SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the three months ended April 30, 2002
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 of other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
111 Monument Circle, Suite 3680
Indianapolis, Indiana 46204
(Address of principal executive offices) (Zip Code)
(317) 237-4122
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------- ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock Outstanding at
$.0001 par value April 30, 2002
36,007,855 shares
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
INDEX
PAGE(S)
PART I - FINANCIAL INFORMATION:
Item 1 - Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets -
April 30, 2002 and October 31, 2001 3
Condensed Consolidated Statements of Operations 5
Three Months and Six Months Ended April 30, 2002 and 2001
Condensed Consolidated Statement of
Changes of Stockholders'Equity 6
Condensed Consolidated Statements of Cash Flows 7
Six Months Ended April 30, 2002 and 2001
Notes to Condensed Consolidated Financial Statements 9
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 20
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 32
PART II - OTHER INFORMATION:
Item 2 - Changes in Securities and Use of Proceeds 32
Item 4 - Submission of Matters to a Vote of Security Holders 32
Item 6 - Exhibits and Reports on Form 8-K 32
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
April 30, October 31,
2002 2001
----------------------------------
Assets
Current assets:
Cash and cash equivalents $ 267 $ 529
Marketable securities 160 223
Accounts receivable, net of allowance for doubtful accounts
of $70 for 2002 and $90 for 2001 4,403 3,744
Accounts receivable, related parties 28 217
Inventories, net 6,402 6,694
Prepaid expenses and other assets 711 1,275
----------------------------------
Total current assets 11,971 12,682
Property, plant and equipment, net 23,456 24,232
Other assets:
Goodwill, net 9,169 9,210
Other intangible assets, net of accumulated amortization of $461 for
2002 and $270 for 2001 1,957 2,147
Other 668 579
----------------------------------
$ 47,221 $ 48,850
==================================
The accompanying notes are an integral part of the condensed
consolidated financial statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
April 30, October 31,
2002 2001
----------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 14,666 $ 9,233
Accounts payable, trade 4,019 3,620
Accounts payable, related parties 665 925
Accrued expenses and customer deposits 2,188 2,388
----------------------------------
Total current liabilities 21,538 16,166
Accounts payable, related parties 1,198 2,170
Long-term debt, related parties 3,323 --
Long-term debt, net of current portion 17,679 27,546
Deferred income tax liabilities 1,433 1,672
Commitments and contingencies -- --
Stockholders' equity:
Common stock, par value $.0001 per share; 40,000,000 shares authorized,
36,007,855 shares outstanding 3 3
Preferred stock, 5,000,000 shares authorized; Class of Series C convertible
preferred stock, par value $.001, 4,600,000 authorized, 4,358,399 and
3,739,169 shares issued and outstanding for 2002 and 2001, respectively,
400,000 shares of undesignated preferred stock authorized 4 4
Additional paid-in capital 8,960 5,612
Accumulated other comprehensive income (loss) (26) 37
Accumulated deficit (6,891) (4,360)
----------------------------------
Total stockholders' equity 2,050 1,296
----------------------------------
$ 47,221 $ 48,850
==================================
The accompanying notes are an integral part of the condensed
consolidated financial statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share and share data)
(unaudited)
Three Months Ended Six Months Ended
--------------------------------------------------------------------------
April 30, 2002 April 30, 2001 April 30, 2002 April 30, 2001
--------------------------------------------------------------------------
Net sales $ 16,973 $ 5,260 $ 29,456 $ 9,003
Cost of sales 14,434 4,203 25,460 7,504
--------------------------------------------------------------------------
Gross profit 2,539 1,057 3,996 1,499
Selling, general and administrative
expenses 2,489 976 4,695 1,491
--------------------------------------------------------------------------
Income (loss) from operations 50 81 (699) 8
Other income (expense):
Interest expense, net (972) (671) (1,846) (888)
Other expense (4) 10 (33) (67)
--------------------------------------------------------------------------
Loss before income taxes (926) (580) (2,578) (947)
Income tax (expense) benefit -- 1 155 13
--------------------------------------------------------------------------
Net loss $ (926) $ (579) $ (2,423) $ (934)
==========================================================================
Basic and diluted loss per share $ (.01) $ (.01) $ (.02) $ (.02)
==========================================================================
Weighted average common and common
equivalent shares outstanding basic and
diluted: 111,220,780 39,419,240 111,001,235 39,419,240
==========================================================================
The accompanying notes are an integral part of the condensed
consolidated financial statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(dollars in thousands)
(unaudited)
Accumulated
Comprehensive Common Stock Preferred Stock Additional Other
------------------------------------------------- Paid-in Comprehensive Accumulated
Loss Shares Amount Shares Amount Capital Income (Loss) Deficit Total
---------------------------------------------------------------------------------------------------------
Balance at
October 31, 2001 $ -- 36,007,855 $ 3 3,739,169 $ 4 $ 5,612 $ 37 $ (4,360) $ 1,296
Distributions -- -- -- -- -- -- -- (108) (108)
to members of
DW Leasing, LLC
Unrealized loss on
on available-for-
sale marketable
securities (63) -- -- -- -- -- (63) -- (63)
Conversion of
debt to preferred
stock and
additional paid-in
capital -- -- -- 619,230 -- 3,348 -- -- 3,348
Net loss (2,423) -- -- -- -- -- -- (2,423) (2,423)
----------------------------------------------------------------------------------------------------------
Total
comprehensive loss $(2,486)
==================
Balance at
April 30, 2002 36,007,855 $ 3 4,358,399 $ 4 $ 8,960 $ (26) $ (6,891) $ 2,050
============================================================================================
The accompanying notes are an integral part of the condensed
consolidated financial statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
-------------------------------
April 30, 2002 April 30, 2001
-------------------------------
Cash flow from operating activities:
Net loss $ (2,423) $ (934)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization 1,346 859
Other 126 51
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable, net (659) (735)
Inventories, net 292 650
Other, net 996 514
-------------------------------
Net cash provided by (used in) operating activities (322) 405
-------------------------------
Cash flows from investing activities:
Capital expenditures (405) (585)
Payments to acquire U.S. Rubber -- (5,528)
Other 11 13
-------------------------------
Net cash used in investing activities (394) (6,100)
-------------------------------
The accompanying notes are an integral part of the condensed
consolidated financial statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
-------------------------------
April 30, 2002 April 30, 2001
-------------------------------
Cash flows from financing activities:
Borrowings from and distributions to related parties, net $ 1,329 $ 429
Net borrowings on lines of credit 401 84
Borrowings (repayments) on long-term debt (1,276) 4,044
Debt issuance cost -- (76)
Proceeds from issuance of U.S. Rubber common stock -- 880
-------------------------------
Net cash provided by (used in) financing activities 454 5,361
-------------------------------
Decrease in cash and cash equivalents (262) (334)
Cash and cash equivalents, beginning of period 529 341
-------------------------------
Cash and cash equivalents, end of period $ 267 $ 7
===============================
Interest paid $ 1,852 $ 912
===============================
Taxes paid $ 15 $ --
===============================
Supplemental disclosure of noncash operating, investing and financing
activities:
Conversion of debt to preferred stock and additional paid-in capital $ 3,348 $ --
Conversion of accounts payable, related parties to debt $ 1,295 $ --
Purchase price adjustment and conversion of accounts payable to debt for
United $ 294 $ --
Advances to construct coaches and equipment acquired by issuance of debt $ -- $ 292
Seller notes issued in acquisition of U.S. Rubber $ -- $ 2,573
The accompanying notes are an integral part of the condensed
consolidated financial statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Description of Business:
Danzer Corporation was reorganized (the "Reorganization") through an Acquisition
and Plan of Reorganization with U.S. Rubber Reclaiming, Inc. and Related
Entities ("U.S. Rubber Companies"), which was consummated on June 21, 2001 (the
"Effective Date"). In addition, Danzer Corporation changed its name to Obsidian
Enterprises, Inc. However, the operating company, Danzer Industries, Inc.,
retained its name. The operating company will continue to be referred to as
Danzer Industries, Inc. The Acquisition and Plan of Reorganization of Danzer
Corporation with U.S. Rubber Companies was accounted for as a reverse
acquisition as the shareholders of the U.S. Rubber Companies owned a majority of
the outstanding stock of Danzer subsequent to the Acquisition and Plan of
Reorganization. For accounting purposes, U.S. Rubber Reclaiming, Inc. is deemed
to have acquired Danzer.
