquisition. Amounts paid by U.S. Rubber,
United, and Danzer were $760, $600, and $600 thousand, respectively.
The December 31, 2000 balance sheet includes notes receivable due from the
former parent company of U.S. Rubber, Inc. prior to it being acquired by
Obsidian. The following table summarizes those notes (in thousands):
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
16. RELATED PARTIES, CONTINUED
December 31,
2000
------------------
Unsecured note receivable from affiliated company. Interest accrues at an annual rate equal to $ 737
Bank One prime (9.5% at December 31, 2000); due on demand.
Unsecured note receivable from affiliated company. Interest is to be paid monthly at an annual 784
rate of 6.2%. Principal is due as follows: $200,000 in 2001; $300,000 in 2002; and $284,360 in
2003. Note matures June 19, 2003.
Unsecured note receivable from affiliated company. Interest is to be paid monthly at an annual 806
rate equal to Bank One prime plus 1/2% (10% at December 31, 2000). Principal is due in equal
monthly installments of $13,440, beginning December 31, 1998, until maturity (November 30,
2005), at which time all unpaid principal and interest will be due.
Unsecured note receivable from affiliated company, payable on demand, with no stated interest 541
2,868
------------------
Less current portion 1,098
$ 1,770
==================
17. COMMITMENTS AND CONTINGENCIES
The Company has a purchase commitment to purchase or lease three (3) coaches
within 60 days of completion, expected to be in the first quarter of calendar
2002. The cost of these coaches will approximate $1.35 million.
In the normal course of business, the Company is liable for contract completion
and product performance. In the opinion of management, such obligations will not
significantly affect the Company's financial position or results of operations.
Certain insurable risks such as health insurance are self-insured by certain of
the Company's subsidiaries. However, the Company has umbrella insurance coverage
for certain risk exposures subject to specified limits. Accruals for claims
under the Company's self-insurance program are recorded on a claim-incurred
basis.
18. SUBSEQUENT EVENTS
Management has reached agreement in principle with SerVaas, Inc. to terminate
the Company's obligations under the Agreement with SerVaas, Inc. for $700,000 in
cash and 30,000 shares of Series C Convertible Preferred Stock. DC Investments,
Inc., an entity controlled by Mr. Durham, has agreed in principle to loan
$700,000 to the Company and to purchase from SerVaas, Inc. the $1,750,000
principal amount Subordinated Note due SerVaas, Inc. which bears interest at 20%
per annum and to exchange that note for a $700,000 principal amount note of U.S.
Rubber bearing interest at 15% per annum paid currently and due, as to the
principal, in one installment in five years. The net effect of this will be to
reduce U.S. Rubber's liabilities by approximately $1,300,000. Management
anticipates this will be concluded in late February 2002. The effect of
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
18. SUBSEQUENT EVENTS, CONTINUED
this transaction would be to increase the Company's equity and to improve its
working capital position.
On February 12, 2002, U.S. Rubber entered into a "Second Amendment to Credit
Agreement" with its primary lender. The terms of the amendment require scheduled
debt service payments under substantially the same terms as described in Note 8
through November 1, 2002 when all debt outstanding with the primary lender will
become due. The agreement also modifies the terms of an operating lease with the
lender requiring payment in full of the remaining lease obligation as of
November 1, 2002 of approximately $738,000.
After October 31, 2001, Champion is in violation of its Senior Credit facility
with Bank One. Champion is working under a forbearance agreement through March
15, 2002. Champion has paid down the Bank One debt by $570,000 as consideration
for such agreements. The Company made a capital contribution of $570,000 from
loan proceeds from DC Investments, LLC, controlled by Tim Durham, Chairman of
the Company. Champion is also indebted to Markpoint Equity Fund IV under a
subordinated credit facility in the amount of $1,250,000. Champion has been in
violation of the funded debt to EBITDA negative covenant of the Markpoint Credit
Agreement since the inception of the loan. Markpoint has informed Champion it
may not grant a waiver of this violation in the future. The Markpoint debt has
been reclassified as current liability due to this default.
