Securities And Exchange Commission

Washington, D.C. 20549

Form 10-K

0-17430

Commission File Number

OBSIDIAN ENTERPRISES, INC.

(Exact name of registrant as specified in its charter)

(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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES o NO ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES o NO ý

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 ý    NO o

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.  ý

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerate filer.  Definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer o    Accelerated filer o   Non-accelerated filer ý

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).  YES  o  NO ý

As of April 30, 2005, 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 $829,550.

As of January 30, 2006, the registrant had 3,109,333 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Information required in Part II and Part III has not been incorporated by reference.

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Part  I

Item 1.                        Business.

Description of Business

Overview

Obsidian Enterprises, Inc. (“Obsidian Enterprises”) is a holding company headquartered in Indianapolis, Indiana. We have historically invested in and acquired small and mid-sized companies in industries such as manufacturing and transportation.

Our goals are to maximize the profits of our current subsidiaries and to acquire additional manufacturing companies of similar size.  We currently conduct business through six subsidiaries:

Butyl-Rubber Reclaiming

•                  U.S. Rubber Reclaiming, Inc. (“U.S. Rubber”), acquired in fiscal 2001, owns and operates butyl-rubber reclaiming facilities;

Coach Leasing

•                  Pyramid Coach, Inc. (“Pyramid”), acquired in fiscal 2001, provides luxury coach leases for corporations and the entertainment industry;

•                  Obsidian Leasing Company, Inc. (“Obsidian Leasing”), formed in fiscal 2002, owns some of the coaches operated by Pyramid;

Trailer and Related Transportation Equipment Manufacturing

•                  United Expressline, Inc., (“United”), acquired in fiscal 2001, manufactures steel-framed cargo, racing and specialty trailers;

•                  Danzer Industries, Inc. (“Danzer”), the only subsidiary of the Company until fiscal 2001, manufactures metal parts and truck bodies for the service and utilities markets;  and

•                  Classic Manufacturing, Inc. (“Classic”), acquired in May 2004, manufactures steel-framed cargo, fifth wheel, gooseneck, motorcycle, race, snowmobile and stacker/lift trailers and open trailers used in the landscape industry.

Prior to fiscal 2001, our only subsidiary was Danzer.  In fiscal 2001, we changed our management and expanded our business.  Timothy S. Durham became our Chief Executive Officer and Chairman of the Board and we purchased four new businesses from Mr. Durham, Obsidian Capital Partners, L.P (“Partners”) and the other owners of such businesses pursuant to an Acquisition Agreement and Plan of Reorganization, dated June 21, 2001.  Pursuant to the Acquisition Agreement and Plan of Reorganization, shares of our Series C Preferred Stock were issued to the sellers in exchange for our acquisition of the businesses.  We currently own and operate three of the businesses acquired in this transaction, U.S. Rubber, Pyramid, and United. The fourth business acquired, Champion Trailer, Inc. (“Champion”), which manufactured racecar transporters, specialty exhibits trailers and mobile hospitality units, was sold in 2003.

In October 2001, we changed our state of incorporation from New York to Delaware and our name was changed from Danzer Corporation to Obsidian Enterprises, Inc.

In March 2004, Obsidian Capital Partners converted all of its shares of our Series C Preferred Stock and our Series D Preferred Stock into a total of 2,218,725 shares of our common stock.  Following this conversion, no shares of our Series C or Series D Preferred Stock are currently outstanding.  Also in fiscal 2004, the shareholders approved a 50-to-1 reverse stock split. As a result of the reverse stock split and the amendment to the Certificate of Incorporation we reduced the number of shares of common stock outstanding and the number of authorized shares were also reduced.

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Segments

We operate in three industry segments:

•                  butyl rubber reclaiming;

•                  trailer and related transportation equipment manufacturing; and

•                  coach leasing.

All sales are in North and South America, primarily in the United States, Canada and Brazil.  For quantitative and geographic segment information, see Note 13 in the Notes to Consolidated Financial Statements.

Butyl Rubber Reclaiming

Our butyl rubber processing facilities are located in two adjacent plants in Vicksburg, Mississippi. We collect various used and scrap butyl rubber products, primarily inner tubes from tires, and then reprocess these into reclaimed butyl rubber sheets. We sell reclaimed butyl rubber products through an internal sales force.

Customers mix our reclaimed butyl rubber 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. The combination of reclaimed butyl rubber with virgin butyl rubber facilitates some manufacturing processes, but the primary reason manufacturers use reclaimed butyl rubber is the cost savings offered compared to virgin butyl rubber.

Three other enterprises engaged in reclaiming butyl rubber worldwide are:

•                  The Gujarat Company in India;

•                  Han Cook in Korea; and

•                  Vrederstein N.V. in the Netherlands.

These enterprises are not major competitors of ours for sales in the North and South America, because price is the primary competitive factor and cost of transportation increases the prices these other enterprises can offer. These enterprises do compete with us for the purchase of used and scrap butyl rubber products, our primary raw material.

Two enterprises manufacture virgin butyl rubber for sale in the United States:

•                  Exxon Corporation; and

•                  Bayer AG.

These enterprises are much larger than we are, are well capitalized and have larger sales staffs.  The prices these enterprises charge for virgin butyl rubber place an upper limit on the prices that we can charge for reclaimed butyl rubber.

We obtain our supply of scrap inner tubes primarily from approximately 1,000 scrap merchants located principally in the United States. We also import a supply of scrap inner tubes from sources in Brazil, Venezuela, and India.  Our 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.  We also obtain some additional supplies with reclaiming scrap butyl rubber pads from the manufacturers of other butyl rubber products.  This pad 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 pad scrap is a partial substitute for inner tubes as raw material for our reclaimed butyl rubber product.

We recently introduced new processing equipment to improve our operating efficiencies and reduce our cost to produce our products. We also added additional equipment including a wet grind and cryogenic systems to

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increase our ability to utilize additional rubber products in our butyl rubber reclaim process and to add new natural rubber products to this segment.

We are the primary supplier of reclaimed butyl rubber to most of the tire industry in the United States and we also have tire manufacturer customers in Canada and Brazil. Although we have had long-term relationships with our primary customers, we do not have long-term contracts with them.  Three of our reclaimed butyl rubber customers accounted for a substantial portion of our butyl rubber sales in fiscal 2005:

•                  Michelin: 42.8 %

•                  Kelley Springfield: 26.3%

•                  Tyco Adhesives: 16.1%

The loss of any of the largest customers would materially and adversely affect our revenues. Our reclaimed butyl rubber products are generally ordered by customers monthly and shipped promptly after the order.  Customers generally pay accounts on 30- to 60-day terms.

Trailer and Related Transportation Equipment Manufacturing

Manufacturing

We manufacture specialty racing, cargo and ATV trailers at facilities we own in Bristol, Indiana, Hagerstown, Maryland and Sturgis, Michigan.  Prior to October 31, 2005 we also manufactured service truck bodies to order for original equipment truck manufacturers under the “Morrison” trademark at our facility in Hagerstown, Maryland.

Customers, Sales and Marketing

We sell our “United Trailers,” “Danzer Trailers,” and “Classic Trailers” product lines through a network of approximately 420 dealers in the United States and Canada, principally in the Midwestern and Eastern United States.  The trailers are built to order to dealer specifications.  Although we have formal agreements with a few of these dealers, most of the dealership arrangements are informal and nonexclusive.  The terms of sale for the trailer products is when title transfers (FOB the plant) with payment generally due upon the dealer taking delivery of the trailer, although certain dealers have 30- or 60-day payment terms.  Our trailer business is somewhat seasonal, with fewer orders during the months from November through January.  Seasonality of our business relates primarily to increased purchases during the warmer months of the year.  Although the prices for our trailer brands can be as high as $80,000, the average price is approximately $3,950.