Pursuant to the Plan of Acquisition and Reorganization, United Expressline, Inc.
was acquired July 31, 2001.
The accompanying financial data as of April 30, 2002 and for the three and six
months ended April 30, 2002 and 2001 has been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. The October 31,
2001 consolidated balance sheet was derived from audited financial statements,
but does not include all disclosures required by accounting principles generally
accepted in the United States of America. However, the Company believes that the
disclosures are adequate to make the information presented not misleading. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the period ended October 31, 2001. The
Company follows the same accounting policies in preparation of interim reports.
In the opinion of management, all adjustments (which include normal recurring
adjustments except as disclosed herein) necessary to present a fair statement of
financial position as of April 30, 2002, results of operations for the three and
six months ended April 30, 2002 and cash flows and stockholders' equity for the
six months ended April 30, 2002 have been made. The results of operations for
the three and six months ended April 30, 2002 are not necessarily indicative of
the operating results for the full fiscal year or any future periods.
The entities resulting from the merger described above, considered accounting
subsidiaries of U.S. Rubber Reclaiming, Inc. (the accounting acquirer) and legal
subsidiaries of Obsidian Enterprises, Inc. (formerly Danzer) after the
Acquisition and Plan of Reorganization, are as follows:
U.S. Rubber Reclaiming, Inc. ("U.S. Rubber", the accounting acquirer), which is
engaged in reclaiming scrap butyl rubber into butyl reclaim for resale to
manufacturers of rubber products.
Obsidian Enterprises, Inc. (formerly Danzer, the legal acquirer), a holding
company.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
Danzer Industries, Inc. ("Danzer Industries"), which is principally engaged in
the design, manufacture and sale of truck bodies.
Pyramid Coach, Inc. ("Pyramid"), which is engaged in the leasing of coaches,
designed and fitted out for use for travel by country, rock bands and other
business enterprises, primarily on weekly to monthly leases. The coach leasing
segment also includes the assets, liabilities, equity and results of operations
of DW Leasing, LLC ("DW Leasing") and Obsidian Leasing Company, Inc. ("Obsidian
Leasing"), formed November 1, 2001. DW Leasing is controlled by individuals who
are also controlling shareholders of Obsidian Enterprises, Inc. and,
accordingly, Pyramid. DW Leasing and Obsidian Leasing also own the majority of
the coaches operated by Pyramid. All intercompany transactions are eliminated in
consolidation.
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, a wholly owned subsidiary of the Company. On November 1, 2001,
the Company completed the tax-free exchange contemplated by the Acquisition
Agreement of June 21, 2001, whereby all but seven coaches and the liabilities
thereon were transferred to Obsidian Leasing to operate this segment of business
previously under DW Leasing. However, as of April 30, 2002, the entities are
combined due to cross-guarantees associated with the debt on the seven coaches.
Champion Trailer, Inc. ("Champion") manufactures and sells transport trailers to
be used primarily in the auto racing industry.
United Expressline, Inc. ("United") manufactures and sells general use cargo
trailers and specialty trailers used in the racing industry and for other
special purposes.
Basis of Presentation:
The Company's April 30, 2002 consolidated financial statements have been
presented on the basis that it is a going concern which contemplates the
realization of assets and satisfaction of liabilities in the normal course of
business. The Company incurred a loss from operations for the ten months ended
October 31, 2001 of $2,149,000 and a net loss of $4,360,000, which included an
asset impairment charge of $2,305,000. In addition, the Company has incurred a
net loss of $2,423,000 for the six months ended April 30, 2002. The losses have
weakened the Company's financial condition and contributed to its failure to
meet certain financial covenants required by the lenders. As a result of these
covenant violations which either were not waived, were waived only through
November 2002, or were subject to amendments to credit agreements, $4,683,000 of
long-term debt has been reclassified and included in the current debt caption of
current liabilities as of April 30, 2002. A significant portion of the Company's
assets is pledged as collateral on these loans and foreclosure by a bank would
seriously impair the Company's existence. In addition, these losses and the
reclassification of long-term debt have contributed to a total deficit in
working capital of $9,567,000 at April 30, 2002.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
In view of these matters, realization of the assets and satisfaction of the
liabilities in the ordinary course of business is dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely basis, comply
with the terms of its debt financing agreements, obtain refinancing of certain
obligations, and continue to receive capital contributions from its majority
stockholder.
Management, as a part of its plan towards resolving these issues and generating
revenue and cash flow, has taken the actions described below during and
subsequent to the quarter ended April 30, 2002. Although management believes
these actions will improve operations and liquidity, there can be no assurance
that such actions will sufficiently improve operations or liquidity, or occur on
terms acceptable to the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" elsewhere in this filing for
further discussions of the liquidity issues facing the Company and the risk
factors associated with these issues as well as management's plans for
addressing them.
o On March 7, 2002, the Company completed a series of transactions with the
subordinated lender at U.S. Rubber resulting in an increase in equity and a
decrease in liabilities of $1,463,000. The subordinated lender received
30,000 shares of Series C convertible preferred stock in this transaction.
o On March 20, 2002, DC Investments, LLC ("DC Investments"), an entity
controlled by the Company's Chairman, acquired all outstanding debt due to
the senior lender of Champion in the amount of $602,000 in a nonrecourse
assignment. Under the terms of the Company's agreement with DC Investments,
this amount has been reclassified as a long-term liability.
o On April 30, 2002, the Company converted $1,289,000 of debt and accrued
interest due to Obsidian Capital Partners, LP ("OCP"), majority owner of
the Company, to equity in exchange for 402,906 shares of Series C
convertible preferred stock.
o On April 30, 2002, the Company converted $596,000 of debt and accrued
interest due to Fair Holdings, Inc. ("Fair"), an entity controlled by the
Company's Chairman, to equity in exchange for 186,324 shares of Series C
convertible preferred stock.
The above transactions are estimated to reduce interest costs by approximately
$345,000 on an annual basis.
o The Board of Directors has authorized the Chairman of the Board to explore
various options regarding the operations at Champion. Options include
divestiture, restructuring of operations or closing the facility. As these
options are considered, management has taken steps to further reduce
overhead through cost reductions and reduction in the space currently under
lease.
o The Company is undertaking to refinance the coaches transferred from DW
Leasing to Obsidian Leasing with existing lenders and DC Investments.
Management anticipates that this will be concluded by the fourth fiscal
quarter of 2002.
o The Company is also pursuing refinancing of the outstanding bank debt at
U.S. Rubber that is due November 1, 2002. Management anticipates the
refinancing will be concluded by the third fiscal quarter of 2002.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
o OCP has entered into agreements related to the debt of U.S. Rubber and
United. Specifically, in the event of a default and in accordance with the
default provisions, Obsidian is obligated to make capital contributions to
these subsidiaries of $1,620,000 and $1,000,000, respectively. In addition,
OCP has committed to fund through the purchase of additional preferred
stock the costs of legal, accounting and related costs to complete the Plan
of Reorganization and the costs to meet regulatory requirements to allow
continued trading of Company stock by shareholders. Funding from OCP is
anticipated to occur during the third fiscal quarter and result in
additional cash of approximately $440,000 and conversion of approximately
$860,000 of advances from OCP to equity.
Significant Accounting Policies:
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is calculated
using the straight-line method over the estimated useful lives of the assets.