The Board of Directors has agreed in principle to divest Champion to a group
consisting of Champion's management and Messrs. Durham and Whitesell pursuant to
the terms of a nonbinding Letter of Intent,subject to an independent review of
fair value by the independent Board members of the Company. DC Investments, LLC
has agreed to contribute $660,000 to the Company in exchange for Series C
Preferred Stock. The Company will use those funds to purchase the loan of Bank
One to Champion in that amount and would contribute that note to Champion as
additional capital. In exchange for the assumption of the $1,250,000
subordinated debt of Champion and all accrued interest and either a release of
the Company's guarantee of that debt or an indemnification of the Company for
any loss to the Company, the management group would purchase the assets and
assume substantially all liabilities of Champion.
To complete the Plan of Reorganization, Pyramid and DW Leasing were required to
obtain lender approval of the transfer of assets subject to liabilities to
Obsidian Leasing Company, Inc. ("Obsidian Leasing"), a wholly owned subsidiary
of the Company. On November 1, 2001, the Company completed the tax-free exchange
contemplated by the Acquisition Agreement of June 21, 2001, whereby all but
seven coaches and the liabilities thereon were transferred to Obsidian Leasing
to operate this segment of business previously under DW Leasing.
DC Investments, LLC, a related party 50% owned by Mr. Durham (Chairman of the
Company), subsequent to year end, has purchased accounts receivable from DW
Leasing, recorded by DW Leasing as deposits on trailers, in the amount of
$1,050,582 as of February 13, 2002. DW Leasing used the proceeds from the
purchase of the accounts receivable to pay off the accounts payable due Obsidian
Capital Company in the amount of $624,317 and the amount due shareholders and
other related parties in the approximate amount of $300,000.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(dollars in thousands, except per share amounts)
Fiscal Year Ended October 31, 2001
First Qtr.* Second Qtr. Ended Third Qtr. Ended Fourth Qtr.
Ended 1/31/01 4/30/01 7/31/01 Ended 10/31/01
------------------ ------------------- ------------------ ------------------
Net sales $ 3,743 $ 5,260 $ 6,040 $ 15,163
Gross profit 442 1,057 1,272 2,659
Net income (loss) (355) (579) (613) (2,871)**
Net income (loss) per common and common
equivalent share -- -- (.02) (.08)
Fiscal Year Ended December 31, 2000
First Qtr. Ended Second Qtr. Ended Third Qtr. Ended Fourth Qtr.
3/31/00 6/30/00 9/30/00 Ended 12/31/00
------------------ ------------------- ------------------ ------------------
Net sales $ 3,059 $ 3,024 $ 3,233 $ 3,267
Gross profit (loss) 301 372 373 147
Net income (loss) 86 (118) 146 (66)
Net income (loss) per common and common
equivalent share -- -- -- --
* The first quarter for U.S. Rubber includes the first and second month
(November and December) of 2000.
** The fourth quarter includes the charge for the impairment of goodwill
related to Champion of $2,305 ($.02 per share).
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
SCHEDULE II--VALUATION AND QUALIFYING OF ACCOUNTS
Ten Months Ended October 31, 2001
(in thousands)
Column C--Additions
-----------------------------------
Column A--Description Column (1)--Charged to (2)--Charged to Column Column
B--Balance at r
Beginning of Costs and Other ibE--Balance at
Period Expenses Accounts--Describe D--Deductions--Desc End of Period
----------------------------- ---------------- ----------------- ----------------- ----------------- -----------------
Inventory valuation
allowances $ 1,338 $ 73 $ -- $ 578* $ 833
================ ================= ================= ================= =================
Deferred tax valuation
reserve $ -- $ 1,038 $ 513** $ -- $ 1,551
================ ================= ================= ================= =================
Year Ended December 31, 2000
(in thousands)
Column C--Additions
-----------------------------------
Column A--Description Column (1)--Charged to (2)--Charged to Column Column
B--Balance at r
Beginning of Costs and Other ibE--Balance at
Period Expenses Accounts--Describe D--Deductions--Desc End of Period
----------------------------- ---------------- ----------------- ----------------- ----------------- -----------------
Inventory valuation
allowances $ 1,818 $ 120 $ -- $ 600* $ 1,338
================ ================= ================= ================= =================
Deferred tax valuation
reserve $ -- $ -- $ -- $ -- $ --
================ ================= ================= ================= =================
* Write-off of inventory against reserve.
