SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED OCTOBER 31, 2003 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO _______________
0-17430
Commission File Number
OBSIDIAN ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Delaware 35-2154335
(State or other jurisdiction of incorporation (IRS Employer Identification No.)
or organization)
111 Monument Circle, Suite 4800
Indianapolis, IN 46204
(Address of principal executive offices) (Zip Code)
(317) 237-4122
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($0.0001 par value)
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES _X_ NO ____
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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes ___ No _X_
As of April 30, 2003, 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 $3,209,900.
As of January 30, 2004, the registrant had 36,007,855 shares of common stock,
4,368,399 shares of Series C Preferred Stock and 134,758 shares of Series D
Preferred Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
INFORMATION REQUIRED IN PART II AND PART III HAS NOT BEEN INCORPORATED BY
REFERENCE.
ITEM 1. BUSINESS.
INTRODUCTION
Obsidian Enterprises, Inc, is a holding company headquartered in Indianapolis,
Indiana. We have historically invested in and acquired small and mid size
companies in basic industries such as manufacturing and transportation. We
conduct business through our subsidiaries.
HISTORY AND DEVELOPMENT OF BUSINESS
We expanded our business and changed our management in 2001. Prior to that date,
our only subsidiary, Danzer Industries, Inc., manufactured metal parts and truck
bodies for the service and utilities markets. In 2001, Timothy S. Durham became
our Chief Executive Officer and Chairman of the Board and we purchased four new
businesses:
o Pyramid Coach, Inc., which provides luxury coach leases for
corporations and the entertainment industry;
o U.S. Rubber Reclaiming, Inc., which owns and operates butyl-rubber
reclaiming facilities;
o United Acquisition, Inc., which we operate as United Expressline and
Southwest Trailers, manufactures steel-framed cargo, racing and
specialty trailers; and
o Champion Trailer, Inc., manufacturer of customized racecar
transporters, specialty exhibits trailers and mobile hospitality units
(we sold this company in 2003).
We acquired these companies from Mr. Durham, Obsidian Capital Partners, L.P. and
their other owners. Mr. Durham is one of the partners of Obsidian Capital
Partners. We issued shares of our Series C Preferred Stock to pay for these
companies.
In October 2001, we changed our state of incorporation from New York to Delaware
and our name from Danzer Corporation to Obsidian Enterprises, Inc.
DESCRIPTION OF BUSINESS
OVERVIEW
Our headquarters are in Indianapolis, Indiana. 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 five
subsidiaries:
o U.S. Rubber;
o Pyramid Coach;
o Obsidian Leasing Co., Inc., the owner of some of the coaches operated
by Pyramid Coach;
o United Expressline; and
o Danzer Industries.
We sold Champion in January 2003.
SEGMENTS
We operate in three industry segments:
o butyl-rubber reclaiming;
o trailer and related transportation equipment manufacturing; and
o coach leasing
All sales are in the Western Hemisphere, primarily in the United States. For
quantitative segment information, see Note 13 to the Consolidated Financial
Statements.
Butyl Rubber Reclaiming
Our butyl-rubber processing facilities are 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 distribute 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.
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. Three other enterprises engaged in reclaiming butyl rubber
worldwide are:
o The Gujarat Company in India;
o Han Cook in Korea; and
o Vrederstein N.V. in the Netherlands.
These enterprises are not major competitors of ours for sales in the Western
Hemisphere, 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 scrap.
Two enterprises manufacture virgin butyl rubber for sale in the United States:
o Exxon Corporation; and
o Bayer AG.
These enterprises are much larger than we are, are well capitalized and have
larger sales staffs. The prices these enterprises charge place an upper limit on
the prices that we can charge for reclaimed butyl rubber.
We obtain our supply of scrap inner tubes from approximately 1000 scrap
merchants worldwide but primarily 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. In 2001,
we began experimenting 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. Our work to
date suggests that pad scrap may be a partial substitute for inner tubes as raw
material for the Company's reclaimed butyl rubber product.
Although we have had long-term relationships with our primary customers, we do
not have long-term contracts with them. Two of our reclaimed butyl rubber
customers accounted for a substantial portion of our butyl rubber sales in 2003:
o Michelin: 41 %
o Kelley Springfield: 20%
The loss of either of these 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
We manufacture service truck bodies at our facility in Hagerstown, Maryland. We
manufacture truck bodies to order for original equipment truck manufacturers and
under the Morrison trademark. We ship the finished bodies to the customer for
installation on truck body chassis. We sell our private label products directly
to our private label customers and market our proprietary "Morrison" products
through a network of approximately 300 dealers who, in turn, sell to
municipalities, utility companies, cable companies, phone companies and
contractors. We market the truck bodies through an internal sales force.
Most truck body customers are in the East and Southeast United States. In 2002,
our largest truck manufacturing customer filed for reorganization under Chapter
11 of the United States bankruptcy code and continues to operate. The loss of
our relationship with the truck manufacturer had a material adverse effect on
our business.
A significant number of companies manufacture service truck bodies in the United
States. While many of these companies are relatively small and do not possess
our technical capacity, a number of our competitors are much larger and possess
equal or greater technical and financial resources. Four of these competitors
are:
o Knapheide Manufacturing Co.;
o Omaha Standard, Inc.;
o Reading Body Works, Inc.; and
o Stahl, a Scott Fetzer Co., which is a wholly owned subsidiary of
Berkshire Hathaway, Inc.
We compete for truck body sales through price and service, with price being the
most important factor. We also offer truck bodies made to the individually
specified requirements of our customers.
We began manufacturing cargo trailers at our Hagerstown facility during 2002 to
utilize the available manufacturing capacity and meet demand for cargo trailers.
We manufacture specialty racing, cargo and ATV trailers at facilities we own in
Bristol, Indiana, and White Pigeon, Michigan. To increase our capacity to meet
demands, we also began leasing a facility in Elkhart, Indiana, in 2003. Our
trailer business is somewhat seasonal, with fewer orders during the months from
November through January. We market our trailers under the names "United
Expressline," "United Trailers," "Southwest Expressline," and "Southwest
Trailers." During 2003, we began the process of consolidating the brand names
under one brand, "United Trailers." Although the prices for our trailer brands
can be as high as $75,000, the average price is approximately $3,900.