Effective February 1, 2002, the Company changed its estimate with regard to
depreciation of coaches owned by Obsidian Leasing and DW Leasing by establishing
a salvage value for the coaches of approximately 38% of original cost. The
depreciable lives of the coaches of fifteen years was not changed. This change
in estimate resulted in a reduction of depreciation for the quarter of
approximately $78,000.
Goodwill and Intangible Assets
The Company adopted the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of fiscal 2002. Accordingly,
effective with the November 1, 2001 adoption of Financial Accounting Standard
(FAS) No. 142, goodwill is no longer amortized but is instead subject to an
annual impairment test. The Company has not yet completed its transitional
impairment test in conjunction with the adoption of FAS 142. However, because
the vast majority of the goodwill recorded relates to recently completed
acquisitions, management does not believe that such goodwill is impaired.
However, until the transitional impairment test is completed, there can be no
assurance that such goodwill is not impaired. The Company expects to complete
the transitional impairment test in the third quarter of fiscal 2002.
Earnings Per Share:
Basic per-share amounts are computed, generally, by dividing net income or loss
by the weighted-average number of common shares outstanding. Basic and diluted
weighted average common shares outstanding for 2002 and 2001 are the same
because the Company incurred losses for all periods presented. Therefore, the
inclusion of options, warrants and other common stock equivalents in the
calculation of diluted loss per share would have an antidilutive effect.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
In arriving at the weighted average number of common shares outstanding for
basic income (loss) per share, the Company's Series C Convertible Preferred
Stock, which has all the rights and privileges of the Company's common stock,
has been reflected as equivalent common shares. Therefore, for the three and six
months ended April 30, 2002, the 4,358,399 shares of Series C Convertible
Preferred Stock have been reflected, on a weighted average basis outstanding, as
common equivalent shares of 75,212,925 and 74,993,470, respectively. The
weighted average common shares outstanding for the three and six months ended
April 30, 2001 reflects the 1,970,962 shares of Series C Convertible Preferred
Stock issued to the former stockholders of the companies acquired in the reverse
merger above, as if such shares had been converted into their equivalent number
of common shares of 39,419,240.
2. PRO FORMA INFORMATION
The unaudited condensed consolidated results of operations shown below are
presented on a pro forma basis and represent the results of Obsidian
Enterprises, Inc. (formerly Danzer), Danzer Industries, U.S. Rubber, United,
Champion, Pyramid, Obsidian Leasing and DW Leasing on a combined basis. The
schedule below includes all necessary pro forma adjustments for all entities for
the periods shown.
Three Months Ended Six Months Ended
April 30, April 30,
2001 2001
----------------------------------------
Net sales $ 17,578 $ 31,577
Net loss $ (341) $ (1,223)
Net loss per share - basic and diluted $ (.01) $ (.03)
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 is it necessarily
indicative of future operating results.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. INVENTORIES
Inventories are stated at the lower-of-cost (first-in, first-out method) or
market and are comprised of the following components (in thousands):
April 30, October 31,
2002 2001
------------------ -------------------
Raw materials $ 3,818 $ 3,734
Work-in-process 977 1,471
Finished goods 2,173 2,322
Valuation reserve (566) (833)
------------------ -------------------
Total $ 6,402 $ 6,694
================== ===================
4. FINANCING ARRANGEMENTS AND STOCKHOLDERS' EQUITY
U.S. Rubber
On March 7, 2002, the Company completed a series of transactions with U.S.
Rubber, SerVaas, Inc. ("SerVaas"), the former owner of U.S. Rubber, and DC
Investments, an entity controlled by the Company's Chairman, whereby certain
existing debt of U.S. Rubber was acquired from SerVaas. DC Investments acquired
the SerVaas interest in the debt agreement with a remaining balance of $730,000,
plus accrued interest of $123,000, for $700,000. U.S. Rubber then acquired this
agreement in exchange for a new note payable to DC Investments with a face
amount of $700,000. The note requires monthly interest payments at 15% per annum
with the principal payable March 2007. The note is subordinate to debt
outstanding with the senior lender of U.S. Rubber.
The Company also acquired the SerVaas interest in the U.S. Rubber $1,750,000
subordinated note payable, plus accrued interest of $255,000, in exchange for
$700,000 and 30,000 shares of Series C convertible preferred stock. The cash
portion of the transaction was from the proceeds of a note payable in the amount
of $700,000 issued to DC Investments. The note requires monthly interest
payments at 15% per annum with the principal payable March 2007.
No gain or loss was recognized in the transactions because of the involvement of
related parties. The transaction resulted in an increase in equity of the
Company of $1,463,000 and an annual interest savings of approximately $145,000.
During February 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 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.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
4. FINANCING ARRANGEMENTS AND STOCKHOLDERS' EQUITY, CONTINUED
Obsidian Enterprises
On April 30, 2002, the Company converted $1,289,000 of debt and accrued interest
owed to OCP and $596,000 of debt and accrued interest owed to Fair Holdings,
Inc. ("Fair"), an entity controlled by the Company's Chairman, to equity through
the issuance to OCP and Fair of a total of 589,230 shares of Series C
Convertible Preferred Stock which are convertible into an aggregate of
11,784,600 shares of common stock of the Company. The transaction resulted in an
increase in equity of the Company of $1,885,000 and an annual interest savings
of approximately $200,000.
The Company and DW Leasing converted amounts owed to DC Investments to notes
payable. The notes bear interest at 10% payable quarterly, with principal due in
one installment in March 2005. The total advances converted to notes payable to
DC Investments were $1,085,000 and $210,000 for Obsidian Enterprises and DW
Leasing, respectively.
Champion
Champion was in technical default of its debt due its subordinated lender as of
April 30, 2002 and in technical default of debt due its senior and subordinated
lender at October 31, 2001. The Company has not been able to obtain a waiver
from the subordinated lender. Accordingly, debt in the amount of $1,250,000 has
been classified as current as of April 30, 2002. At October 31, 2001, $2,612,000
of debt was classified as current. On March 20, 2002, DC Investments acquired
the senior lender's loan to Champion in the amount of $602,000 in a nonrecourse
assignment of the debt.
DW Leasing
DW Leasing was in technical default of certain loan covenants with two of its
primary lenders. The Company has obtained bank waivers from one of these lenders
through November 2002 for a portion of this amount. Amounts classified as
current as of April 30, 2002 and October 31, 2001 due to defaults that have not
been waived are $600,000 and $639,000, respectively.
Danzer Industries
Danzer Industries was in technical default of certain loan covenants in its
credit agreement. As a result of these violations, long-term debt in the amount
of $883,000 is classified as current as of April 30, 2002.
The Company was in violation of three negative covenants with Renaissance US
Growth & Income Trust PLC and FBSUS Special Opportunities Trust PLC, the holders
of debentures that completed the financing of United. The Company has received a
waiver of these violations through November 1, 2002.