Prior to October 31, 2005 our service truck bodies were sold primarily to customers located in the Eastern and Southeastern United States.  We sold our service truck bodies to original equipment truck manufacturers, or “private labels”, shipping finished bodies to the customer for installation on truck body chassis.  We also sold service truck bodies under our proprietary “Morrison” trademark to a network of approximately 300 dealers who, in turn, sell to municipalities, utility companies, cable companies, phone companies and contractors.  Sales of service truck bodies tend to follow a seasonal pattern of increased purchases during the spring and fall and lower purchases during the months of late fall and winter due to the purchasing habits of the telecom industry.  Although the prices for our service truck bodies can be as high as $10,000, the average price is approximately $3,000.  As part of our cost cutting measures and improvement in operating efficiencies, the truck body line has been discontinued as of October 31, 2005.

Sales of both trailers and related transportation equipment manufacturing products are conducted through an internal sales force maintained by our subsidiaries.

Competitors

A significant number of companies manufacture specialty racing, cargo and ATV carriers in the United States. Although many of these companies are relatively small and do not possess our technical capability, a number of our competitors are much larger and possess equal or greater technical and financial resources.  Four of our larger competitors are:

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•                  Haulmark Industries;

•                  Pace American;

•                  U.S. Cargo; and

•                  Wells Cargo.

We compete for specialty racing, cargo and ATV trailer sales through price, quality and availability, but price generally is the most important factor.

Raw Materials

We purchase our raw materials for the trailer and related transportation equipment segment from numerous suppliers. During fiscal 2005 and 2004, we had an adequate supply of raw materials for our production needs, although the prices for these materials escalated substantially.

Warranties

We generally warrant our trailer and related transportation equipment to be free from defects in material and workmanship, and we also provide warranties relating to performance under normal use, including service for three to five years after retail sale.  Our obligation under these warranties generally is limited to the repair or replacement of the defective product. Historically, our warranty costs have not been material to our consolidated financial statements.

Backlog

The backlog of our trailer and related transportation segment as of October 31, 2005 was approximately $5,853 as compared to backlog as of October 31, 2004 of $6,823 (stated in thousands). We expect to fill this backlog during fiscal 2006.

Coach Leasing

We lease high-end luxury entertainment coaches from our facility in Nashville, Tennessee. We lease coaches for both short-term (weekly or monthly) and long-term periods.

At October 31, 2005, we managed 36 coaches.  We also at times sublease coaches from other coach owners on a short-term basis in order to lease them to our customers.

DW Leasing, LLC (“DW Leasing”), a company Mr. Durham controls, transferred 22 coaches to our subsidiary Obsidian Leasing in fiscal 2002.  DW Leasing continues to own seven coaches that we manage. We also manage ten coaches owned by DC Investments Leasing, LLC (“DC Investments Leasing”), an entity controlled by Mr. Durham.

Our consolidated financial statements include the assets, liabilities and equity of DW Leasing and the results of its operations, and since its December 1, 2002 inception, the assets, liabilities and equity of DC Investments Leasing and the results of its operations. Both of these entities are in the business of coach leasing and their coaches are leased exclusively through Pyramid. For additional information, see the discussion of FASB Interpretation No. 46 included in Note 1 to the Notes to Consolidated Financial Statements contained in Item 8.

We lease coaches through an internal sales force to country, rock-n-roll, pop and traveling Broadway show entertainment industries across the United States.  During the year ended October 31, 2005, we leased coaches to a number of touring groups, including Alan Jackson, Kathy Mattea, Julie Roberts, Deana Carter, Jo Dee Messina, Tanya Tucker, Kenny Rogers, Steve Earle, Josh Turner, Ruben Studdard, Loretta Lynn, 38 Special, Caedmon’s Call, Steve Winwood, G Love & Special Sauce, Jamie O’Neal, Brad Cotter, Los Lobos, Big Bad Vodoo Daddy, Nickel Creek, and the Producers.  We also lease coaches to various corporate customers.

Several other companies lease luxury coaches in the United States. A significant number of companies are small in comparison to the number of coaches in our fleet.  Although many of these companies are relatively

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small and do not possess our amenity qualities, a number of our competitors are much larger and possess equal or greater amenity qualities and financial resources.   Some of our larger competitors include:

•                  Entertainer Coaches of America;

•                  Florida Coach;

•                  Senators Coach; and

•                  Hemphill Brothers.

We believe that amenities are an important factor in leasing coaches to our target market and we equip our coaches with a full complement of amenities.  We compete with other luxury coach providers based on a combination of quality, amenities, availability and price. During fiscal 2005 and 2004 we experienced turnover in management, and the entertainment touring experienced a significant increase in competition which had a negative impact on our operations.

Government Regulation

Federal, state, and local agencies regulate areas of our business, including environmental and fire hazard control.  They also regulate our work place to ensure safe working conditions for our employees.  The trailers and truck bodies we manufacture must meet standards set by state and federal transportation authorities and the coaches we lease must comply with those standards and regulations.  These regulatory bodies could take actions that would have a material adverse affect on our ability to do business.

Employees

As of October 31, 2005, we had 450 employees.  We have a labor contract through January 2008 with the United Brotherhood of Carpenters and Joiners of America for the approximately 50 production workers at our facility in Hagerstown, Maryland.  None of the employees at our other facilities is represented by a labor union.  We believe that our employee relations are satisfactory.

Patents and Proprietary Technology

We do not rely on any patents, registered trademarks, or special licenses to give us a competitive advantage.  The “Danzer,” “Pyramid,” “United Trailer,” and “Classic Trailer” brand names have brand recognition in the relevant market.

Research and Development

We have not incurred any material research and development expenses during any of our last three fiscal years and we do not contemplate incurring any material research and development expenses in fiscal 2006.

Financial Information for business segment data and geographic data

We operate our business through three segments. For further detail of revenue, profit or loss and total assets see Note 13 to the Notes to Consolidated Financial Statements contained in Item 8.

Working Capital

Our practices relating to working capital are described under the heading Item 7 “Liquidity and Capital Resources”.

Forward-Looking Information and Risks

In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements. You can identify forward-looking statements by the use of words and phrases such as “expects,” “plans,” “will,” “estimates,” “forecasts,” “projects,” “believes,” “anticipates,” “looking forward” and other words and phrases of similar meaning. You also can identify forward-looking statements by the fact that they do not

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relate strictly to historical or current facts. Forward-looking statements 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 Operation.” Readers should carefully review the risks described in this and other documents that we file from time to time with the Securities and Exchange Commission, including the quarterly reports on Form 10-Q and other reports filed by the Company.  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.

Forward–looking statements cannot be guaranteed and actual results may vary materially due to the uncertainties and risks, known and unknown, associated with such statements. The Company wishes to caution readers that the important factors set forth in Item 1A of this Form 10-K in some cases have affected, and in the future could affect, the Company’s actual results an could cause actual consolidated results to differ materially from those expressed in any forward-looking statements made by, or on behalf of the Company.

Item 1A.     Risk Factors.

1.               A group of Obsidian Stockholders have filed a transaction statement on Schedule 13E-3. The purpose of the transaction is to eliminate the public stockholders of Obsidian and cause Obsidian to become a private company whose stock will no longer be traded on the OTC Bulletin Board and which will no longer be subject to the periodic reporting requirements of the Securities Exchange Act of 1934. Subsequent to fiscal 2005, the group filed amendment 4 to schedule 13-E3 notifying all shareholders that the group obtained 90% ownership and the expected date to complete the going private transaction is March 6, 2006.

2.               There is a limited market for our Common Stock. There can be no assurance that a broader market for the Common Stock will develop. Selling shares of the Common Stock may be difficult because smaller quantities of shares are bought and sold and security analysts’ and news media coverage about the Company is limited. These factors could result in lower prices and larger spreads in the bid and asked prices for the shares of Common Stock.

3.               Recently, there have been significant regulatory changes, including the Sarbanes-Oxley Act of 2002, and there may be new accounting pronouncements or regulatory rulings that will have an impact on our future consolidated financial position and results of operations. The Sarbanes-Oxley Act of 2002 and other rule changes and proposed legislative initiatives following several highly publicized corporate accounting and corporate governance failures are likely to increase general and administrative costs.