** Valuation reserve of acquired companies recorded in purchase accounting.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf, by the undersigned, thereunto
duly authorized.
Dated: August 25, 2003 OBSIDIAN ENTERPRISES, INC.
By: /s/ Timothy S. Durham
----------------------------------
Timothy S. Durham
Chief Executive Officer
EXHIBIT INDEX
Exhibit No. Description Incorporated by Reference/Attached
2 Acquisition Agreement and Plan of Reorganization, dated June Incorporated by reference to
21, 2001, by and among Registrant, Danzer Industries, Inc., Exhibit 2.1 to Report on Form 8-K
Pyramid Coach, Inc., Champion Trailer, Inc., United filed August 15, 2001
Acquisition, Inc., U.S. Rubber Reclaiming, Inc., Obsidian
Capital Partners, L.P. and Timothy S. Durham
3.1 Certificate of Incorporation (filed with Delaware Secretary Attached+
of State on October 4, 2001)
3.2 Certificate of Designations, Preferences, Rights and Attached+
Limitations of Series C Preferred Stock
3.3 By Laws of the Registrant Attached+
4.1 Registration Rights Agreement, dated June 21, 2001 Attached+
4.2 Amendment and Joinder to Registration Rights Agreement, dated Attached+
July 27, 2001
4.3 8.00% Convertible Debenture Issued by Registrant on July 19, Incorporated by reference to
2001 to HSBC Global Custody Nominee Due July 19, 2008 Exhibit 2 to Schedule 13D filed
September 20, 2001 by Russell
Cleveland, Renaissance Capital
Group, Inc.
4.4 8.00% Convertible Debenture Issued by Registrant on July 19, Incorporated by reference to
2001 to Renaissance US Growth & Income Trust PLC Due July 19, Exhibit 3 to Schedule 13D filed
2008 September 20, 2001 by Russell
Cleveland, Renaissance Capital
Group, Inc.
4.5 Convertible Loan Agreement, dated July 19, 2001, Among Attached+
Registrant, BFSUS Special Opportunities Trust PLC,
Renaissance US Growth & Income Trust PLC and Renaissance
Capital Group, Inc.
10.1 2001 Long Term Incentive Plan* Incorporated by reference to
Appendix E to the Registrant's
Proxy Statement filed on
September 18, 2001
10.2 Asset Purchase Agreement, dated April 20, 2000, between Attached+
Champion Trailer Company, L.P. and Harold Peck, Mary Peck,
Champion Trailer, Ltd. (f/k/a) Champion Trailer, LLC,
Champion Collision, Ltd. (f/k/a) Champion Collision, L.L.C.
and Brandonson, Inc.
10.3 Stock and Asset Purchase Agreement, dated December 20, 1999, Attached+
among Timothy S. Durham, Terry Whitesell, DW Leasing, LLC,
Bobby Michael, Becky Michael, Jennifer George, Pyramid Coach,
Inc., Precision Coach, Inc., American Coach Works, Inc.,
Transport Trailer Service, Inc., Rent-A-Box, Inc. and LBJ, LLC
10.4 Assumption Agreement and Second Amendment to Credit Attached+
Agreement, dated June 18, 2001, among Bank One, Indiana,
N.A., Champion Trailer, Inc. and Champion Trailer Company,
L.P.
10.5 Credit Agreement, dated December 29, 2000, between USRR Attached+
Acquisition Corp. and Bank One, Indiana, N.A.
10.6 First Amendment to Credit Agreement, dated June 20, 2001, Attached+
between U.S. Rubber Reclaiming, Inc. and Bank One, Indiana,
N.A.
10.7 Note Purchase Agreement, dated May 2, 2000, between Champion Attached+
Trailer, Inc. and Markpoint Equity Growth Fund, J.V., and
Related Documents
10.8 Warrant, dated May 2, 2000, from Champion Trailer Company, LP Attached+
to Markpoint Equity Growth Fund, J.V.