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.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
5. BUSINESS SEGMENT DATA AND GEOGRAPHIC DATA
The Company operates in three industry segments comprised of trailer and related
transportation equipment manufacturing (trailer manufacturing); coach leasing;
and butyl rubber reclaiming. All sales are in North and South America primarily
in the United States, Canada and Brazil. Selected information by segment follows
(in thousands):
Three Months Ended April 30, 2002
-------------------------------------------------------------------------------
Trailer Butyl Rubber
Manufacturing Coach Leasing Reclaiming Total
-------------------------------------------------------------------------------
Sales:
Domestic $ 12,878 $ 1,511 $ 2,383 $ 16,772
Foreign -- -- 201 201
-------------------------------------------------------------------------------
Total $ 12,878 $ 1,511 $ 2,584 $ 16,973
Cost of goods sold $ 11,315 $ 766 $ 2,353 $ 14,434
Income (loss) before taxes $ (651) $ (20) $ (255) $ (926)
Identifiable assets $ 24,636 $ 12,518 $ 10,067 $ 47,221
Depreciation and $ 227 $ 165 $ 253 $ 645
amortization expense
Three Months Ended April 30, 2001
-------------------------------------------------------------------------------
Trailer Butyl Rubber
Manufacturing Coach Leasing Reclaiming Total
-------------------------------------------------------------------------------
Sales:
Domestic $ 1,246 $ 900 $ 2,955 $ 5,101
Foreign -- -- 159 159
-------------------------------------------------------------------------------
Total $ 1,246 $ 900 $ 3,114 $ 5,260
Cost of goods sold $ 1,100 $ 358 $ 2,745 $ 4,203
Loss before taxes $ (172) $ (365) $ (43) $ (580)
Identifiable assets $ 5,476 $ 10,747 $ 11,264 $ 27,487
Depreciation and $ 79 $ 227 $ 267 $ 573
amortization expense
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
5. BUSINESS SEGMENT DATA AND GEOGRAPHIC DATA, CONTINUED
Six Months Ended April 30, 2002
-------------------------------------------------------------------------------
Trailer Butyl Rubber
Manufacturing Coach Leasing Reclaiming Total
-------------------------------------------------------------------------------
Sales:
Domestic $ 22,128 $ 2,554 $ 4,462 $ 29,144
Foreign -- -- 312 312
-------------------------------------------------------------------------------
Total $ 22,128 $ 2,554 $ 4,774 $ 29,456
Cost of goods sold $ 19,722 $ 1,339 $ 4,399 $ 25,460
Loss before taxes $ (1,584) $ (387) $ (607) $ (2,578)
Identifiable assets $ 24,636 $ 12,518 $ 10,067 $ 47,221
Depreciation and $ 424 $ 410 $ 512 $ 1,346
amortization expense
Six Months Ended April 30, 2001
-------------------------------------------------------------------------------
Trailer Butyl Rubber
Manufacturing Coach Leasing Reclaiming Total
-------------------------------------------------------------------------------
Sales:
Domestic $ 1,364 $ 1,179 $ 6,195 $ 8,738
Foreign -- -- 265 265
-------------------------------------------------------------------------------
Total $ 1,364 $ 1,179 $ 6,460 $ 9,003
Cost of goods sold $ 1,183 $ 447 $ 5,874 $ 7,504
Loss before taxes $ (309) $ (531) $ (107) $ (947)
Identifiable assets $ 5,476 $ 10,747 $ 11,264 $ 27,487
Depreciation and $ 108 $ 302 $ 449 $ 859
amortization expense
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
5. BUSINESS SEGMENT DATA AND GEOGRAPHIC DATA, CONTINUED
Obsidian Enterprises, Inc. (legal parent) allocates selling, general and
administrative expenses to the respective companies primarily based on a
percentage of sales. For the three months and six months ended April 30, 2002,
allocated corporate expenses by segment were as follows:
Three Months Ended Six Months Ended
April 30, April 30,
2002 2002
----------------------------------------
Trailer manufacturing $ 476 $ 694
Coach leasing 56 81
Butyl rubber reclaiming 95 146
----------------------------------------
$ 627 $ 921
========================================
Included in the above expenses are professional fees related to regulatory
filings and historical audits and other related expenses which will be
nonrecurring costs. Total nonrecurring costs for the three months and six months
ended April 30, 2002 were approximately $400,000 and $600,000, respectively.
6. 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):
April 30, October 31,
2002 2001
------------------ ------------------
Balance sheet:
Current assets:
Accounts receivable, DC Investments $ 5 $ --
Accounts receivable, Obsidian Capital Company (OCC) 4 217
Accounts receivable, Obsidian Capital Partners (OCP) 10 --
Accounts receivable, stockholders 9 --
Long-term portion:
Investment banking fees, purchase accounting -- 1,960
------------------ ------------------
Total assets $ 28 $ 2,177
================== ==================
Current liabilities:
Accounts payable, DC Investments $ 15 $ --
Accounts payable, Obsidian Capital Company 263 625
Accounts payable, Obsidian Capital Partners 5 --
Accounts payable, stockholders 382 300
Long-term portion:
Accounts payable, DC Investments 338 --
Accounts payable, Obsidian Capital Partners 860 2,170
------------------ ------------------
Total liabilities $ 1,863 $ 3,095
================== ==================
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
6. RELATED PARTIES, CONTINUED
Three Months Ended Six Months Ended
-------------------------------------- -------------------------------------
April 30, 2002 April 30, 2001 April 30, 2002 April 30, 2001
------------------- ------------------ ------------------ ------------------
Income statement:
Interest expense, DC Investments $ 104 $ -- $ 104 $ --
=================== ==================================== ==================
Interest expense, Obsidian Capital $ 58 $ -- $ 58 $ --
Partners
=================== ================== ================== ==================
Rent expense, Obsidian Capital Company $ 10 $ -- $ 25 $ --
=================== ================== ================== ==================
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 April 30, 2002 or October 31, 2001,
respectively. Amounts classified as long term represent amounts not currently
due, amounts that are expected to be converted to equity subsequent to April 30,
2002 and October 31, 2001, respectively, or amounts converted to long-term debt
subsequent to April 30, 2002.
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. Also see Note 4 for details regarding
related-party transactions converting debt to equity.
7. COMMITMENTS AND CONTINGENCIES
The Company has a purchase commitment to purchase or lease three (3) coaches
within 60 days of completion. The cost of these coaches will approximate $1.35
million. This transaction was initially expected to close in the second quarter
of calendar 2002 and has been extended until financing for these coaches has
been obtained.
On April 29, 2002, the Company received notice of a lawsuit filed by the
subordinated lender of Champion seeking payment of a $1,250,000 note payable
plus accrued interest from Champion or Obsidian Enterprises under a guarantee
agreement. An answer of general denial on behalf of Champion has been filed with
the court. In addition, a special appearance with respect to jurisdiction has
been filed with the court on behalf of Obsidian Enterprises.
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.
8. SUBSEQUENT EVENTS
On May 16, 2002, one of the production facilities of U.S. Rubber was damaged by
a fire at an adjacent property. The primary production facility was not damaged,
and the Company is able to produce and ship product although at a reduced rate.
The Company is currently having discussions with its insurance carrier regarding
potential claims for damaged equipment and facilities and business interruption.
Total losses and any potential recovery are not currently known.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
IMPORTANT NOTE ABOUT FORWARD-LOOKING STATEMENTS.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. The Company and its representatives may from time to
time make written or oral forward-looking statements, including statements
included in or incorporated by reference into this Quarterly Report on Form 10-Q
and the Company's other filings made with the Securities and Exchange
Commission. These forward-looking statements are based on management's views and
assumptions and involve risks, uncertainties and other important factors, some
of which may be beyond the control of the Company, that could cause actual
results to differ materially from those expressed or implied in the
forward-looking statements. Factors that might cause or contribute to such
differences include, but are not limited to, those discussed in this Item 2.,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, in this Form 10-Q. Readers should carefully review the risks
described in this and other documents that the Company files from time to time
with the Securities and Exchange Commission. The forward-looking statements
speak only as of the date that they are made and the Company undertakes no
obligation to update or revise any of the forward-looking statements.
OVERVIEW
The reverse merger transactions, completed in June and July 2001, have been
treated for accounting purposes as an acquisition by U.S. Rubber. For this
reason, the results for the six-month period April 30, 2001 represent only the
financial results of U.S. Rubber for six months, Champion Trailer for four
months, and the Pyramid Group for four months based on the January 1, 2001
acquisition date. Danzer Corporation and its wholly owned subsidiary, Danzer
Industries, and United Expressline were acquired June 21, 2001 and July 31,
2001, respectively, and, accordingly, are not included in the results of
operations for the three and six months ended April 30, 2001. Since the Company
acquired a substantial portion of its operations on or after January 1, 2001 and
was not previously a registrant, management's discussion and analysis does not
include a comparison of 2001 operating results with the three-month and
six-month periods ended April 30, 2000.