4.               Our financial statements have been presented on the basis that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company’s independent auditor has included a going concern emphasis paragraph in its audit report relating to the Company’s audited financial statements for the fiscal year ended October 31, 2005, based on, among other things, concerns regarding, working capital deficits, loan covenant violations and recurring losses from operations. The Company’s realization of its assets and satisfaction of its liabilities in the normal course of business is dependent upon the Company’s ability to generate sufficient cash flow to meet its financial obligations, to comply with the terms of its debt financing agreements, to obtain refinancing of certain obligations and to continue to receive financial support under its line of credit agreements.

5.               Our inability to obtain additional financing may prevent additional expansion in our current business or acquiring new businesses. Additional financing may not be available to us on

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advantageous terms or at all, if, for example the interest rates are unattractive or we do not have sufficient collateral available to secure the desired increase in debt. Currently all of our assets are being used to secure outstanding debt, so unless we acquire unsecured assets or obtain a partial release from our secured creditors of their security interests, we will not have available additional collateral to pledge to new debtors.

6.               We may issue equity to finance any future acquisitions or refinance existing debt. This would dilute the proportionate ownership of our current shareholders and may reduce per share value. Acquisitions may also lead to increased levels of borrowing. This would result in increased interest expense. Acquisitions are also likely to increase our depreciation and amortization expense. These factors may incur losses or reduced profits in the future.

7.               The prices of the raw materials we utilize are subject to fluctuation, as occurred in fiscal 2005. We may not be able to pass along any or all of these increases to our customers. As a result, increases in the price of raw materials may decrease the profit margin from sales of our products.

8.               Our overall strategy includes increasing revenue and reducing/controlling operating expenses. We have concentrated our efforts in ongoing, company-wide efficiency activities intended to increase productivity and reduce costs including personnel reductions, reduction or elimination of non-personnel expenses and realigning and streamlining operations. We cannot assure that our efforts will result in increased profitability for any meaningful period of time.

9.               We face significant competition in connection with the products and services we provide. The level of competition has increased recently and is expected to continue at increasing levels in the future. There are many other companies engaged in the manufacture of cargo trailers, luxury coach leasing and butyl rubber reclaiming, and many of these companies have greater financial and other business resources than those possessed by us. Furthermore, other companies may enter the our area of business in the future. If competition increases, our sales and profits are likely to decline.

10.         We may have difficulty receiving our requirements for butyl rubber tubes, our principle raw material in this segment. In recent years, the number of sources of supply has been reduced. We continue to search for additional sources and to make purchases from foreign suppliers. However, if the number of suppliers is further reduced, or if we are otherwise unable to obtain butyl raw material requirements on a timely basis and on favorable terms, our operations may be harmed.

Item 1B.               Unresolved Staff Comments.

Not applicable.

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Item 2.                        Properties.

The following describes the Company’s properties:

** Long term lease from a related party expiring May 2012.

We believe that our property, plant and equipment are well maintained and adequate for our requirements. We also believe that all of our assets are adequately covered by insurance.

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Item 3.                        Legal Proceedings.

During fiscal 2005, Pyramid and its parent, Obsidian Enterprises, and other affiliated companies and members filed suit against the former owners of Pyramid for violation of the terms of its non-compete agreement with the Twentieth Judicial District Chancery Court of Davidson County, Tennessee on December 10, 2004.  The lawsuit was filed against various individuals and operating entities that are directly competing with the Company and the Company is seeking punitive and compensatory damages.

The Company is, from time to time, involved in certain legal proceedings in the ordinary course of conducting its business.  Management believes there are no pending legal proceedings in which the Company is currently involved in which will have a material adverse affect on the Company’s financial position.

Item 4.                        Submission of Matters to a Vote of Security Holders.

No matters were submitted to a vote of our stockholders during the fourth quarter of fiscal 2005.

Part  II

Item 5.        Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The Company’s common stock is currently traded on the OTC Bulletin Board under the symbol “OBDE.OB.” The following table sets forth the high and low bid quotations for the common stock for the fiscal quarters indicated.

The above quotations reflect inter-dealer prices, and may not include retail mark-up, mark down or commissions and may not necessarily represent actual transactions.  At October 31, 2005, there were approximately 707 holders of record of the Company’s common stock. Some of the shares of common stock are held in street name for an unknown number of beneficial owners. To date the Company has not paid a cash dividend on its common stock. The payment and amount of any future cash dividends would be restricted by the Company’s lenders and will necessarily depend upon conditions such as the Company’s earnings, financial condition, working capital requirements and other factors. The Company does not anticipate paying any dividends in the near future. As of October 31, 2005 the Company has no outstanding options or warrants under any equity compensation plan.  For the year ended October 31, 2005, there was no equity compensation under any equity compensation plan.

Item 6.                        Selected Financial Data.

The following table sets forth certain selected consolidated financial information concerning the Company. This information is not covered by the independent auditor’s report. For further information, see the

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accompanying Consolidated Financial Statements of Obsidian Enterprises, Inc. and subsidiaries for the years ended October 31, 2005, 2004, and 2003 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.

Operating Data:

(Amounts in thousands, except per share data)

Balance Sheet Data:

No dividends have been declared or paid in any period presented.

The Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, on November 1, 2001.  SFAS No. 142 changed the accounting for goodwill from a model that required amortization supplemented by impairment tests to an accounting model based solely upon impairment tests.  The consolidated operating data presented includes goodwill amortization only for the ten months ended October 31, 2001.  Had the nonamortization provisions of SFAS No. 142 been effective prior

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to fiscal 2001, the net loss for the ten months ended October 31, 2001 would have been reduced by $76 to $4,319.  There would be no change in earnings per share.  All other periods presented would be unchanged.

Item 7.        Management’s Discussion and Analysis of Financial Condition and Results of Operations.

All dollar amounts in this Item 7 are in thousands (except for share and per share information).

Organization of Financial Information

This Management’s Discussion and Analysis provides material historical and prospective disclosures intended to enable investors and other users to assess our financial condition and results of operations. Statements that are not historical are forward-looking and involve risks and uncertainties discussed under the caption “Forward-Looking Statements” in Item 1 and the Risk Factors discussed in Item 1B of this Annual Report on Form 10-K.

The consolidated financial statements and notes are presented in Item 8 of this Annual Report on Form 10-K. Included in the consolidated financial statements are the consolidated statements of operations, consolidated balance sheets, consolidated statements of cash flows, and consolidated statements of stockholders’ deficit and comprehensive loss. The notes, which are an integral part of the consolidated financial statements, provide additional information required to fully understand the nature of amounts included in the consolidated financial statements.

Significant Transactions and Financial Trends

Throughout these financial sections, you will read about significant transactions or events that materially contribute to, or reduce, earnings and materially affect financial trends. Significant transactions discussed in this Management’s Discussion and Analysis include:

•                  Raw material price increases;

•                  Cost reduction initiatives including plant closings and elimination of product lines;

•                  Charge for discontinued product line; and

•                  Change in estimates for reserves.

These significant transactions or events resulted from unique facts and circumstances that are not expected to recur with similar materiality or impact on continuing operations. While these items are important in understanding and evaluating financial results and trends, other transactions or events such as those discussed later in this Management’s Discussion and Analysis may also have a material impact. An understanding of these transactions or events is necessary in order to estimate the likelihood that current trends will continue or these events will recur.