We sell our "United Trailers," "United Expressline," "Southwest Trailers," and
"Southwest Expressline" product lines through two dealer networks that have
approximately 300 dealers in the United States and Canada. Most of these dealers
are located in the Midwest United States. Although we have formal agreements
with a few of the dealers, most of the dealership arrangements are informal and
nonexclusive. We conduct our sales through an internal sales force.
The trailers are built to order to dealer specifications. The terms of sale for
the "United Trailers," "United Expressline," "Southwest Trailers," and
"Southwest Expressline" products are FOB the plant with payment generally due
upon the dealer taking delivery of the trailer. A few dealers have 30- or 60-day
terms.
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 these competitors are:
o Haulmark Industries;
o Pace American;
o U.S. Cargo; and
o Wells Cargo.
We compete for specialty racing, cargo and ATV trailer sales through price,
quality and availability, but price generally is the important factor.
We purchase our raw materials for the trailer and related transportation
equipment segment from numerous suppliers and have not had any difficulty in
obtaining components or raw materials. During the last six months of fiscal
2003, the supply of plywood became limited. Although we had an adequate supply
for our production needs, the prices nearly doubled during this period. At this
time, we cannot estimate if or when the cost of plywood will return to historic
levels, and we are pursuing alternate material sources.
We generally warrant our product to be free from defects in material and
workmanship and performance under normal use and service for 12 months after
shipment. Our obligation 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.
At October 31, 2003, the backlog of our trailer and related transportation
segment was approximately $4,650, composed of approximately $140 for truck
bodies and $4,510 for specialty racing, cargo and ATV trailers. We expect to
fill this backlog during the 2004 fiscal year.
Coach Leasing
We lease high-end luxury entertainment coaches from our facility in Joelton,
Tennessee. We lease coaches for both short-term (weekly or monthly) and
long-term periods.
At October 31, 2003, we managed 38 coaches. We also sometimes sublease coaches
from other coach owners on a short-term basis.
DW Leasing, LLC, a company Mr. Durham controls, transferred 22 coaches to our
subsidiary Obsidian Leasing in 2002. DW Leasing continues to own seven coaches
that we manage. We also manage nine coaches owned by DC Investments Leasing,
LLC, an entity controlled by Mr. Durham.
Our consolidated financial statements include the assets, liabilities and equity
of DW Leasing and DC Investments Leasing and the results of their operations
from January 1, 2001 and December 1, 2002 (inception of DC Investments Leasing),
respectively. Both of these entities are in the business of coach leasing and
their coaches are leased exclusively through Pyramid Coach. For additional
information, see the discussion of FASB Interpretation No. 46 included in Note 2
to the Notes to Consolidated Financial Statements contained in Item 8.
We lease coaches through an internal sales force to the country, rock-n-roll,
pop and traveling Broadway show entertainment industries. We also lease coaches
to various corporations. During the year ended October 31, 2003, we leased
coaches to a number of touring groups, including Ozzy Osbourne, Brad Paisley and
the Broadway Show "Stomp." Our corporate customers include the Golf Channel.
Several other companies lease luxury coaches. Some of our larger competitors
include:
o Entertainer Coaches of America;
o Florida Coach;
o Senators Coach; and
o 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.
GOVERNMENT REGULATION
Federal, state, and local agencies regulate areas of our business, including for
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, 2003, we had 405 employees. We have a labor contract through
January 2005 with the United Brotherhood of Carpenters and Joiners of America
for the approximately 40 production workers at our truck body manufacturing
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 "Morrison," "Danzer," "Pyramid," "United
Trailer," "United Expressline," "Southwest Trailer," and "Southwest Expressline"
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 the 2004 fiscal year.
FORWARD-LOOKING STATEMENTS
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 relate strictly to historical or current
facts. Forward-looking statements that involve risks and uncertainties that
could cause actual results to differ materially. Factors that might cause or
contribute to such differences include, but are not limited to, those discussed
in the section entitled "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of 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 to be filed by the Company in 2004. 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.
ITEM 2. PROPERTIES
The following describes the Company's properties:
Identification Location Ownership/Description Segment
-------------------------------------------------------------------------------------------------------------------
Headquarters 111 Monument Circle, Suite 3,700 square feet leased N/A
4800, Indianapolis, IN commercial office space
46204
Butyl Rubber Processing Vicksburg, Mississippi Two adjacent plants aggregating Butyl Rubber
Plants 87,000 square feet, each owned Processing
by the Company and encumbered
by a mortgage to PNC Bank
Truck Body Plant Hagerstown, Maryland 75,000 square foot plant owned Trailer and related
by the Company and encumbered transportation
by a mortgage to Fair Holdings, equipment
Inc. manufacturing
United Expressline Plant Bristol, Indiana Several buildings aggregating Trailer and related
49,000 square feet owned by the transportation
Company and encumbered by a equipment
mortgage to First Indiana Bank manufacturing
NA
United Expressline Plant Elkhart, Indiana 35,000 square foot plant leased Trailer and related
by the Company transportation
equipment
manufacturing
United Expressline Plant White Pigeon, Michigan 47,000 square foot plant owned Trailer and related
by the Company and encumbered transportation
by a mortgage to First Indiana equipment
Bank NA manufacturing
Pyramid Coach Office Joelton, Tennessee 12,000 square feet of office Coach Leasing
space and other facilities
leased by the Company
The Company believes that its property, plant and equipment are well maintained
and adequate for its requirements. The Company also believes that all of its
assets are adequately covered by insurance.
ITEM 3. LEGAL PROCEEDINGS
All dollar amounts in Item 3 are in thousands (except for share and per share
information).