The financial condition at April 30, 2002 and the results of operations for the
three and six months ended April 30, 2002, include the operations of Obsidian
Enterprises, U.S. Rubber, Champion Trailer, Pyramid Coach, Obsidian Leasing, DW
Leasing, United Expressline, and Danzer Industries.
RESULTS OF OPERATIONS
The Company's overall operating results and financial condition improved during
the second quarter of 2002 compared to the first quarter of 2002 and can be
characterized by revenue increases in each segment of its business, the shift to
positive EBITDA in each business segment, reduced operating losses and positive
stockholders' equity. These results are indicative of business seasonality in
the trailer and related transportation equipment manufacturing and coach leasing
segments, and increasing demand in the butyl rubber segment, as well as
management's efforts to concentrate on generating revenue and earnings, managing
cash, and steadily addressing the debt/equity structure while completing the
integration of acquired subsidiaries (mostly nonaudited privately held entities)
into an effective publicly traded operating company with consistent reporting
systems. Management has no prior history in effecting such an integration of
subsidiaries under a holding company, and its ability to successfully accomplish
this task will have a substantial impact on long-term Company revenues and
profits. During this quarter, the Company hired a new Chief Financial Officer to
direct many of these functions including cash management, debt consolidation,
more timely reporting, and development of personnel incentive programs, and to
help integrate the acquired subsidiaries into an effective operating company.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
The Company operates in three industry segments, comprised of trailer and
related transportation equipment manufacturing, butyl rubber reclaiming, and
coach leasing. Trailer and related transportation equipment manufacturing
includes the operations of United, Danzer Industries, and Champion. Butyl rubber
reclaiming includes the operations of U.S. Rubber and coach leasing includes the
operations of Pyramid, DW Leasing, and Obsidian Leasing.
The following is a discussion of the major elements impacting the Company's
operating results by segment for the three-month and six-month periods ended
April 30, 2002 compared to the three-month and six-month periods ended April 30,
2001. The comments that follow should be read in conjunction with the Company's
condensed consolidated financial statements and related notes contained in this
Form 10-Q.
TRAILER AND RELATED TRANSPORTATION EQUIPMENT MANUFACTURING
The following table shows sales, cost of sales and gross profit for this segment
for the periods indicated (in thousands):
Three Months Ended Six Months Ended
------------------------------------------ ------------------------------------------
April 30, 2002 April 30, 2001 April 30, 2002 April 30, 2001
--------------------- -------------------- --------------------- --------------------
Net Sales $ 12,878 $ 1,246 $ 22,128 $ 1,364
Cost of Sales 11,315 1,100 19,722 1,183
--------------------- -------------------- --------------------- --------------------
Gross Profit $ 1,563 $ 146 $ 2,406 $ 181
===================== ==================== ===================== ====================
Gross Profit % 12.1% 11.7% 10.9% 13.3%
Three Months Ended April 30, 2002 Compared to The Three Months Ended April 30,
2001 And Six Months Ended April 30, 2002 Compared to The Six Months Ended April
30, 2001
Operating results between these periods are not comparable due to the
acquisition of Danzer and United in June and July of 2001, respectively, and the
acquisition of Champion in January 2001. During the three months and six months
ended April 30, 2002, this segment has seen increasing sales in cargo trailers,
primarily in the three months ended April 30, 2002, due to additional demand
driven by marketing efforts, as well as the seasonal nature of the product.
These increases have been partially offset by a continued reduction in the
demand for truck bodies and slow sales volume in the transport specialty trailer
product line.
The primary reason for truck body sales at levels below historic amounts is the
continued depressed condition of the telecommunications industry that
historically purchased a significant volume of this product line. Management
anticipates that the overall general economic conditions and the economic state
of the telecommunications industry will continue to adversely impact sales of
truck bodies during 2002. Management is investigating the possibility of
integrating the production of cargo trailers into its truck body production
facility as a means to increase production capacity of the cargo trailer product
and absorb excess capacity at this facility.
Gross profit for the three months and six months ended April 30, 2002 was
impacted negatively due to reduced volume in the truck body and specialty
transport trailer lines partially offset by reductions in personnel at these
facilities and increased volume in the cargo trailer product line.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
BUTYL RUBBER RECLAIMING
The following table shows sales, cost of sales and gross profit for this segment
for the periods indicated (in thousands):
Three Months Ended Six Months Ended
------------------------------------------ ------------------------------------------
April 30, 2002 April 30, 2001 April 30, 2002 April 30, 2001
--------------------- -------------------- --------------------- --------------------
Net Sales $ 2,584 $ 3,114 $ 4,774 $ 6,460
Cost of Sales 2,353 2,745 4,399 5,874
--------------------- -------------------- --------------------- --------------------
Gross Profit $ 231 $ 369 $ 375 $ 586
===================== ==================== ===================== ====================
Gross Profit % 8.9% 11.9% 7.9% 9.1%
Three Months Ended April 30, 2002 Compared to
The Three Months Ended April 30, 2001
Net sales in this segment for the three months ended April 30, 2002 as compared
to the comparable three-month period ended April 30, 2001 decreased 17.0% in the
amount of $530. While a negative trend, sales did improve over the first fiscal
quarter 2002 as demand has begun to increase. The reduction in sales is due
primarily to reduced sales to tire manufacturers and pipeline mastic
manufacturers.
The Company's tire manufacturing customers built up large inventories during the
widespread tire recalls in 2001 in anticipation of huge demand under such
recalls. The number of tire orders submitted by consumers to be replaced was
substantially lower than anticipated, and as a result, tire manufacturer orders
were lower than the previous year, producing a substantial decrease in reclaimed
butyl demand. The Company has seen an increase in sales beginning in January
2002 which may indicate a return to historic inventory levels at its tire
manufacturer customers, but does not anticipate a return to historic levels of
demand for reclaimed butyl rubber by tire manufacturers prior to the fourth
fiscal quarter of 2002.
The demand for pipeline mastic wraps produced with reclaimed butyl rubber
supplied by the Company also fell dramatically beginning in October 2001 as a
result of the decline in the price of crude oil in late 2001 which caused a
decline in new oil exploration. If the price of crude oil begins to climb again,
the Company believes the demand for those uses will also return to historic
levels.
Gross profit percentage fell from 11.9% in the three months ended April 30, 2001
to 8.9% for the three months ended April 30, 2002 as a result of the decreased
volume. The reduction was partially offset by the refurbishment of the 12"
extruder, a primary piece of operating equipment, and the use of butyl rubber
pad scrap in the production process that have reduced operating costs.
Six Months Ended April 30, 2002 Compared to
The Six Months Ended April 30, 2001
Net sales in this segment for the six months ended April 30, 2002 as compared to
the comparable six-month period ended April 30, 2001 decreased 26.1% in the
amount of $1,686. The reduction in sales is due primarily to reduced sales to
tire manufacturers and pipeline mastic manufacturers as described above.
Gross profit percentage for the six months ended April 30, 2002 was 7.9%
compared to 9.1% for the six months ended April 30, 2001 as a result of the
decreased volume. Gross profit in the six months ended April 30, 2001 was also
below historical levels as the result of an inventory obsolescence charge
recorded in December 2001. The reduction in gross profit for 2002 was partially
offset by the refurbishment of the 12" extruder, a primary piece of operating
equipment, and the use of butyl rubber pad scrap in the production process that
have reduced operating costs.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
Management believes that the use of butyl rubber pad scrap will help control the
cost of raw materials during the remainder of 2002 and the Company is also
exploring the ability to raise prices in late 2002.
On March 7, 2002, the Company completed a series of transactions with U.S.
Rubber, SerVaas, the former owner of U.S. Rubber, and DC Investments whereby
certain existing debt of U.S. Rubber was acquired from SerVaas. DC Investments
acquired the SerVaas interest in the debt agreement with a remaining balance of
$730,000, plus accrued interest of $123,000, for $700,000. U.S. Rubber then
acquired the debt agreement from DC Investments in exchange for a new $700,000
note payable to DC Investments. The note requires monthly interest payments at
15% per annum with the principal payable March 2007. The note is subordinate to
debt outstanding with the senior lender of U.S. Rubber.