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Introduction

Obsidian Enterprises is a holding company headquartered in Indianapolis, Indiana. We conduct business through our subsidiaries:

Butyl Rubber Reclaiming

•                  U.S. Rubber, acquired in fiscal 2001, owns and operates butyl rubber reclaiming facilities;

Coach Leasing

•                  Pyramid, acquired in fiscal 2001, provides luxury coach leases for corporations and the entertainment industry;

•                  Obsidian Leasing, formed in fiscal 2002, owns some of the coaches operated by Pyramid;

Trailer and Related Transportation Equipment Manufacturing

•                  United, acquired in fiscal 2001, manufactures steel-framed cargo, racing and specialty trailers;

•                  Danzer, the only subsidiary of the Company until fiscal 2001, manufactures steel-framed cargo trailers. Prior to October 31, 2005 the Company also manufactured metal parts and truck bodies for the service and utilities markets; and

•                  Classic, acquired in May 2004, manufactures steel-framed cargo, fifth wheel, gooseneck, motorcycle, race, snowmobile and stacker/lift trailers and open trailers used in the landscape industry.

While each of the subsidiaries markets its products or services independently, our emphasis is to provide high quality products and services by taking advantage of cross-selling opportunities, manufacturing and other operational efficiencies through each of the subsidiaries.

Results of Operations

OVERVIEW

The Company’s 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. In the period since June 2001, Obsidian Enterprises and its subsidiaries have incurred losses and reductions in equity on a consolidated basis. Recurring losses, working capital deficits and loan covenant violations have led the Company’s independent auditor, Somerset CPAs P.C. to include a going concern emphasis paragraph in its audit report relating to the Company’s audited consolidated financial statements for the year ended October 31, 2005.  Historically, certain cash deficits have been financed with DC Investments, LLC (“DC Investments”) and its subsidiary Fair Holdings, Inc. (“Fair Holdings”), entities controlled by the Company’s Chairman.  As of October 31, 2005, total debt outstanding to DC Investments and Fair Holdings was $31,173.

During fiscal 2005, our results of operations were negatively impacted by various events discussed below.  During fiscal 2006, we intend to focus our efforts on generating positive cash flow and increasing our working capital through improved operations and pursuing significant strategic initiatives.

During fiscal 2005 a group of Obsidian Stockholders filed a transaction statement on Schedule 13E-3 and announced their intention to take Obsidian private. The purpose of the transaction is to eliminate the public stockholders of Obsidian and cause Obsidian to become a private company whose stock will no longer be

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traded on the OTC Bulletin Board and which will no longer be subject to the periodic reporting requirements of the Securities Exchange Act of 1934. Once this transaction is completed, the overall general and administrative expenses will be reduced by approximately $700,000 on a recurring basis.

Our trailer segment was negatively affected by the significant increases in raw material prices during fiscal 2005 which reduced our gross margins. We were able to pass some of the increases through to our customers through price increases of approximately 17%. Our price increases lagged behind the raw material price increases throughout fiscal 2005, which reduced our overall gross margins. We expect market conditions to remain very competitive and raw material prices to remain somewhat volatile in this segment. As raw material prices begin to level off, we expect our price increases to return our margins to a profitable level. We are also implementing programs with a goal of reducing the costs of raw material. Our cost of materials percentage historically has been above the industry average. Our cost reduction initiatives for fiscal 2006 include the closing of our White Pigeon plant and consolidation of operations with our Bristol facility to reduce our overhead costs and improve operating efficiencies. We also discontinued our truck body line in Hagerstown to reduce our overhead costs and increase our trailer manufacturing capacity. Additional strategies in the trailer segment include: building sales growth through market expansion, cross selling and additional geographical production. We continue to evaluate strategic acquisitions to determine whether they can improve the performance of this segment.

Our butyl rubber reclaiming segment sales remained flat during fiscal 2005. Additional costs were incurred to maintain the equipment in this very capital intensive operation. The primary reason for this decrease is lower production efficiency because a major piece of production equipment was taken out of commission for maintenance for the last six months of the year.  During the downtime, we relied on backup equipment for our production needs, which increased our cost to produce material and reduced our throughput efficiency.  We also incurred significant increases in energy costs and we increased our reserve on slow moving raw materials which reduced our gross profit by $500,000. During fiscal 2005 we implemented an additional five percent price increase as our cost to pass through some of the additional costs of producing our products. Subsequent to fiscal 2005 we purchased a new piece of equipment that, based upon preliminary testing, should ultimately increase our production efficiency and lowering our overhead costs by lowering our cost of utilities and automating a portion of the production process which is currently manually intensive.  For fiscal 2006 we expect the market demand for our product in this segment to be high due to our current order backlog. The availability of raw material for butyl rubber reclaiming to meet the market demands continues to be a concern. We will continue to modify our Fine Grind and cryogenic operations to increase our rubber resource utilization of existing material and expand our product lines of natural rubber in new markets.

Our luxury coach leasing segment was negatively affected by a decrease in sales from a lower utilization of our fleet. The lower utilization is due to increased market competition in the industry and a significant decrease in the number of entertainers touring. We also had various turnover in management for the leasing segment.  As noted in the legal matters under Item 3, the company filed a law suit against the former owners of Pyramid for violation of their non-compete agreement.  Utilization of our fleet for fiscal 2005 decreased approximately 10.9% which in turn had a significant negative impact on the earnings of this segment. In the future sales and gross profits and profitability for this segment will depend on the industry market conditions and a continued effort to upgrade the management of this segment.  We are continually working to improve our utilization of our owned coaches to increase our revenues and minimize additional costs from leasing third party buses. In addition, we continue to explore other non-traditional uses for our coaches to improve the utilization and therefore increase our cash flow and working capital in this segment. We are also evaluating our coaches and, as noted above, selling the older coaches in our fleet to reduce our costs.

We will continue to pursue strategic acquisition opportunities that include targets both in our traditional, basic industries and manufacturing sectors as well as targets that possess assets (including cash) that are outside our traditional areas of focus, and available on terms that our management believes to be attractive. Ultimately, these acquisitions may (but cannot be guaranteed to) result in our having increased financial resources and potentially a broader asset base and more diversified sources of revenue.

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Fiscal 2005 Compared with Fiscal 2004

The following table details our results of operations as a percentage of sales:

Net Sales

Net sales in fiscal 2005 were $65,774 compared to $64,360 in fiscal 2004, an increase of 2.2%.  The sales growth relates primarily to the inclusion of Classic for twelve months compared to six months from the date of acquisition in fiscal 2004. In addition, cargo trailer sales have increased due to the increased capacity and sales growth from our Hagerstown Maryland facilities along with an average price increase of 17.0% to offset raw material price increases.  Sales in the butyl rubber reclamation segment increased slightly and sales in the coach leasing segment decreased by approximately $2,121.

Gross Profit

Gross profit as a percentage of sales decreased by 3.4% from 10.2% in fiscal 2004 to 6.8% in fiscal 2005. The decrease was mainly the result of increased raw material costs in our trailer and related transportation equipment segment.  In addition, our rubber reclaim segment incurred additional costs during fiscal 2005 for repair and maintenance and additional processing of materials while a critical piece of equipment was under repair of their capital intensive equipment. Also additional reserves were established on slow moving inventory and an increase in purchases of butyl raw materials from foreign sources which is at a premium compared to domestic markets.  We were able to pass some of the price increases through to our customers although our price increases did lag behind the material cost increases throughout fiscal 2005 and 2004, therefore reducing our overall gross profit.

Looking ahead, we expect improvement of our gross profit margins in fiscal 2006 compared to fiscal 2005, driven primarily by the cost reductions as follows:

•                  Consolidated a portion of our operations in the trailer segment and closed one of our manufacturing facilities in White Pigeon Michigan. This is expected to reduce our overhead expenses and improve our overall production efficiency through a realignment of our existing manufacturing facilities.

•                  Discontinued our truck body and related equipment product lines and realigned our plant to produce additional trailers at our Hagerstown, Maryland facilities. This is expected to reduce our overhead expenses and improve our overall production efficiency.

•                  New equipment purchases for our Butyl Rubber Reclaim segment is expected to reduce our overhead expenses significantly by eliminating various labor intensive portions of production and reducing our utilities expenses.

Selling, General and Administrative (SG&A) Expenses

The Company’s SG&A expenses decreased by 1.2%, for the year ended October 31, 2005 compared to fiscal 2004.  The decrease in SG&A was primarily due to a decrease in corporate expenses, primarily professional fees of approximately $684 along with various marketing expenses at United of approximately $86. This decrease was offset by an increase in SG&A expenses for Classic of approximately $469 due to the inclusion of twelve months of operations compared to six months for fiscal 2004.