On April 29, 2002, Markpoint Equity Fund J.V. ("Markpoint"), a Texas joint
venture of which The Markpoint Company serves as Managing Partner, filed an
action in the Texas District Court, Dallas County, seeking payment of $1,250
owed by Champion, a subsidiary subsequently divested, as further described in
Note 4 to the Consolidated Financial Statements. On January 27, 2003, the
Company reached an agreement to settle this liability for a cash payment of $675
and issuance to Markpoint of 32,143 shares of the Company's Series D preferred
stock. In addition, the agreement provided Markpoint the option to require the
Company to repurchase these shares at a price of $21 per share. The Company's
repurchase obligation was guaranteed by Mr. Durham. Pursuant to an Assignment
Agreement, dated May 12, 2003, the Company assigned all of its rights, title and
interest in the repurchase option to Fair Holdings, Inc. in exchange for Fair
Holding, Inc.'s assumption of the Company's repurchase obligations. The
repurchase obligation as of October 31, 2003 has been recorded in the
consolidated balance sheet as mandatory redeemable preferred stock. Fair
Holdings exercised its options to acquire the Series D Preferred Stock from
Markpoint on May 12 and November 10, 2003.
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 the 2003 fiscal year.
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 Over-the-Counter
Electronic Bulletin Board under the symbol "OBSD." The following table sets
forth the high and low bid quotations for the common stock for the fiscal
quarters indicated.
FISCAL 2003 FISCAL 2002
High Low High Low
1st Quarter $0.26 $0.15 $0.25 $0.12
2nd Quarter $0.25 $0.18 $0.36 $0.12
3rd Quarter $0.26 $0.08 $0.27 $0.11
4th Quarter $0.85 $0.14 $0.27 $0.10
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, 2003, there were approximately 871 holders of
record of the Company's common stock. Most 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.
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 accompanying
Consolidated Financial Statements of Obsidian Enterprises, Inc. and subsidiaries
for the years ended October 31, 2003 and 2002 and the ten-month period ended
October 31, 2001 and the information set forth in Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
in Item 8, "Financial Statements and Supplementary Data" below.
The information for the years ended December 31, 2000 and 1999 is for that of
U.S. Rubber Reclaiming only, the accounting acquirer in the reverse merger
further described in Items 7 and 8.
OPERATING DATA:
(Amounts in thousands, except per share data)
Ten Months
Year Ended October 31, Ended Year Ended December 31,
--------------------------------- October 31, ----------------------------
2003 2002 2001 2000 1999
-------------------------------------------------------------------------------
Net sales $ 59,295 $ 57,274 $ 24,689 $ 12,583 $ 11,439
Income (loss) from operations (978) 449 981 184 413
Discontinued operations, net of tax (49) (1,040) (3,376) -- --
Cumulative effect of change in accounting
principle -- (2,015) -- -- --
Net income (loss) (3,873) (6,330) (4,395) 48 216
Basic and diluted earnings (loss) per
share:
From continuing operations (.12) (.09) (.04) -- --
Discontinued operations -- (.03) (.13) -- --
Cumulative effect of change in
accounting principle -- (.06) -- -- --
Net income (loss) per share (.12) (.18) (.17) -- --
BALANCE SHEET DATA:
October 31, December 31,
-------------------------------------------------------------------------
2003 2002 2001 2000 1999
-------------------------------------------------------------------------
Working capital (deficit) $ 6,045 $ 1,591 $ (2,528) $ 864 $ 1,896
Total assets 45,882 45,923 48,850 9,633 11,633
Long-term debt, including current portion and
mandatory redeemable preferred stock 43,221 36,464 35,382 3,846 5,914
Stockholders' equity (deficit) (3,253) (689) 1,331 4,939 4,890
No dividends have been declared or paid in any period presented.
We 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 to 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).
INTRODUCTION
Obsidian Enterprises, Inc. is a holding company headquartered in Indianapolis,
Indiana. We conduct business through our subsidiaries:
o Pyramid Coach, Inc., a leading provider of corporate and celebrity
entertainer coach leases;
o Obsidian Leasing, Inc., owner of coaches managed by Pyramid Coach;
o United Expressline, Inc., and its division, Southwest Trailers,
manufacturers of steel-framed cargo, racing ATV and specialty
trailers;
o U.S. Rubber Reclaiming, Inc., a butyl-rubber reclaiming operation; and
o Danzer Industries, Inc., a manufacturer of service and utility truck
bodies and steel-framed cargo trailers.
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.
Organization of Financial Information
The 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 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' equity (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:
o a discounting program in the Trailer manufacturing segment in 2003,
o cost reduction initiatives for raw materials under "lean"
manufacturing concepts,
o an asset impairment charge and discontinued operations recorded in
fiscal 2002,
o the cumulative effect of accounting principle as a result of
adopting Statement of Financial Accounting Standard (SFAS) No.
142 in fiscal 2002, and
These significant transactions 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 is necessary in order to
estimate the likelihood that current trends will continue or these events will
recur.
RESULTS OF OPERATIONS
OVERVIEW
During 2003, we were negatively impacted by general economic conditions and
various company specific events discussed below. We were able to effect a
significant restructuring and refinancing of our outstanding indebtedness and
secured new funding (see "Liquidity and Capital Resources"). As discussed below,
during 2004, we anticipate generating positive cash flow and increasing our
working capital through improved operations and pursuing significant strategic
acquisition initiatives.
o In the trailer and related transportation equipment manufacturing
segment our major competitors were aggressive in their sales and
marketing approach by offering price concessions and a variety of
special programs designed to stimulate business. For the first time,
we were forced to offer sales promotions and discount programs to
maintain our market share. In lieu of future discounting to maintain
market share, we have introduced a new line of trailers that is
offered at competitive prices while maintaining historic profit
margins. Our results in this segment were also affected by the
significant increase in raw material prices primarily related to
plywood during the last six months of the 2003 and the fact that the
truck body market has been depressed for the past twenty-four months
as the telecommunications industry has maintained low levels of
capital spending. Given the current state of the telecommunications
industry and economic conditions, we will continue to evaluate the
operations and progress with the implementation of the trailer
production in the Danzer operational facility. We are evaluating the
trailer line implementation and its impact on operations on a
continuous basis.
Since we expect market conditions to remain very competitive, we
introduced new cost reduction initiatives, including combining
operations for United Expressline and Southwest and coordinating
administrative and sales and marketing efforts under one brand name,
United Trailers. In addition, we are implementing programs with a goal
of reducing material cost as a percentage of sales by 3.0%, since we
believe, compared to industry averages, that our cost of materials
percentage appears to be above the industry average. Additional
strategies in the trailer and related transportation segment include:
building sales growth through our expansion of production facilities,
market expansion through cross selling and additional geographical
production at Danzer and other potential acquisitions.
o Our butyl rubber reclaiming segment increased sales by 8.7%. We were
able to reduce some overall manufacturing costs by consolidating some
of the operational facilities. However, additional costs were incurred
to maintain the equipment in this very capital intensive operation.