The Company also acquired the SerVaas interest in the U.S. Rubber $1,750,000
subordinated note payable, plus accrued interest of $255,000, in exchange for
$700,000 and 30,000 shares of Series C convertible preferred stock. The cash
portion of the transaction was from the proceeds of a $700,000 loan to the
Company by DC Investments. The loan requires monthly interest payments at 15%
per annum with the principal payable March 2007.
No gain or loss was recognized in the transactions due to involvement of related
parties. The transaction resulted in an increase in equity of the Company of
$1,463,548 and an net annual interest savings of approximately $145,000.
COACH LEASING
The following table shows sales, cost of sales and gross profit for this segment
for the periods indicated (in thousands):
Three Months Ended Six Months Ended
------------------------------------------ ------------------------------------------
April 30, 2002 April 30, 2001 April 30, 2002 April 30, 2001
--------------------- -------------------- --------------------- --------------------
Net Sales $ 1,511 $ 900 $ 2,554 $ 1,179
Cost of Sales 766 358 1,339 447
--------------------- -------------------- --------------------- --------------------
Gross Profit $ 745 $ 542 $ 1,215 $ 732
===================== ==================== ===================== ====================
Gross Profit % 49.3% 60.2% 47.5% 62.1%
Three Months Ended April 30, 2002 Compared to
The Three Months Ended April 30, 2001
Sales for the three months ended April 30, 2002 increased 67.9% in the amount of
$611 over the comparable three-month period ended April 30, 2001. The increase
in sales is attributable to an increase in the size of the coach fleet,
additional revenue from the increased use of employer coach drivers versus
independent contractors paid directly by the customer and due to increased
utilization of the fleet in 2002. Management believes the increased utilization
is a result of its marketing efforts to rock and roll, pop, touring Broadway
shows and corporate customers. These customers are in addition to the
traditional country and western performers who have historically been this
segment's primary customer base. In addition, this business is seasonal in
nature and historically is stronger in the spring, summer and fall months.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
Gross profit for this segment was 49.3% for the three months ended April 30,
2002 compared to 60.2% for the comparable three-month period ended April 30,
2001. The reduction is attributable to several factors. During the three-month
period ended April 30, 2002, additional coaches have been leased from unrelated
third parties to meet current demand. The additional lease cost has been
recorded as a component of cost of sales and represents an increase of
approximately 5% as a percentage of sales. This segment had no lease cost for
outside coaches in the comparable period of 2001. In addition, additional
drivers have been added as employees during 2002 adding approximately 7% as a
percentage of sales to the costs of direct wages and benefits for the quarter.
In the three month period ended April 30, 2001, a larger percentage of coach
drivers were independent contractors paid directly by the customer.
Six Months Ended April 30, 2002 Compared to
The Six Months Ended April 30, 2001
Results for the six months ended April 30, 2002 are not comparable to the
six-month period ended April 30, 2001, as this segment was acquired as of
January 1, 2001 and, therefore, includes only four months of operations for the
period ended April 30, 2001. Gross profit percentage is also not comparable for
the reasons stated above and also 2001 does not include the months of November
and December that are historically a slow period for this segment.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES
Selling, general and administrative expenses are higher for the three months
ended April 30, 2002 versus the three-month period ended April 30, 2001 due to
the operations added in 2002, as previously discussed.
In addition, selling, general and administrative expenses are higher for the
three month period ended April 30, 2002 than would be expected on an ongoing
basis. This is due primarily to increased administrative costs that were
necessary to continue the process of creating better subsidiary reporting, the
use of outside professionals for services in assisting in post acquisition
activities, the cost to obtain prior year audits to meet regulatory filing
requirements, and the cost of providing accounting and related services to
management, that will normally be performed by Company personnel on a going
forward basis. As a part of the postacquisition process, OCP has agreed to
provide capital to fund certain of the administrative expenses and convert the
amount to equity prior to the end of this fiscal year. As of April 30, 2002, OCP
has provided funding of approximately $860,000 of such expenses. Management
anticipates this amount will be converted to equity during the third fiscal
quarter of 2002 in exchange for issuance of Series C convertible preferred
stock. In addition, under the terms of the agreement with OCP, the Company
anticipates receiving an additional amount of approximately $440,000 during the
third fiscal quarter of 2002. This will also be converted to equity in exchange
for Series C convertible preferred stock.
INTEREST EXPENSE
The Company's interest expense remains a high percentage when calculated as a
percentage of net sales, as all acquisitions were made on a highly leveraged
basis. For the three-month period ended April 30, 2002, the percentage of
interest expense to net sales of 5.7% was comparable to the 5.7% for the Pro
Forma period ended April 30, 2001. This percentage is indicative of the efforts
made to improve the debt/equity structure of the Company.
INCOME TAX PROVISION
The income tax benefit for the six-month period ended April 30, 2002 increased
by $142,000 as compared to the six-month period ended April 30, 2001. The income
tax benefit is created primarily through operating loss carryforwards recognized
in the quarter to the extent they are available to offset the Company's net
deferred tax liability. Quarterly tax benefits are based on the estimated
effective tax rate for the full year.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES
Each of the subsidiaries of the Company have separate revolving credit
agreements and term loan borrowings through which the subsidiary finances its
operations together with cash generated from operations. The principal balances
of some of these loans reflect the fact that OCP, 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 has created liquidity issues for the Company and the
stringent financial covenants that are common for this type of debt increase the
probability that the Company's subsidiaries may from time to time be in
technical default under these loans. These risks are mitigated, in part, for the
Company's United and U.S. Rubber subsidiaries by the right described below under
"Guarantees of OCP." They are also mitigated by the actions taken with Champion,
U.S. Rubber and the refinancing efforts underway with U.S. Rubber and Pyramid.
The Company and certain 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 subordinated debt, Danzer Line of Credit and Term
Note 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 April 30, 2002 by $9,567,000 in part because approximately 41%
of the Company's debt is classified as a current liability.
The Company has been addressing these liquidity and working capital issues in a
number of ways. Management anticipates that the following steps started in early
2002 and currently in process will improve the Company's working capital,
strengthen its equity and place the Company in a position to successfully
address its liquidity issues. These steps include:
o The transactions described below under "Partners Equity Transactions" which
converts approximately $2,689,000 of long-term liabilities to equity. Of
this amount, $1,289,000 was converted to Series C convertible preferred
stock during the second fiscal quarter of 2002.
o The actions taken with respect to Champion described below under "Champion
Transaction" which would improve the Company's overall equity and working
capital position.
o The transactions described below under "Refinancing Activities" which
management anticipates will reduce the Company's interest costs and
decrease the proportion of debt which has been reclassified as a current
liability.