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Looking ahead, SG&A expenses are expected to decrease. During fiscal 2005 a group of Obsidian Stockholders filed a transaction statement on Schedule 13E-3 and announced their intention to take Obsidian private. The purpose of the transaction is to eliminate the public stockholders of Obsidian and cause Obsidian to become a private company whose stock will no longer be traded on the OTC Bulletin Board and which will no longer be subject to the periodic reporting requirements of the Securities Exchange Act of 1934. Once this transaction is completed, the overall general and administrative expenses by approximately $700,000 on a recurring basis. In addition, the Company will not be required to comply with the Sarbanes Oxley section 404 implementation, for which the cost of implementation was estimated at approximately $1.2 million.

Interest Expense

Interest expense for the year ended October 31, 2005 as a percentage of average debt borrowings of $51,477 was 10%.  Interest expense for the year ended October 31, 2004 as a percentage of average debt borrowings of $44,088 was 9.5%.  The increase is primarily due to the increase of the prime rate as well as increased borrowings on related party debt discussed below in “Liquidity and Capital Resources,” “Refinancing Activities,” and “Partners Equity Transactions.”

Income Tax Provision

The income tax benefit for the year ended October 31, 2005 increased by $203 compared to the year ended October 31, 2004.   The income tax benefit is created primarily through net operating loss carry forwards recognized to the extent they are available to offset the Company’s net deferred tax liability.

Fiscal 2004 Compared with Fiscal 2003

The following table details our results of operations as a percentage of sales:

Net Sales

Net sales in fiscal 2004 were $64,360 compared to $59,295 in fiscal 2003, an increase of 8.5%.  The sales growth relates primarily to the purchase of Classic in May 2004. In addition, cargo trailer sales have increased due to the increased capacity and sales growth from our Hagerstown Maryland facilities along with an average price increase of 4.5% to offset raw material price increases.  Sales in the butyl rubber reclamation segment decreased slightly and sales in the coach leasing segment decreased approximately by $1,800.

Gross Profit

Gross profit as a percentage of sales decreased 2.5 from 12.7% in fiscal 2003 to 10.2% in fiscal 2004. The decrease was mainly the result of increased raw material costs in our trailer and related transportation equipment segment related to steel and wood which are the most significant components of our cost of goods sold. In addition, our rubber reclaim segment incurred additional costs during fiscal 2004 for repair and maintenance of their capital intensive equipment and the purchase of raw materials from foreign sources.  We were able to pass some of the price increases through to our customers although our price increases did lag behind the material cost increases throughout fiscal 2004 therefore reducing our overall gross profit.

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Selling, General and Administrative (SG&A) Expenses

The Company’s SG&A expenses increased $2,290 or 26.8% for the year ended October 31, 2004 compared to 2003. The increase in expenses was professional fees and other expenses related to the unsuccessful exchange offer for Net Perceptions, Inc. These expenses are non-recurring and totaled approximately $600. Other increases include the additional SG&A expenses of $500 for Classic, depreciation and amortization of $375, insurance of $500 and the remaining increase of $315 for salaries, marketing expenses for website advertising and other general expenses.

Interest Expense

Interest expense for the year ended October 31, 2004 as a percentage of average debt borrowings of $44,088 was 9.5%.  Interest expense for the year ended October 31, 2003 as a percentage of average debt borrowings of $39,819 was 8.9%.  The increase is primarily due to the increase of the prime rate as well as increased borrowings on related party debt discussed below in “Liquidity and Capital Resources,” “Refinancing Activities,” and “Partners Equity Transactions.”

Income Tax Provision

The income tax benefit for the year ended October 31, 2004 decreased by $914 compared to the year ended October 31, 2003.   The income tax benefit is created primarily through net operating loss carry forwards recognized to the extent they are available to offset the Company’s net deferred tax liability.

Business Segments

The following information provides perspective on our business segments’ sales and operating results by segment for the years ended October 31, 2005, 2004, and 2003.  The comments that follow should be read in conjunction with our consolidated financial statements and related notes contained in this Form 10-K.  The following table shows net sales by product segment:

We allocate corporate SG&A expenses to the respective subsidiaries primarily based on a percentage of sales.  Amounts allocated by segment are as follows:

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Trailer and Related Transportation Equipment Manufacturing

The following table shows sales, cost of sales, gross profit and loss before taxes and minority interest for this segment for the periods indicated:

Sales

Net sales in this segment for fiscal 2005 were $51,469, an increase of $3,285 or 6.8% compared to net sales of $48,184 for fiscal 2004. The increase was primarily due to Classic, which increased sales by $4,997 due to twelve months vs. six months in 2004 from the acquisition date.  Additionally, there was an increase in Danzer’s sales of $2,295 for cargo trailers and $454 for truck bodies, which was due the addition of new customers on the East coast for cargo trailers and a modest increase in orders from the telecommunications industry.   Sales of United products decreased by $4,461, primarily due to the increased sales of the economy line trailers, which sell at a lower price and the closing of the White Pigeon  facility that had a decrease in sales order volume.

In fiscal 2004, sales in this segment increased $7,175 or 17.5% over the comparable period of fiscal 2003. A portion of the increase relates to our purchase of Classic, which increased our year to date sales by $4,061. In addition, cargo trailer sales have increased $3,233 due to strong customer demand for both our United and Danzer products along with the acceptance of new products offered by both subsidiaries. The increase was offset by the decrease in sales of truck bodies by approximately $119 during the twelve months ended October 31, 2004. This reduction was related to the continued decrease in orders from the telecommunications industry for truck bodies.

Gross profit

The gross profit in this segment for fiscal 2005 was $3,996, a slight decrease of 0.6% to 7.8% of revenues, compared to $4,068, or 8.4% of revenues for fiscal 2004. The acquisition of Classic contributed to the improvement of the segment’s gross profit by enabling us to add synergistic products to our trailer line product line which, historically, has had higher gross margins than our comparable products.  This increase in the gross margin from Classic is offset by the significant increase in raw materials during fiscal 2005. Although we raised our selling prices an average of 17% to offset the significant price increases, we were not able to pass all the cost increases through to our customers on a timely basis which reduced our overall gross profit margins.

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The gross profit for fiscal 2004 increased slightly to 8.4% of revenues as compared to 8.1% for fiscal 2003. The cost of plywood and steel, major components of our cargo trailers increased significantly starting in August 2003 and continued through October 31, 2004. Material cost surcharges were initiated in April 2004 to our customers to offset the significant price increases we incurred from our vendors.  Our gross margins improved somewhat throughout the year, but we were unable to pass all the increases through during fiscal year 2004. For that reason, our margins were negatively affected for 2004. Our gross margins were also negatively impacted by a fire at the Hagerstown, Maryland facility in May 2004 which interrupted production. These negative affects on our gross margins were offset somewhat by the purchase of Classic in May 2004. The gross margins for the Classic trailer lines typically are higher than our historical gross margins.

Loss before taxes and minority interest

In fiscal 2005, the loss before taxes and minority interest decreased by $1,374 when compared to fiscal 2004, and $783 when compared to fiscal 2003. This improvement is primarily related to the overall reduction in SG&A expenses as a result of our cost reduction initiatives.

Looking ahead

Future improvement in this segment will depend on our ability to continue to pass through our raw material cost increases to our customers.  The increased volume of Classic is expected to continue to improve our gross margin as Classic’s product line historically had higher gross margins than our comparable products. We expect our plant closing and the elimination of the truck body line to decrease our overhead expenses and improve our operating efficiencies.  We are also implementing a process to pool all of our related resources together for our trailer manufacturing subsidiaries to increase our purchasing power, obtain volume discounts and increase our Brand awareness.