The availability of raw materials continues to be a concern as the use
of Butyl inner tubes and reclaim disposal has decreased over the past
several years. We continue to identify new market sources for raw
material including a new recycling program with the chapters of The
National FFA Organization. A new Fine Grind process was also initiated
in 2003 which increases our ability to use other types of rubber in
our Butyl reclaim process and as potential new natural rubber
products.
o Fiscal 2003 was a record-setting year for our coach leasing segment
for both net sales and earnings. Five additional coaches were added to
our fleet at the end of the first quarter, and the entertainment
industry and related tours began to pick up momentum due to improving
economic conditions and additional marketing efforts. We were able to
refinance a significant portion of the bank debt during the fourth
quarter of 2002 and the first quarter of 2003, which reduced our
overall effective rate of interest paid to approximately 8.5%.
Utilization of our coaches has a significant impact on the earnings of
this segment. The last six months of fiscal 2003 began to show
improvements in our operations. We plan to leverage that momentum and
continue to take steps to increase productivity and otherwise reduce
costs to lay the groundwork for continuous improvement.
o As discussed below under "Liquidity and Capital Resources," during
2003 we began and substantially completed the process of refinancing
and restructuring our outstanding indebtedness. At February 2, 2004,
we had completed negotiation of a $12.0 million financing facility of
which approximately $5.9 million is available for borrowing by the
Company.
o We commenced a strategy in late 2003 of pursuing strategic acquisition
opportunities that include targets both in our traditional, basic
industries and manufacturing sectors as well as targets that possessed
assets (including cash) that, while outside our traditional areas of
focus, were available on terms that our management believed to be
attractive. While no material negotiations are currently active with
respect to any targets (other than Net Perceptions, Inc., which is
discussed below and with respect to which we have commenced an
exchange offer), we anticipate that over the course of 2004 we will
pursue acquisition opportunities that we deem attractive in a variety
of industry sectors. Ultimately, these acquisitions may (but can not
be guaranteed) to result in our qualifying for listing on a national
securities exchange, having increased financial resources and
potentially a broader asset base and more diversified sources of
revenue.
In addition, we plan to eliminate waste throughout the Company through the use
of "lean" manufacturing concepts such as inventory control and managing
purchases. We are strengthening our cultural values by focusing on teamwork,
communication, and customer responsiveness.
Fiscal 2003 Compared with Fiscal 2002
The following table details our results of operations as a percentage of sales:
Year Ended October 31,
----------------------------
2003 2002
----------------------------
Net sales 100.0% 100.0%
Cost of sales 87.3 83.5
Selling, general and administrative expenses 14.4 15.0
Loss on asset impairment -- 1.3
Loss from discontinued operations -- 1.8
Interest expense 6.0 6.2
Interest income -- --
Net Sales
Net sales in fiscal 2003 were $59,295 million compared to $57,274 million in
fiscal 2002, an increase of 3.5%. Sales growth was primarily driven by our coach
leasing segment with the addition of five new buses. Our butyl rubber segment
also had increases due to increased demand in the oil exploration and tire
industries. The trailer and related equipment manufacturing segment had a slight
increase due to the discounting that occurred in the industry during 2003 and
overall reduction in the sale of truck bodies.
Looking ahead, we expect improvement of sales growth in fiscal 2004 compared to
sales growth in 2003, driven primarily by:
o The introduction of new products in cargo trailers,
o Elimination of the discounting program for cargo trailers,
o Increased production capacity through our new leased facility in
Elkhart, Indiana,
o Expected improvement in economic conditions, and
o Strategic marketing activities directed to expand our market share of
cargo trailers on the East Coast through our Hagerstown Maryland
facilities which is in its second year of production for cargo
trailers.
Gross Profit
Gross profit as a percentage of sales decreased 3.8 percentage points from 16.5
percent in fiscal 2002 to 12.7 percent in fiscal 2003. The decrease was mainly
the result of:
o The sales discount program for cargo trailers that took place in 2003
which lowered our gross margin by $1,511 million or 2.6%.
o Increased raw material costs in our trailer segment of 1%, primarily
related to plywood which is a significant total of our raw materials
used in production.
o Purchases of raw materials in our rubber reclaim segment from foreign
sources thus increasing the cost.
Looking ahead, gross profit is expected to improve by discontinuing our
discounting program for cargo trailers, implementation of our cost reduction
initiatives, continued development of our fine grind production and the roll out
of The National FFA Organization recycling project to find additional sources of
butyl and other rubber sources.
Selling, General And Administrative (SG&A) Expenses
Our selling, general and administrative expenses decreased $53 or .6% for the
year ended October 31, 2003 compared to 2002. The decrease is related primarily
to the overall decrease in professional fees for services in assisting with
creating better subsidiary reporting and post acquisition activities, the cost
to obtain prior year audits to meet regulatory filing requirements and the cost
of using outside consultants to provide accounting and related services to
management.
Looking ahead, SG&A expense is expected to stay the same or increase slightly as
we expect to grow our company through mergers and acquisitions which will
include additional legal, accounting and regulatory filing expenses.
Interest Expense
Interest expense for the year ended October 31, 2003 as a percentage of average
debt borrowings of $39,819 was 8.9%. Interest expense for the year ended October
31, 2002 as a percentage of average debt borrowings of $35,923 was 9.6%. The
decrease is primarily due to the reduction of the prime rate as well as the
refinancing debt and equity transactions discussed below in "Liquidity and
Capital Resources," "Refinancing Activities," and "Partners Equity
Transactions."
Income Tax Provision
The income tax benefit for the year October 31, 2003 increased by $904 compared
to the year ended October 31, 2002 The income tax benefit is created primarily
through net operating loss carryforwards recognized to the extent they are
available to offset the Company's net deferred tax liability.