10.9 Management Agreement, dated December 29, 2000, between Attached
Obsidian Capital Company, LLC and USRR Acquisition Corp.
10.10 Management Agreement, dated June 16, 2001, between Pyramid, Attached+
Inc. and D.W. Leasing
10.11 Promissory Note, dated June 1, 2001, from Obsidian Capital Attached+
Company, LLC to U.S. Rubber Reclaiming, Inc.
10.12 Promissory Note, dated June 11, 2001, from Champion Trailer, Attached+
Inc. to Obsidian Capital Partners, LP
10.13 Purchase Agreement, dated June 5, 2001, between United Attached+
Expressline, Inc., United Acquisition, Inc., J.J.M.
Incorporated and the Shareholders of United Expressline, Inc.
and J.J.M. Incorporated
10.14 Promissory Note, dated July 27, 2001, from United Attached+
Acquisition, Inc. to United Expressline, Inc.
10.15 Credit Agreement, dated July 27, 2001, between United Attached+
Acquisition, Inc. and First Indiana Bank
10.16 Loan and Security Agreement, dated January 21, 2000, between Attached+
Danzer Industries, Inc. and Banc of America Commercial
Finance Corp.
10.17 Warrant, dated August 1997, by Danzer Corp. to Duncan-Smith Attached+
Co. and Letter Agreement, dated June 21, 2001, between Danzer
Corp. and Duncan-Smith Co.
10.18 Stock Purchase Agreement, dated December 29, 2000, between Attached+
USRR Acquisition Corp. and SerVaas, Inc.
10.19 Subordinated Secured Promissory Note, dated December 29, Attached
2000, from USRR Acquisition Corp. to SerVaas, Inc.
10.20 Supply and Consignment Agreement, dated December 29, 2000, Attached+
between U.S.R.R. Acquisition and SerVaas, Inc.
10.21 Form of Installment Loan from Edgar County Bank & Trust Co. Attached+
to DW Leasing Company, LLC, Related Documents and Schedule
Identifying Material Details
10.22 Loan Agreement, dated December 10, 1999, between Old National Attached+
Bank and DW Leasing Company, LLC, and Related Documents
10.23 Form of Promissory Note from DW Leasing Company, LLC, to Attached+
Former Shareholders of Pyramid Coach, Inc., Related Security
Agreement, and Schedule Identifying Material Details
10.24 Form of Promissory Note from DW Leasing Company, LLC to Star Attached+
Financial Bank, Related Documents and Schedule Identifying
Material Details
10.25 Form of Lock-Up Agreement, dated July 19, 2001, and Schedule Attached+
Identifying Material Details
10.26 Master Lease Agreement, dated May 17, 2000, between Old Attached+
National Bank and DW Leasing Company, LLC, and Related
Documents
10.27 Loan Agreement, dated June 1, 2000, between DW Leasing Attached+
Company LLC and Regions Bank and Security Agreement
10.28 Business Loan Agreement (Asset Based), dated August 15, 2001, Attached+
between Danzer Industries, Inc. and Bank of America, N.A.
10.29 1999 Stock Option Plan*
10.30 Amendment to Acquisition Agreement and Plan of Attached+
Reorganization, dated December 28, 2001, between Registrant
and Obsidian Leasing Company, Inc.
10.31 Agreement and Plan of Reorganization and Corporate
Separation, dated December 28, 2001, between DW Leasing LLC
and Obsidian Leasing Company, Inc.
21 List of Subsidiaries Attached +
31.1 Sarbanes-Oxley Act Section 302 Certification Attached
31.2 Sarbanes-Oxley Act Section 302 Certification Attached
32.1 Sarbanes-Oxley Act Section 906 Certification Attached
32.2 Sarbanes-Oxley Act Section 906 Certification Attached
* Indicates Exhibits that describe or evidence management contracts or
compensatory plans or arrangements required to be filed as Exhibits to this
Annual Report on Form 10-K.
+ Previously filed.