Butyl Rubber Reclaiming

The following table shows sales, cost of sales, gross profit and loss before taxes and minority interest for this segment for the periods indicated:

Sales

Net sales in this segment for fiscal 2005 were $10,962 as compared to net sales of $10,712 for fiscal 2004, representing an increase of $250 or 2.3%.  Sales in this segment remain relatively flat due to the limited availability of raw materials.  Sales to our customers have remained the same and additional increases will depend on finding new sources of butyl inner tubes and developing other natural rubber products. In addition, alternative sources of material, including overseas sources, are being pursued to provide a consistent supply of material. We continue to utilize our fine grind and other processes to increase

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our ability to process other types of products for our butyl reclaim products as well as other natural rubber products.

Net sales in this segment for fiscal 2004 as compared to fiscal 2003 decreased by $293 or 2.7%.  Sales in this segment remain flat due to the limited availability of raw materials.

Gross profit

Gross profit as a percentage of sales decreased by 10.7% to $(935) for fiscal 2005 as compared to $240 for fiscal 2004. The primary reason for this decrease is due to lower production because of an electrical fire that closed the plant for seven days in December 2004. In addition, our rubber reclaim segment incurred additional costs during fiscal 2005 for repair and maintenance and additional processing of materials while a critical piece of equipment was under repair of this capital intensive equipment. Also additional reserves of approximately $500 were established on slow moving inventory that decreased our gross margins by approximately 4.5%. In addition, an increase in purchases of raw materials from foreign sources, a significant increase in the cost of natural gas and electricity also affected gross profit.

Gross profit as a percentage of sales decreased by 7.2% for fiscal 2004 as compared to fiscal 2003. The primary reason for this decrease is a lack of a consistent supply of raw materials and increasing energy costs. As a result of having to use less than optimum raw material mix in the reclaiming process, additional processing time is incurred to ensure delivery of quality product. Our processes require significant amounts of natural gas and electricity which increase significantly during fiscal 2004. Additional costs were incurred to maintain the equipment in this very capital intensive operation. During fiscal 2004 we initiated price increases of 5% to partially offset increasing costs of production and materials.

Loss before taxes and minority interest

In fiscal 2005, the loss before taxes and minority interest increased by $882 as compared to fiscal 2004, and $1,736 as compared to fiscal 2003. The decrease in profitability and negative trend as noted above has been primarily due to the significant increases in energy costs, inefficiencies in production and higher maintenance costs and additional reserves on our raw materials.

Looking ahead

The Company’s management has put into place new process for our Butyl, cryogenic and fine grind systems. We anticipate the new processes will improve our efficiencies and provide additional profitability for this segment.

Coach Leasing

The following table shows sales, cost of sales, gross profit and loss before taxes and minority interest for this segment for the periods indicated:

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Sales

Net sales for fiscal 2005 were $3,343, a decrease of $2,121 or 38.8% compared to net sales of $5,464 for fiscal 2004.  The decrease in sales relates to a lower utilization of our fleet. Management believes the lower utilization is due to increased market competition in the industry and a significant decrease in the number of professional acts touring. We also experienced turnover in management which also contributed to the loss of several tours. Utilization of our fleet decreased 10.9% for the fiscal year end 2005 as compared to 2004 which had a negative impact on our operations. At this time, we cannot estimate when tours for the entertainment industry will return to previous historical levels.  As noted in Part II, Item 1 “Legal Proceedings”, the Company filed a lawsuit against the former owners of Pyramid for violation of their non-compete agreement.

Sales for fiscal 2004 decreased by $1,817 or 25% from fiscal 2003.  The decrease in sales relates to a lower utilization of our fleet compared to the same period for fiscal 2003. Management believes the lower utilization is due to increased market competition in the industry. As noted in legal matters in section, Item 3, the company filed a lawsuit in December 2004 against the former owners of Pyramid for violation of their non-compete agreement.  Utilization of our fleet for fiscal 2004 decreased 25% for the twelve months ended October 31, 2004 as compared to the same period for fiscal 2003. In fiscal 2003, sales increased 14.2% in the amount of $907 over fiscal 2002. The increase in sales is attributable to marketing efforts and the addition of six coaches during fiscal 2003. Our marketing efforts on specialized tour groups such as golf course trips, Broadway musicals, corporate customers, and rock and pop bands expanded our customer base as these customers are in addition to the country and western performers who have traditionally been this segment’s primary customer base.

Gross profit

Gross profit was $1,407 for this segment, or 42.1% as a percentage of net sales for the fiscal year ended  2005 compared to $2,248 or 41.1% for the fiscal year ended  2004. The increase is attributable primarily to the mix of utilization of the coaches owned in our fleet and a lower need to sublease additional buses from third parties to meet demand for 2004. Coaches which we must sublease from third parties are typically leased to our customers at lower gross margins for us. As demand has decreased, our need for third party coaches has also decreased. Since November 2004, we have sold a total of three older coaches at no material gain or loss.  The sale of our older coaches is expected to reduce our fleet maintenance expenses as the older coaches require a higher level of maintenance.

Gross profit percentage for this segment was 41.1% for fiscal 2004 compared to 44.2% for fiscal 2003. The decrease is attributable primarily to the increase of costs for maintaining a larger fleet while revenues per coach have decreased. In addition, some of our increased costs as a percentage of revenue were offset by the mix of utilization of the coaches owned in our fleet and the need to sublease additional buses from third parties to meet demand. Subleasing third party buses are typically at lower gross margins. As current demand has decreased our need for third party coaches has decreased.

Loss before taxes and minority interest

In fiscal 2005, the loss before taxes and minority interest increased $637 from fiscal 2004 and $2,089 since fiscal 2003. The decrease in profitability and negative trend as noted above has been primarily due to the significant increase in industry competition in fiscal 2005 and 2004.

Looking ahead

Looking ahead, segment sales and gross profits in fiscal 2006 will depend on the industry market conditions.  We are continually working to improve our utilization of our owned coaches to increase our revenues and minimize additional costs from leasing third party buses. We continue to explore other non traditional uses

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for our coaches to improve the utilization and therefore increase our profitability in this segment. We are also evaluating our coaches and as noted above selling the older coaches in our fleet to reduce our costs.

Liquidity And Capital Resources

Overview

The Company’s 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. Obsidian Enterprises and its subsidiaries have incurred losses and reductions in equity on a consolidated basis. These recurring losses, working capital deficits and certain loan covenant violations and have led the Company’s independent auditor, Somerset CPAs P.C. to include a going concern emphasis paragraph in its audit report relating to the Company’s audited consolidated financial statements for the year ended October 31, 2005.  Historically certain cash losses have been financed with DC Investments and its subsidiary Fair Holdings, entities controlled by the Company’s Chairman. As of October 31, 2005, our total debt outstanding to Fair Holdings was $31,173.

We are continuing to address our liquidity and working capital needs through various means including operational changes and financing matters which are discussed below. During fiscal 2006 we expect to refinance current debt of $17,000 on a long-term basis. We also expect to generate approximately $5,200 in cash from operations which will be used to satisfy current obligations. Any potential cash shortage is expected to be supported through our existing lines of credit with Fair Holdings.  Up to $5,600 was available under our lines of credit with Fair Holdings at October 31, 2005.  We also believe, based on oral representation of Fair Holdings, additional financial support is available from Fair Holdings, if necessary.

Working Capital

Our businesses are working capital intensive and require funding for purchases of production inventory, capital expenditures and expansion and upgrading of facilities.   Each of our subsidiaries have separate revolving credit agreements and term loan borrowings through which the subsidiary finances its operations together with cash generated from operations.  Our working capital position (current assets over current liabilities) was negative at October 31, 2005 by $18,289. At the end of fiscal year 2004, our working capital position was negative by $10,784.  The decrease in working capital is primarily attributable to certain loans that became current as of October 31, 2005. We are currently working to cure our loan covenant violations for United and extend our subordinate debt of $8,500, refinance loans for Obsidian Leasing in the amount of $2,974 and US Rubber in the amount of $5,005 as noted in further detail below. The refinancing of these obligations along with positive cash flow from operations is expected to improve our working capital to a positive position upon completion.