Discontinued Operations
On October 30, 2002, our Board of Directors agreed to sell substantially all
assets of Champion to an entity controlled by Messrs. Durham and Whitesell in
exchange for assumption of all liabilities of Champion, other than its
subordinated debt. In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 144, Accounting for Impairment of Long-Lived Assets, the
operating results of Champion have been classified as discontinued operations.
The losses from discontinued operations for the year ended October 31, 2003 and
2002 represent the losses of Champion during these periods, net of tax benefit
of $25 and $0, respectively. The loss from discontinued operations for the years
ended October 31, 2003 and 2002 were $49 and $1,040, respectively.
Substantially all assets of Champion subject to its liabilities were sold on
January 30, 2003. No gain or loss was recognized in the consolidated statement
of operations due to the involvement of related parties. This transaction
resulted in an increase in equity of $1,142.
Fiscal 2002 Compared with Fiscal 2001
The following table details our results of operations as a percentage of sales:
Year Ended Ten Months Ended
October 31, October 31,
2002 2001
---------------------------------
Net sales 100.0% 100.0%
Cost of sales 83.5 78.8
Selling, general and administrative expenses 15.0 17.2
Loss on asset impairment 1.3 --
Loss from discontinued operations 1.8 13.7
Interest expense 6.2 9.4
Our results of operations for 2001 are not comparable to 2002 because the
results of operations in 2001 include only ten months of operations, which
affects the comparability of the two periods.
In addition, the results of operations for the trailer manufacturing segment in
2001 do not include the operations of United and Danzer Industries for the
entire ten-month period. Under accounting principles generally accepted in the
United States of America, U.S. Rubber is treated as the acquirer in the June 21,
2001 Reorganization, and U.S. Rubber is treated as having acquired Champion and
Pyramid at the beginning of 2001. Thus, the results of operations for the
ten-month period ended October 31, 2001 include the operations of the following
subsidiaries from the date shown below through October 31, 2001:
Subsidiary Date
Danzer Industries June 21, 2001
Pyramid January 1, 2001
U.S. Rubber January 1, 2000
United July 31, 2001
Since Champion is accounted for as a discontinued operation, its results of
operations and cash flow have been removed from our continuing operations for
all periods presented.
Net Sales
As noted above, net sales for the period is not comparable due to the timing of
the acquisitions and combining the operations. Net sales increased in 2002
primarily in cargo trailers due to additional demand driven by marketing effort
and our Coach Leasing segment which increased sales due to the addition of two
new coaches, increase in our utilization and marketing efforts to rock, pop,
touring Broadway shows and corporate customers. These increases were partially
offset by a continued reduction in the demand for truck bodies and reduced
manufacturing capacity at the butyl rubber reclaiming facility due to a fire
that closed a portion of the facility for approximately two months.
Gross Profit
Gross profit as a percentage of net sales was 16.5% in fiscal 2002 compared to
21.2% in 2001. The decrease was mainly a result of the reduced volume of truck
bodies, and operational inefficiencies in the butyl rubber segment due to a
fire. The coach leasing segment also had reduced gross margins as a result of
leasing third-party buses for part of the year to meet current demand.
Selling, General And Administrative (SG&A) Expenses
As noted above, our selling, general and administrative expenses for the periods
presented are not comparable. Our selling, general and administrative expenses
decreased as a percentage of sales by 2.2% for the year ended October 31, 2002
versus the ten-month period ended October 31, 2001. although the change was
affected by the integration of operations as noted above.
In addition, selling, general and administrative expenses were higher for the
year ended October 31, 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 our personnel on a going forward basis.
The additional costs were partially offset by a business interruption claim
related to the fire at the butyl rubber reclaiming facility in the amount of
$325.
In addition, on February 1, 2002, we changed our estimates with regard to
depreciation of coaches owned by DW Leasing and Obsidian Leasing by establishing
a salvage value of approximately 38%. The depreciable lives of the coaches of 15
years was not changed. This change in estimate resulted in a reduction of
selling, general and administrative expenses in the year ended October 31, 2002
of approximately $200.
Interest Expense
As discussed above, results between periods presented are not comparable. While
the interest expense increased over the prior period primarily as a result of
the transactions that occurred in June and July 2001, interest expense for the
year ended October 31, 2002 as a percentage of average debt borrowings of
$37,158 was 9.6%. Interest expense for the ten months ended October 31, 2001 as
a percentage of average debt borrowings of $24,964 was 9.3% (11.2% on an annual
basis). The decrease is primarily due to the reduction of the prime rate as well
as the refinancing debt and equity transactions discussed below in "Liquidity
and Capital Resources," "Refinancing Activities," and "Partners Equity
Transactions."
Cumulative Effect of Change in Accounting Principle
We adopted the new rules on accounting for goodwill and other intangible assets
beginning in the first quarter of fiscal 2002. We completed our transitional
impairment test in conjunction with the adoption of Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets during
the quarter ended July 31, 2002. The impairment test indicated that a portion of
the goodwill of Danzer Industries was impaired. Accordingly, we recorded $2,015
as a cumulative effect of change in accounting principle.
During the fourth quarter of 2002, we evaluated the recoverability of Danzer
Industries' long-lived assets, including remaining goodwill, due to Danzer
Industries' significant operating loss in 2002 and the Chapter 11 bankruptcy
filing of a significant customer. We determined the estimated future
undiscounted cash flows were below the carrying value of certain long-lived
assets. As a result, we wrote off the remaining goodwill and recorded as an
operating expense a charge of $720 as loss on asset impairment.
Discontinued Operations
On October 30, 2002, our Board of Directors agreed to sell substantially all
assets of Champion to an entity controlled by Messrs. Durham and Whitesell in
exchange for assumption of all liabilities of Champion, excluding its
subordinated debt. In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 144, Accounting for Impairment of Long-Lived Assets, we
classified the operating results of Champion as discontinued operations. The
losses from discontinued operations for the year ended October 31, 2002 and ten
months ended October 31, 2001 of $1,040 and $3,376, respectively, represent the
losses of Champion during these periods, net of tax benefit of $438 and $0,
respectively. The loss in 2001 includes a charge for asset impairment of $2,305.
Champion was not included in the financial statements for the year ended
December 31, 2000. Sales of Champion in the year ended October 31, 2002 were
$2,884 as compared to $3,365 for the ten months ended October 31, 2001. The
decrease of $481 or 14.3% is attributable to lower order volume during 2002.