While there can be no assurance that these transactions will continue to occur
as projected, the transactions that have taken place are consistent with the
plans delineated in previously issued reports. It should be noted that even if
these transactions do occur, there can be no assurance that they will
sufficiently address the Company's liquidity issues. Management will continue to
address the liquidity concerns as well as consider any additional actions if the
contemplated transactions either do not occur or are insufficient.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
FINANCIAL COVENANT WAIVERS
The Company has reached agreements with certain of its lenders to waive
financial covenant defaults under the following loans:
o Management has completed discussions with Bank One in respect of the
violations by U.S. Rubber of the negative covenants of (i) fixed charge
coverage ratio and (ii) funded debt to EBITDA ratio. Management has
received a waiver of these violations and an amendment of the Credit
Agreement which extends it through November 1, 2002 when the entire debt is
due. The Company is currently pursuing refinancing of this debt.
o Pyramid is a guarantor of DW Leasing's debt to Regions Bank, Nashville,
Tennessee. DW Leasing and Pyramid have been in violation of the Funded Debt
to EBITDA ratio in the Regions Bank Credit Facility since the inception of
the loan. This is due to the fact that DW Leasing acquired eight additional
new luxury coaches, in highly leveraged transactions. At the time of the
Acquisition, Regions Bank granted a waiver of this violation. To date, the
covenant has not been rewritten. Regions Bank has waived the violation as
of October 31, 2001. However, since the Company continues to be in
violation of this covenant, $600,000 of long-term debt due Regions Bank has
been reclassified as a current liability.
o The Company was in violation of three negative covenants with Renaissance
US Growth & Income Trust PLC and FBSUS Special Opportunities Trust PLC, the
holders of debentures that completed the financing of United. The Company
has received a waiver of these violations through November 1, 2002.
o Danzer Industries was notified by letter dated May 28, 2002 that it was in
technical default of its revolving note and term note due to nonreceipt of
certain documentation and noncompliance with the debt service ratio. The
Company is endeavoring to provide the appropriate documentation and resolve
the compliance requirement. In addition, the Company's line of credit with
an outstanding balance of $725,000 expired March 31, 2002. The line of
credit has been extended based on a verbal agreement with the bank while
the covenant violations are addressed. As of April 30, 2002, $883,000 of
long-term debt related to these obligations has been reclassified as a
current liability due to these violations.
o Champion remains in default of its subordinated debt agreement in the
amount of $1,250,000, which has been classified as a current liability due
to the default. On April 29, 2002, the Company received notice of a lawsuit
filed by the subordinated lender seeking payment of the $1,250,000 note
payable plus accrued interest from Champion or Obsidian Enterprises under a
guarantee agreement. An answer of general denial on behalf of Champion has
been filed with the court. In addition, a special appearance with respect
to jurisdiction has been filed with the court on behalf of Obsidian
Enterprises. DC Investments, in a nonrecourse assignment, has purchased the
outstanding senior debt from Bank One on March 20, 2002. (See Champion
Transactions below.)
FUNDS AVAILABILITY
On a consolidated basis, as of April 30, 2002, the Company had approximately
$267,000 of cash and cash equivalents. Danzer Industries, U.S. Rubber and United
each have revolving credit lines available for working capital at each
individual entity. Borrowings under the credit facilities are available to the
lesser of the maximum amount or the borrowing base as defined in the credit
agreement. At April 30, 2002, Danzer Industries, U.S. Rubber, and United had
additional current availability of $233,000, $140,000, and $560,000,
respectively. Maximum additional amounts available under these credit lines if
supported by their individual borrowing base are approximately $42,000,
$817,000, and $177,000 for Danzer Industries, U.S. Rubber, and United,
respectively.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
The Company generated net cash flow of $18,000 from operations during the
quarter ended April 30, 2002. While cash flow generated from operations remains
negative for the six months ended April 30, 2002, the Company expects operating
cash flow to be positive during the last half of the fiscal year.
REFINANCING ACTIVITIES
Management is in the process of refinancing certain 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 during the third
fiscal quarter.
o The Company expects in the ordinary course of business to obtain an
extension or annual renewal of the term note on the United revolving line
of credit with First Indiana Bank.
o The Company is undertaking to refinance the coaches transferred from DW
Leasing to Obsidian Leasing with DC Investments and its various existing
lenders. Management anticipates that this will be concluded during the
fourth fiscal quarter.
PARTNERS EQUITY TRANSACTIONS
OCP, 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 OCP.
Such amounts expended through April 30, 2002 approximated $1,300,000. As of
April 30, 2002, OCP has advanced approximately $860,000 to the Company for these
expenses. Management anticipates receiving an additional amount of approximately
$440,000 during the third fiscal quarter of 2002. Upon receipt, the Company and
OCP plan to convert these amounts to equity in exchange for issuance to OCP of
Series C convertible preferred stock.
OCP converted $1,289,000 of notes payable and accrued interest from OCP to the
Company to 402,906 shares of Series C convertible preferred stock of the
Company.
GUARANTEES OF OCP
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 or United were to
declare a default. In either of those events, 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.
These payments, if any, would be applied directly to reduce the respective
subsidiary's debt obligations to the lender.
CHAMPION TRANSACTIONS
The Board of Directors has authorized the Chairman of the Board of the Company
to explore various options to divest Champion Trailer or, at a minimum,
restructure this component of the business. As a result, DC Investments
negotiated the purchase of the loans of Bank One to Champion.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
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 through January 31, 2002. Markpoint has
informed Champion that it would not grant waiver of this violation in the
future. The Markpoint debt has been classified as a current liability due to
this violation. Subsequent to DC Investments purchasing the Bank One debt in a
nonrecourse assignment, Markpoint filed a lawsuit in Texas state court seeking
payment in full for their subordinated debt.
CASH FLOWS (EBITDA)
A summary of our contractual cash obligations for the fiscal years ending 2002
through 2005 and 2006 and thereafter at April 30, 2002 is as follows:
2006 and
Contractual Obligations Total 2002 2003 2004 2005 Thereafter
------------ ------------- ------------ ------------ ------------ ------------
Long-term debt, with covenant
violations and classified as current $2,733,000 $2,733,000 $ -- $ -- $ -- $ --
Long-term debt, and all debt service
interest payments 37,932,000 5,351,000 6,433,000 3,783,000 8,599,000 13,766,000
Operating leases 1,854,000 727,000 980,000 67,000 32,000 48,000
Purchase agreement for equipment 1,350,000 1,350,000 -- -- -- --
------------ ------------- ------------ ------------ ------------ ------------
Total contractual cash obligations $43,869,000 $10,161,000 $7,413,000 $3,850,000 $8,631,000 $13,814,000
============ ============= ============ ============ ============ ============
Cash flow and liquidity are discussed further below, and the footnotes to our
financial statements discuss cash flow, liquidity and the current classification
of debt due to loan covenant violations.
We also have a commercial commitment as described below:
Other Commercial Commitment Total Amount Committed Outstanding at April 30, Date of Expiration
2002
------------------------------- ---------------------------- ---------------------------- ----------------------------
Line of credit 1,000,000 725,000 March 31, 2002*
Line of credit 3,500,000 2,763,000 July 1, 2002
Line of credit 3,000,000 2,043,000 November 1, 2002
*extended by verbal agreement
The Company's net cash used in operations for the six months ended April 30,
2002 was $322,000. This is comprised of a net loss of $2,423,000, decrease in
other liabilities of $95,000, and increases in accounts receivable of $659,000,
offset by noncash depreciation and amortization of $1,346,000, decreases in
inventories of $292,000, decreases in prepaid expenses and other assets of
$341,000, increases in accrued expenses and customer deposits of $183,000, and
increases in accounts payable of $693,000.
Net cash flow provided from financing activities for the six months ended April
30, 2002 was $454,000. This is comprised of borrowings of long-term debt and net
borrowings of short-term debt of $401,000 and borrowings from related parties of
$1,329,000, offset by principal repayments of long-term debt of $1,276,000.