We continue to address liquidity and working capital issues in a number of ways.  In fiscal 2005, net cash used in continuing operations was $7,115 compared to $4,600 in fiscal 2004. The use of cash and working capital was primarily related to operating losses.  For fiscal 2006, we expect our operations to begin to generate positive cash and increase our overall working capital through improved operations as follows:

•                  Cost reduction and other initiatives are being put in place for raw materials in the trailer and related transportation manufacturing segment with the consolidation of plant operations and the discontinuation of production on the truck body product line to reduce overhead costs, implementation of alternative materials and additional discounts through volume purchasing by pooling our purchasing power from all affiliated companies. Significant increases in raw material costs are passed through to our customers through price increases.

•                  We have financial commitments available from Fair Holdings to provide, additional borrowings under a line of credit agreements, which expire through April 2012.  Approximately $5,600 is currently available

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to us under these agreements.

•                  Obsidian Leasing has current debt obligation due of $3,144.  The Company is actively working to refinance $2,974 of this debt with other banks.

•                  US Rubber had a balloon payment on its debt which was due October 24, 2005. We are currently working with the bank under a short term extension to refinance the debt on a long term basis.

•                  We are actively working to restructure or refinance our high interest rate debt on more favorable terms. Approximately $22,271 of our debt bears interest from rates ranging from 10% to 15%.

•                  As fully described under the “Guarantees of Obsidian Capital Partners”, we have an agreement that gives us the right to mandate a capital contributions 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 up to $1,370 on U.S. Rubber and $1,000 on United to fund the respective subsidiary’s shortfall.  These payments, if any, would be applied directly to reduce the respective subsidiary’s debt obligations to the lender.

Management believes the steps taken to improve operations will positively impact our liquidity and working capital for fiscal 2006.  In addition, we continue to look for ways to strengthen our liquidity, equity and working capital through ongoing evaluations of merger and acquisition candidates and other recapitalization methods.

Financial Covenants

Significant financial covenants in our credit agreements are the maintenance of minimum ratios, levels of earnings to funded debt and fixed charge coverage ratios.  The Company did not meet requirements and covenants in certain debt agreements.

At October 31, 2005, United did not meet financial covenants with its Bank and Huntington Capital Investment Company.  United did not meet its tangible net worth and fixed charge coverage ratios. The total debt of $7,064 is classified as current.

Obsidian Leasing was in technical default of its fixed charge coverage ratio with a Bank. In December 2005, Obsidian Leasing entered into a term loan note modification agreement with the Bank which extended the maturity of the debt to November 1, 2006, increased the monthly payment to $47 and increased the interest rate to 8.50%.  Management is currently exploring options with regard to refinancing the outstanding debt.

At December 31, 2005, DC Investments Leasing was in violation of its debt service coverage ratio with the Bank.  The amount of $1,983 has been classified as current as of October 31, 2005 until a waiver can be obtained or completion of an amendment to cover future violations.

US Rubber did not meet its financial covenant related to its fixed charged ratio and the delivery of audited statements within 90 days. The bank debt has matured and the Company is currently working with the bank on a short term extension until it is refinanced.  The total debt of $5,005 is classified as current.

Obsidian Enterprises did not meet its financial covenant related to a minimum working capital requirement and delivery of audited statements within 90 days with RENN Capital. No waiver was received and the total balance of $500 is classified as current.

Our high level of debt creates liquidity issues for us and the stringent financial covenants that are common for this type of debt increase the probability that our subsidiaries may from time to time be in technical default under these loans.  These risks are mitigated, in part, for our United and U.S. Rubber subsidiaries by the right described below under “Guarantees of Obsidian Capital Partners.”

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Long-Term Assets

Long-term assets as of October 31, 2005 were $31,431 compared to $32,810 as of October 31, 2004. The net decrease of $1,379 was primarily due to amortization of intangible assets, depreciation of assets net of capitalized purchases and the disposal of assets.

Capital Structure

The following table details our total capitalization components:

Total debt increased in fiscal 2005 by $8,495 compared to fiscal 2004. The increase relates primarily to the increase in working capital needs by funding operational losses, financing of operational equipment and coaches and the change in the valuation of Redeemable Stock. Shareholders equity decreased primarily as a result of the current year loss.

Cash Availability

On a consolidated basis, at October 31, 2005, we had approximately $651 of cash and cash equivalents.  United, Classic, Danzer, U.S. Rubber, and Obsidian Enterprises each have revolving credit lines available for working capital at each individual entity.  Borrowings under the credit facilities are available to the lesser of the maximum amount or the borrowing base as defined in the credit agreement.  At October 31, 2005, additional current availability under these credit lines and maximum availability if supported by their individual borrowing base are:

(1)   Additional borrowings only through Fair Holdings, a Related Party, under existing lines of credit.

Partners Equity Transactions

Obsidian Capital Partners (“Partners”), our major shareholder, was required under the Agreement and Plan of Reorganization to fund through the purchase of additional preferred stock certain ongoing administrative expenses of the Company to complete the Plan of Reorganization, complete all required current and prior year audits to meet the regulatory filing requirements, and ensure all annual and quarterly SEC filings are completed to enable the registration of the preferred stock issued to Partners.

In October 2003, Partners acquired shares of the Company’s Series D Preferred Stock for $250 under the capital contribution agreement described under “Guarantee of Partners” below.

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In March 2004, Partners converted all of the outstanding Series C and D Preferred Stock to 1,807,492 shares of common stock.

Guarantees Of Obsidian Capital Partners

We have an agreement with Partners that gives us the right to mandate under the debt obligations with third parties a capital contribution from the Partners if the lenders to U.S. Rubber or United were to declare a default.  In either of those events, the Company has the right to enforce a capital contribution agreement with Partners requiring a contribution of up to $1,370 to be made to U.S. Rubber and $1,000 to be made to 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.  During fiscal 2003, Partners contributed $250 under the above agreement and was issued Series D Preferred Stock which was converted to 49,998 shares of common stock in March 2004. The proceeds were contributed to U.S. Rubber to keep the Company in compliance with its fixed charge coverage ratio for its revolving line of credit agreement.

Champion Transactions

To facilitate the sale of substantially all assets of Champion, on January 27, 2003, the Company agreed to a settlement with Markpoint of its outstanding subordinated debt with Champion. In return for cancellation of the indebtedness and release of a pending legal action against us and Champion, we made a cash payment to Markpoint of $675 and issued to Markpoint 32,143 shares of the Company’s Series D preferred stock. In addition, we agreed to repurchase these shares at a price of $21 per share.  Our repurchase obligation was guaranteed by Mr. Durham. Fair Holdings assumed the repurchase obligation. See Item 13 “Certain Relationships and Related Transactions.” In calendar 2003 Markpoint exercised its option to require the repurchase of the shares and the shares were purchased by Fair Holdings.  Subsequent to the settlement, the Company’s Board of Directors authorized the sale of Champion, which was completed January 30, 2003.

Off-Balance Sheet Arrangements and Contractual Obligations

It is not our usual business practice to enter into off-balance sheet arrangements, except for off-balance sheet arrangements related to operating lease commitments described below in the table of contractual obligations.

A summary of our contractual cash obligations for the fiscal years ending 2006 through 2009 and 2010 and thereafter at October 31, 2005 is as follows:

(1)          The Company has debt outstanding which matures through 2014.

(2)          The Company has various operating lease commitments, principally related to machinery and equipment, office equipment, and facilities which go through 2012.

(3)          The Company entered into a purchase agreement for equipment which requires full payment during fiscal 2006.

(4)          In conjunction with the United acquisition in 2001, the Company issued 154,482 shares of Common 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 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. As the

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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 or retained earnings when additional paid in capital related to the fair value change has been reduced to zero. At October 31, 2005, the estimated redemption requirement is $252.

Cash flow and liquidity are discussed further below, and in the footnotes to our consolidated financial statements.