To facilitate the sale of substantially all assets of Champion, on January 27,
2003, we 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 our Series D
preferred stock. In addition, we agreed to repurchase these shares at
Markpoint's option at a price of $21 per share. Our repurchase obligation was
guaranteed by Mr. Durham. Fair Holdings, Inc. assumed the repurchase obligation
in 2003. See Note 11 to the consolidated financial statements. In calendar 2003
Markpoint exercised its option to require the repurchase of the shares and the
shares were purchased by Fair Holdings, Inc. The shares issued to Markpoint have
been recorded in the consolidated balance sheet as mandatory redeemable
preferred stock. An amount of $338 was reclassified to equity in May 2003 when
Fair Holdings acquired 16,072 shares of the Series D Preferred Stock for
Markpoint and the repurchase requirement for those shares was eliminated.
Subsequent to year end, Fair Holdings acquired the remaining 16,071 shares of
Series D Preferred Stock from Markpoint canceling the remaining repurchase
obligation. The balance of mandatory redeemable Series D Preferred Stock at
October 31, 2003 of $337 was reclassified to equity subsequent to year end.
Income Tax Provision
There was income tax benefit of $33 for the year ended October 31, 2002 due to
the utilization of previously reserved net operating loss (NOL) carryforwards
offset by taxable gains on debt forgiveness. The income tax benefit is created
primarily through NOL carryforwards recognized to the extent they are available
to offset our net deferred tax liability.
BUSINESS SEGMENTS
The following information provides perspective on our business segments' sales
and operating results by segment for the year ended October 31, 2003, 2002 and
the ten-month period ended October 31, 2001. 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:
Ten Months Ended
Year Ended October 31, October 31,
---------------------------------
2003 2002 2001
-----------------------------------------------------
Trailer manufacturing $ 41,009 $ 40,775 $ 10,650
Butyl rubber reclaiming 11,005 10,125 9,874
Coach leasing 7,281 6,374 4,165
-----------------------------------------------------
Total $ 59,295 $ 57,274 $ 24,689
=====================================================
We allocate selling, general and administrative expenses to the respective
subsidiaries primarily based on a percentage of sales. Amounts allocated by
segment are as follows:
Year Ended October 31, Ten Months Ended
October 31,
---------------------------------
2003 2002 2001
-----------------------------------------------------
Trailer manufacturing $ 1,174 $ 934 $ 245
Coach leasing 200 146 96
Butyl rubber reclaiming 317 232 275
-----------------------------------------------------
Total $ 1,691 $ 1,312 $ 616
=====================================================
TRAILER AND RELATED TRANSPORTATION EQUIPMENT MANUFACTURING
The following table shows sales, cost of sales and gross profit for this segment
for the periods indicated:
Year Ended October 31, Ten Months Ended
October 31,
------------------------------
2003 2002 2001
-------------- --------------- ---------------------
Net sales $ 41,009 $ 40,775 $ 10,650
Cost of sales 37,704 35,077 8,955
-------------- --------------- ---------------------
Gross profit $ 3,305 $ 5,698 $ 1,695
============== =============== =====================
Gross profit % 8.1% 14.0% 15.9%
============== =============== =====================
Sales in this segment increased $234 or .6% over the comparable period of 2002.
The increase was primarily related to the following factors. The sales of cargo
trailers increased approximately $1,600 for the year ended October 31, 2003 as a
result of additional production facilities. We added a new leased facility in
Elkhart, Indiana, and production at our Danzer facility. We also made sales to
existing customers in new markets. We also began a sales discount/rebate program
to stimulate sales. While this program did increase the units sold, it resulted
in a lower average price per unit.
The increase in cargo trailer sales was offset by the decrease in sales of truck
bodies of approximately $1,375 for the year ended October 31, 2003. This
reduction was related to the continued depressed condition of the
telecommunications industry which has historically been a significant consumer
of truck bodies, as well as the bankruptcy filing of a significant truck body
customer in late 2002.
Looking ahead, sales for the trailer and related equipment manufacturing segment
are expected to grow in fiscal 2004 compared to fiscal 2003 because we expect
our new product line for cargo trailers, which has been well received, will
eliminate the need for a discounting program. We also have additional production
capacity in our new leased facility and at Danzer. We believe sales of truck
bodies will continue at about the same level as 2003 unless a replacement market
can be developed.
Gross profit decreased 5.9% primarily as a result of our discounting of cargo
trailers that decreased our gross margin by 2.6 %. The sales discounts/rebates
offered during 2003 have ended as of July 31, 2003 with the introduction of new
product lines to compete in the market at higher gross margins than the
discounted cargo trailers. Gross profits were also impacted by the rising costs
of raw materials, primarily plywood which is a significant portion of materials
in our cargo trailers. Plywood costs have nearly doubled in the last quarter of
fiscal 2003 and reduced our overall gross margin by 1%. In addition the
decreased volume at our truck body plant resulted in an inability to absorb
fixed overhead costs. To offset these costs, management began production of
cargo trailers in this facility during late 2002. Inefficiencies in the start up
of this operation and additional production facilities in Elkhart, Indiana, have
also had a negative impact in gross profit margins as compared to the year ended
October 31, 2002.
Gross profit for the year ended October 31, 2002 was impacted by the reduced
volume of truck bodies sold and only partially offset by reductions in personnel
at these facilities and increased volume in the cargo trailer product line.
BUTYL RUBBER RECLAIMING
The following table shows sales, cost of sales and gross profit for this segment
for the periods indicated:
Year Ended October 31, Ten Months Ended
October 31,
------------------------------
2003 2002 2001
-------------- --------------- ---------------------
Net Sales $ 11,005 $ 10,125 $ 9,874
Cost of Sales 9,972 9,407 8,884
-------------- --------------- ---------------------
Gross Profit $ 1,033 $ 718 $ 990
============== =============== =====================
Gross Profit % 9.4% 7.1% 10.0%
============== =============== =====================
Net sales in this segment for the year ended October 31, 2003 as compared to
2002 increased 8.7% in the amount of $880. Sales in this segment were higher in
2003 because of increased demand from our tire manufacturing customers and an
increase in pricing. Net sales also increased due to increased demand for
pipeline mastic wraps produced with reclaimed butyl rubber. Demand for this
product fell dramatically beginning in October 2001 as a result of a decline in
the price of crude oil in late 2001, which caused a decline in new oil
exploration. As the price of crude oil has increased, the demand for those uses
has also increased.