Cash flow was used in investing activities for the six months ended April 30,
2002 of $394,000. This is comprised primarily of purchases of property and
equipment.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
The total decrease in cash is summarized as follows:
Six Months Ended
--------------------------------------
April 30, April 30,
2002 2001
------------------ -------------------
Net cash used in operations $ (322) $ 405
Net cash used in investing activities (394) (6,100)
Net cash provided by financing
activities 454 5,361
------------------ -------------------
Decrease in cash and cash equivalents $ (262) $ (334)
================== ===================
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:
Three Months Ended April 30, 2002
(in thousands)
------------------------------------------------------------------------
Net
Interest Income Depreciation Income
EBITDA Expense Taxes & Amortization (Loss)
------------ ------------ ----------- -------------------- -------------
Trailer and related transportation
equipment manufacturing $ 9 $ 433 $ 57 $ 227 $ (708)
Butyl rubber reclaiming 150 152 (57) 253 (198)
Coach leasing 522 377 -- 165 (20)
------------ ------------ ----------- -------------------- -------------
Total Company $ 681 $ 962 $ -- $ 645 $ (926)
============ ============ =========== ==================== =============
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
Three Months Ended April 30, 2001
(in thousands)
------------------------------------------------------------------------
Net
Interest Income Depreciation Income
EBITDA Expense Taxes & Amortization (Loss)
------------ ------------ ----------- -------------------- -------------
Trailer and related transportation
equipment manufacturing $ 1 $ 94 $ -- $ 79 $ (172)
Butyl rubber reclaiming 427 203 (1) 267 (42)
Coach leasing 236 374 -- 227 (365)
------------ ------------ ----------- -------------------- -------------
Total Company $ 664 $ 671 $ (1) $ 573 $ (579)
============ ============ =========== ==================== =============
Six Months Ended April 30, 2002
(in thousands)
------------------------------------------------------------------------
Net
Interest Income Depreciation Income
EBITDA Expense Taxes & Amortization (Loss)
------------ ------------ ----------- -------------------- -------------
Trailer and related transportation
equipment manufacturing $ (367) $ 793 $ 11 $ 424 $ (1,595)
Butyl rubber reclaiming 233 328 (166) 512 (441)
Coach leasing 757 734 -- 410 (387)
------------ ------------ ----------- -------------------- -------------
Total Company $ 623 $ 1,855 $ (155) $ 1,346 $ (2,423)
============ ============ =========== ==================== =============
Six Months Ended April 30, 2001
(in thousands)
------------------------------------------------------------------------
Net
Interest Income Depreciation Income
EBITDA Expense Taxes & Amortization (Loss)
------------ ------------ ----------- -------------------- -------------
Trailer and related transportation
equipment manufacturing $ (72) $ 129 $ -- $ 108 $ (309)
Butyl rubber reclaiming 619 277 (13) 449 (94)
Coach leasing 253 482 -- 302 (531)
------------ ------------ ----------- -------------------- -------------
Total Company $ 800 $ 888 $ (13) $ 859 $ (934)
============ ============ =========== ==================== =============
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
Obsidian Enterprises, Inc. (legal parent) allocates selling, general and
administrative expenses to the respective companies primarily based on a
percentage of sales. Amounts allocated by segment are as follows:
Three Months Ended Six Months Ended
April 30, April 30,
2002 2002
----------------------------------------
Trailer manufacturing $ 476 $ 694
Butyl rubber reclaiming 95 146
Coach leasing 56 81
----------------------------------------
Total $ 627 $ 921
========================================
EBITDA by segment, exclusive of the allocation of the above selling, general and
administrative expenses, is as follows:
Three Months Ended Six Months Ended
April 30, April 30,
2002 2002
----------------------------------------
Trailer manufacturing $ 485 $ 327
Butyl rubber reclaiming 245 379
Coach leasing 578 838
----------------------------------------
Total $ 1,308 $ 1,544
========================================
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are summarized in the footnotes to our
financial statements. Some of the most critical policies are also discussed
below.
As a matter of policy, we review our major assets for impairment. Our major
operating assets are accounts receivable, inventory, intangible assets and
property and equipment. We have not experienced significant bad debts expense
and our reserve for doubtful accounts of $70,000 should be adequate for any
exposure to loss in our April 30, 2002 accounts receivable. We have also
established reserves for slow-moving and obsolete inventories and believe the
reserve of $566,000 is adequate. We depreciate our property and equipment and
amortize intangible assets (except for goodwill) over their estimated useful
lives. We have identified items that are impaired and the operating results for
the ten-month period ended October 31, 2001 included a goodwill impairment
charge of $2,305,000. There are no impairment charges in the six-month period
ended April 30, 2002.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to interest rate changes. See the
discussion of market risk in Management's Discussion and Analysis of Financial
Condition and Results of Operations in Item 2, which discussion is incorporated
by reference herein.
PART II--OTHER INFORMATION
Item 1. Legal Proceedings
On April 29, 2002, Markpoint Equity Fund J.V. ("Markpoint"), a Texas joint
venture for which The Markpoint Company serves as Managing Venturer, filed an
action in the Texas District Court, Dallas County seeking payment of $1,250,000
owed by Champion under the subordinated credit facility described above in
Management's Discussion and Analysis of Financial Condition and Results of
Operation under the caption "Champion Transactions."
Item 2. Changes in Securities and Use of Proceeds.
On March 7, 2002, the Company issued 30,000 shares of the Company's Series C
convertible preferred stock and paid $700,000 to SerVaas, the former owner of
U.S. Rubber, to obtain the SerVaas interest in a U.S. Rubber $1,750,000
subordinated note. This transaction is described in more detail above in Note 4
to the Condensed Consolidated Financial Statements under the caption "U.S.
Rubber," which description is incorporated herein by reference.
On April 30, 2002, the Company issued 402,906 shares of Series C convertible
preferred stock to OCP in the conversion of $1,289,299 of debt owed to OCP and
issued 186,324 shares of Series C convertible preferred stock to Fair Holdings,
Inc. ("Fair") in conversion of $596,236 of debt owed to Fair. These transactions
are described in more detail above in Note 4 to the Notes to Condensed
Consolidated Financial Statements under the caption "Obsidian Enterprises,"
which description is incorporated herein by reference.
Each share of Series C convertible preferred stock is convertible into twenty
shares of the Company's common stock. All of the issuances described above were
made in reliance upon the exemption provided by Section 4(2) of the Securities
Act of 1933 for transactions not involving a public offering.
Item 3. Defaults Upon Senior Securities.
As described above in Management's Discussion and Analysis of Financial
Condition and Results of Operation under the caption "Champion Transactions,"
Champion has been in violation of the funded debt-to-EBITDA negative covenant in
a $1,250,000 subordinated credit facility with Markpoint. Markpoint has filed a
lawsuit seeking payment in full of the debt in the suit described above in Item
1 of this Part II.
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
None
A. Exhibits
The exhibits filed as part of this Quarterly Report on Form 10-Q are identified
in the Exhibit Index, which Exhibit Index specifically identifies those exhibits
that describe or evidence all management contracts and compensating plans or
arrangements required to be filed as exhibits to this Report. Such Exhibit Index
is incorporated herein by reference.
B. Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OBSIDIAN ENTERPRISES, INC.
June 14, 2002 By: /S/Timothy S. Durham
-------------------------- -------------------------------------
Date Timothy S. Durham, Chairman and
Chief Executive Officer
June 14, 2002 By: /s/ Barry S. Baer
-------------------------- -------------------------------------
Date Barry S. Baer, Executive Vice President/
Chief Financial Officer
EXHIBIT INDEX
Exhibit No. Description
10.1 Assignment and Assumption Agreement between Champion
Trailer, Inc. and DW Leasing, LLC dated February 19, 2002
10.2 Assignment and Assumption Agreement between DW Leasing, LLC
and Fair Holdings, Inc. dated February 20, 2002
10.3 Agreement to Purchase Subordinated Secured Promissory Note
and Supply and Consignment Agreement among SerVaas, Inc.,
the Beurt SerVaas Revocable Trust, U.S. Rubber Reclaiming,
Inc., Obsidian Enterprises, Inc. and DC Investments, LLC
dated February 26, 2002
10.4 Promissory Note of Obsidian Enterprises, Inc. to DC
Investments, LLC in the principal amount of $700,000 due
March 1, 2007
10.5 Promissory Note of Obsidian Enterprises, Inc. in favor of
Fair Holdings, Inc. in the principal amount of $570,000 due
February 1, 2007
10.6 Subscription Agreement of Fair Holdings, Inc. for
186,324 shares of Series C Convertible Preferred Stock.
10.7 Subscription Agreement of Obsidian Capital Partners, LP
for 402,906 shares of Series C Convertible Preferred Stock .