The following details our commercial commitments included in contractual obligations;

(1) The Company is working with the bank on a temporary extension until the debt can be refinanced.

Our net cash used in continuing operations for the year ended October 31, 2005 was $7,115. This is comprised of a loss from continuing operations of $10,652, offset by non-cash depreciation and amortization of $3,573, increases in customer deposits of $72, accrued expenses of $174, other assets of $23, and deferred taxes of $233 and decreases of accounts receivable of $1,229, inventory of $5, and accounts payable of $1,721.  In addition, we had non-cash gain on minority interest of $31, accretion of interest of $402, and a loss on sale of equipment of $90.

Net cash flow provided from financing activities for the year ended October 31, 2005 was $9,334.  This is comprised of borrowings of long-term debt and net borrowings of short-term debt including related parties of $11,914, related party advances net of $1,410, offset by repayments on lines of credit of $52, principal repayments of long-term debt of $3,798, and debt issuance costs of $140.

Cash flow was used in investing activities for the year ended October 31, 2005 of $2,256.  This is comprised of purchases of property and equipment of $2,700 and proceeds from the sale of property and equipment of $444.

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The total increase (decrease) in cash is summarized as follows:

Critical Accounting Policies

Our significant accounting policies are summarized in the footnotes to our financial statements.  Some of the most critical policies are also discussed below.

As a matter of policy, we review our major assets for impairment.  Our major operating assets are accounts receivable, inventory, intangible assets and property and equipment.  We have not historically experienced significant bad debts expense, and we believe our reserve for doubtful accounts of $760 should be adequate for any exposure to loss in our October 31, 2005 accounts receivable.  We have also established reserves for slow-moving and obsolete inventories and believe the reserve of $2,195 is adequate.  We depreciate our property and equipment and amortize intangible assets (except for goodwill) over their estimated useful lives.  Property and equipment are reviewed for impairment when events and circumstances indicate impairment factors may be present. During fiscal 2005 and 2004, certain equipment became idle due to the realignment of the plant at U.S. Rubber.  The equipment will be used in the future for replacement of existing equipment as needed.  Due to the uniqueness of the equipment and the high cost to buy new similar pieces, the net book value of $1,544 and $353 for the years ended October 31, 2005 and 2004, respectively, was transferred to other assets under idle equipment and is subject to impairment valuation. Accordingly, we continue to analyze the Danzer and US Rubber assets for impairment in conjunction with our analysis of the continuing operations of these facilities. In assessing the recoverability of our property and equipment, we must make various assumptions regarding estimated future cash flows and other factors in determining the fair values of the respective assets. If these estimates or related assumptions change in the future, we may be required to record impairment charges for these assets in future periods. Any such resulting impairment charges could be material to our results of operations. As of October 31, 2005 we determined there is no impairment of our property and equipment.

Goodwill and intangibles are reviewed annually for impairment as of the first day of the fourth quarter or more frequently when events and circumstances indicate potential impairment factors are present. The realization of goodwill of $7,055 is primarily dependent on the future operations of the operating entities where the goodwill is allocated. Historical operating results, current product demand and estimated future results indicate the results of operations should be adequate to continue to realize this amount. However, future results may not meet expectations due to economic or other factors, including the ability to pass through material cost increases to our customers, to maintain revenues and to improve gross margins. Failure to meet expectations may result in the goodwill not being fully realizable and accordingly result in impairment charge which could be material to our operating results.

The initial cost of coaches acquired is depreciated over a straight-line basis to a salvage value of 38% of original cost. Subsequent enhancements and refurbishments of coaches are depreciated over five years using the straight-line method. The age of coaches in our fleet range from less than one year to eleven years, with an average age of approximately six years. Actual value of coaches after 15 years is dependent on several factors including the level of maintenance and the market conditions at the time of disposal. We recently

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disposed of two coaches which did not result in a material gain or loss.  We continue to evaluate our estimates with respect to the actual depreciation of such vehicles based on market conditions and our experience in disposals when they occur. Depreciation expense related to the coaches for the year ended October 31, 2005 was approximately $797. If future factors indicate that our salvage value on the coaches should be reduced to 20%, depreciation expense would have to be increased approximately $177 to $974. If it is determined that the coaches have no salvage value, estimated depreciation expense for the coaches for the year ended October 31, 2005 would have approximated $1,170.

In conjunction with financing of the acquisition of United, the Company issued 154,482 shares of common stock to Huntington Capital Investment Corporation (“Huntington”). The note purchase agreement includes a provision that gives Huntington the option to require the Company to repurchase these shares at 90% of market value upon the earlier of: a) fifth anniversary of issuance of such shares, b) default under the subordinated debt agreement, c) other factors related to a sale of substantially all assets of the Company as defined in the agreement. Increases in the value of the Company’s stock will result in a corresponding increase to this repurchase requirement. Subsequent to October 31, 2005 Huntington sold its shares to Black Rock Acquisition Corp for $1.85 per share. This transaction was a result of the “going private” transaction as fully disclosed in the schedule 13-E3 filing as of January 30, 2006.

With the acquisition of Classic effective May 1, 2004, we issued 170,451 shares of our common stock to the former owners of Classic. The purchase agreement for Classic included a provision that gives the sellers the right to have us redeem these shares at a price of $6.5970 per share within five years of the date of issuance of the shares. The sellers have the right to partially redeem these shares in increments of 10,000 or more shares per transaction. The agreement also has an automatic termination provision if the Company’s shares have traded at a closing price of greater than $7.33 per share for any consecutive period of 60 trading days during the period of time commencing on the date there are no restrictions on the seller’s sale of shares and ending on the fifth anniversary of the agreement. Subsequent to October 31, 2005 these shares were contributed under a subscription agreement to Black Rock Acquisition Corp. in exchange for the same number of Black Rock shares. This transaction was also part of the “going private” transaction as fully disclosed in the schedule 13-E3 filing as of January 30, 2006.

Contingencies

The Company is party to ordinary litigation incidental to its business.  No current pending litigation is expected to have a material adverse effect on results of operations, financial condition or cash flows.

Item 7A.               Quantitative and Qualitative Disclosures about market Risk

Due to the nature of our operations and the highly leveraged acquisitions incurred with variable debt we are subject to exposures that arise from fluctuations in interest rates. To manage the volatility relating to this exposure, we evaluate our exposures and attempt to minimize any negative effects by refinancing.

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OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands except per share and share data)

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Obsidian Enterprises, Inc. and Subsidiaries

Indianapolis, Indiana

We have audited the accompanying consolidated balance sheet of Obsidian Enterprises, Inc. and Subsidiaries as of October 31, 2005 and the related consolidated statements of operations, stockholders’ equity (deficit) and comprehensive loss, and cash flows for the year then ended.  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 audit.  The financial statements of Obsidian Enterprises, Inc. and Subsidiaries, as of October 31, 2004, were audited by other auditors whose report dated February 4, 2005, included an explanatory paragraph that described the assumption the Company would continue even though it had going concern even though it had suffered recurring losses from operations, total liabilities exceeded total assets, and had not complied with the terms of its debt financing agreements as discussed in the Summary of Significant Accounting Policies in the financial statements.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the 2005 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Obsidian Enterprises, Inc. and Subsidiaries at October 31, 2005, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying 2005 consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in the Summary of Significant Accounting Policies, the consolidated financial statements of the Company reflects recurring losses from operations, current liabilities in excess of current assets, violation of certain loan covenants,  and shareholders equity deficit.  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, successfully refinancing certain obligations and ability to obtain additional borrowings.  Management’s plans in regard to these matters are also described in the Summary of Significant Accounting Policies.  The financial statements do not include any adjustments that might result from the outcome of these uncertainties.

The accompanying notes are an integral part of the consolidated financial statements.

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Somerset CPAs, P.C.

Indianapolis, Indiana

February 10, 2006

The accompanying notes are an integral part of the consolidated financial statements.

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The accompanying notes are an integral part of the consolidated financial statements.

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