Net sales in this segment for the year ended October 31, 2002 as compared to the
ten-month period ended October 31, 2001 increased 2.5%. However, sales in this
segment were lower than anticipated for the year ended October 31, 2002 compared
to the ten months ended October 31, 2001 due to damage at a production facility
in May 2002 as a result of a fire at an adjacent property. The damage caused the
facility to be closed for approximately two months and resulted in our being
unable to fill all outstanding customer orders. This facility resumed production
during July 2002. During 2002, we recorded an insurance recovery for business
interruption of $325 as a reduction of general and administrative costs. In
addition to the effects of the fire, sales for 2002 were below historical levels
due to the factors enumerated below.
Significant portions of sales in this segment are to tire manufacturing
companies. The tire manufacturers continued to see lower volumes of tire
production during 2002. Accordingly, sales to these customers are below
historical levels.
The lack of consistent sources of raw materials has also been a constraint on
generating additional sales volume. The primary material used in reclaiming is
scrap inner tubes. Since the introduction of the tubeless tire for automobiles
in the 1970s, sources of material have declined substantially. Management has
been testing other materials including butyl pad scrap as a replacement material
for the past several years with some success. In addition, alternative sources
of material, including overseas sources, are being pursued to provide a
consistent supply of material in the future.
Looking ahead, sales are expected to grow in fiscal 2004 compared to fiscal
2003. Sales growth will depend greatly on successful implementation of our
recycling program with the chapters of The National FFA Organization and finding
other sources of material. In addition, the continued implementation of our Fine
Grind process will increase the our ability to utilize some additional rubber
products in our Butyl reclaim process and add potential new products.
Gross profit as a percentage sales increased 2.3% for the year ended October 31,
2003 compared to 2002. The primary reason for this increase is due to efficiency
gains with the consolidation of our plant operations in 2003. Although we gained
some efficiency in consolidating plant operations, our reclaim process is most
efficient when raw material consists of primarily road worn inner tubes with a
mix of other butyl rubber. During 2003 we were also able to utilize raw material
previously subject to valuation allowances in the amount of approximately $145.
However, the benefit of this usage is partially offset by the additional
processing and labor costs involved in its usage. Since the introduction of the
tubeless tire for automobiles in the 1970s, sources of material have declined
substantially and the cost of available raw materials has increased. As a result
of having to use less than optimum raw material mix in the reclaiming process,
additional processing time is incurred to ensure delivery of quality product.
Management has been testing other materials including butyl pad scrap as a
replacement material for the past several years with some success. In addition,
alternative sources of material, including overseas sources, are being pursued
to provide a consistent supply of material in the future.
Operating results between fiscal year 2002 and fiscal year 2001 are not
comparable, because the results of operations in 2001 include only ten months of
operations. Gross profit percentage decreased from 10% for the ten months ended
October 31, 2001 to 7.1% for the year ended October 31, 2002 as a result of
constraints on achieving operating efficiency including lack of consistent raw
material supply, the fire discussed above, and reduced use of raw materials
previously subject to valuation allowances. During 2002 we were able to utilize
raw material previously subject to valuation allowances in the amount of
approximately $404 as compared to $578 in 2001.
Looking ahead, our segment earnings are expected to improve, but will depend
greatly on the success of finding consistent sources of raw material and
improved efficiencies in our operations.
COACH LEASING
The following table shows sales, cost of sales and gross profit for this segment
for the periods indicated:
Year Ended October 31, Ten Months Ended
October 31,
------------------------------
2003 2002 2001
-------------- --------------- ---------------------
Net Sales $ 7,281 $ 6,374 $ 4,165
Cost of Sales 4,060 3,357 1,618
-------------- --------------- ---------------------
Gross Profit $ 3,221 $ 3,017 $ 2,547
============== =============== =====================
Gross Profit % 44.2% 47.3% 61.1%
============== =============== =====================
Sales for year ended October 31, 2003 increased 14.2% in the amount of $907 over
2002. The increase in sales is attributable to marketing efforts and the
addition of five coaches during the first quarter of 2003. Our marketing efforts
on specialized tour groups such as golf course trips, Broadway musicals,
corporate customers, and rock and pop bands have 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. The additional five
coaches plus an additional coach purchased in the fourth quarter of 2003
increase the average number of coaches in the fleet to 38 for the year ended
October 31, 2003, compared to 32 for the year ended October 31, 2002.
Operating results are not comparable for the year ended October 31, 2002 and the
ten months ended October 31, 2001, because the results of operations in 2001
include only ten months of operations. Sales for the year ended October 31, 2002
increased 53% in the amount of $2,209 over the ten-month period ended October
31, 2001. The increase in sales is attributable to an additional two months in
the period and additional revenue from the increased use of employee coach
drivers versus independent contractors paid directly by the customer. These
factors were partially offset by a decrease in utilization from 75% in 2001 to
69% in 2002. The average fleet size in 2002 of 32 was comparable to 2001. We
believe the increased revenue 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. This business is
seasonal in nature and historically is stronger in the spring, summer and fall
months.
Looking ahead, we expect segment sales in fiscal 2004 to increase with the
full-year impact increase in the total number of coaches added to our fleet. We
are also working to continually improve our utilization percentage. Our total
utilization rate was approximately 69% for 2003 and 2002, which indicates the
period of time the coach is being leased.
Gross profit percentage for this segment was 44.2% for the year ended October
31, 2003 compared to 47.3% for the year ended October 31, 2002. The reduction is
attributable primarily to the need to sublease additional buses from third
parties to meet current demand during peak periods and increased operating costs
for insurance.
Gross profit for this segment was 47.3% for the year ended October 31, 2002
compared to 61.l% for the comparable ten-month period ended October 31, 2001.
The reduction is primarily attributable to two factors. First, during the
summer, additional coaches were 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. Second, 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 comparable period ended October 31,
2001, a larger percentage of coach drivers were independent contractors paid
directly by the customer. In addition, the two additional months of activity for
the year ended October 31, 2002 include the months of November and December
which are historically slower months, resulting in lower gross profits for this
segment.
Looking ahead, we expect fiscal 2004 gross profit to be higher than 2003 with
the additional sales related to the six new coaches added which reduces the need
to sublease from third parties.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
In June 2001, we purchased four new businesses and began operations as a
consolidated holding company with multiple operating subsidiaries. In the period
since June 2001, we have incurred losses and reductions in our equity. During
this period we have financed our losses and have been able to refinance certain
third party obligations with DC Investments, LLC and its subsidiary Fair
Holdings and other third parties. Our borrowings from Fair Holdings have been on
terms that may not have been available from other sources. As of October 31,
2003, our total debt outstanding to Fair Holdings was $14,158.
We are continuing to address our liquidity and working capital through various
means including operational changes and financing matters which are discussed
below. During the period these plans are put in place, we have continued to
receive financing, and have in place arrangements to receive additional
financial support 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 positive at October 31, 2003 by
$6,045. At the end of fiscal year 2002, our working capital position was $1,591.
The increase in working capital is primarily attributable to our ability to
finance working capital and financial losses through long-term borrowings from a
related party under a line of credit agreement. The following table highlights
several key measures of our working capital performance:
2003 2002
------------------ -------------------
Average cash and cash equivalents $ 1,034 $ 725
Average short-term debt 4,023 6,769
Average inventories, net 7,385 6,439
Average receivables, net 3,486 3,439
Average days receivables outstanding 21.9 21.1
Inventory turnover 7.0 7.4
Average short-term debt decreased in fiscal 2003 compared to fiscal 2002
primarily due to the timing of maturities on certain line of credit facilities
and refinancing certain debt with a related party on a long term basis. The
increased average inventories, net was primarily due to additional purchases for
expected sales volumes and additional production capacity to build more cargo
trailers. These factors also affected our inventory turnover which decreased
from 7.4 in 2002 to 7.0 in 2003. Our average days receivables outstanding
increased slightly to 21.9 in 2003 compared to 21.1 in 2002 but are low due to
the prepayment of our tours for coach leasing and good collection efforts with
customers.
We expect that average receivables and inventory levels in fiscal 2004 will
increase slightly compared to fiscal 2003 due to higher planned sales volumes.
We also anticipate both average days outstanding for receivables and inventory
turnover to be about the same in fiscal 2004 compared to fiscal 2003 as we
continue efforts to improve asset utilization.
We continue to address liquidity and working capital issues in a number of ways.
In fiscal 2003, net cash used in continuing operations was $2,604. The use of
cash and working capital was primarily related to the discounting program and
overall economic conditions as described above. In 2004 we expect our operations
to generate positive cash and increase our overall working capital through
improved operations by;
o Discontinuing the cargo trailer discounting program that ended in July
2003 with the introduction of a new product line to replace the need
to provide discounts to maintain market share. The new product line
has a competitive price, while providing gross profits at historic
levels.
o Cost reduction initiatives for raw materials in the trailer and
related transportation manufacturing segment with the implementation
of alternative materials and additional discounts through purchasing.
o Implementation of the new fine grind production process in the butyl
rubber reclaiming segment. The new process will maximize the use of
the existing raw materials in the existing butyl reclaim production
and also provide potential additional production of natural rubber.
o Capitalize on the trailer production line put in place in the fourth
quarter of 2002 that provides a new product line to the existing
customers of Danzer. This production line and related sales effort
have allowed us to enter a new market along the East coast of the U.S.
Our ability to capitalize on this opportunity will be a determining
factor on our ability to reduce this operation's use of working
capital resources. Management will continue to evaluate the operations
on a continuous basis.
o We continue to look for ways to strengthen our liquidity, equity and
working capital through ongoing evaluations of merger and acquisition
candidates. As fully described in the Registration Statement on Form
S-4 and the other filings we have made with the SEC, on December 15,
2003 we commenced an exchange offer for all of the outstanding shares
of Net Perceptions, Inc., a developer of software products for the
retail industry which has been winding down its operations and whose
assets are predominately cash or cash equivalents. We cannot predict
whether we will be successful in acquiring some or all of the
outstanding shares of Net Perceptions in exchange for our common
shares due to the fact that several important conditions are in the
control of the Board of Directors of Net Perceptions. If we are
successful in acquiring all of the outstanding shares based upon our
latest proposal, the effect of the transaction would be to
substantially increase our working capital and equity and to
substantially increase the number of our outstanding common shares. If
we are unsuccessful in acquiring Net Perceptions, we will have
incurred substantial expenses which will impact our operating results
and available working capital.
o Overall improvements in economic conditions
In addition, management believes that the following steps started in early 2003
and currently underway will continue to improve our working capital, strengthen
our equity and place us in a position to successfully enhance our liquidity.
These steps include:
o The divestiture of Champion in the first quarter of 2003 as described
below under "Champion Transactions" which improved the Company's
overall equity and working capital position.
o Our refinancing activities in the fourth quarter of 2002 and first
quarter of 2003 reduced our interest costs and decreased the
proportion of debt which has been classified as a current liability.
We refinanced certain coaches transferred from DW Leasing to Obsidian
Leasing with various existing lenders and with Fair Holdings. Two
senior lenders representing approximately 80% of Obsidian Leasing
Company's debt have refinanced their respective loans which included a
substantial reduction in the interest rates and a longer amortization
of the debt. The debt was refinanced by the existing lenders for 80%
of the current amount outstanding. The remaining 20% was financed
through a note payable to Fair Holdings. In addition to the above
refinancing, on December 17, 2002, Obsidian Leasing sold four coaches
to DC Investments Leasing, LLC ("DC Investments Leasing"), a newly
created entity owned 50% by the Company's Chairman, in exchange for DC
Investments Leasing's satisfaction of the debt outstanding on such
coaches. DC Investments Leasing paid this debt through a financing at
terms that included a reduction in interest rates. In addition, DC
Investments Leasing also acquired five additional coaches that were
previously to be purchased by us thereby eliminating our existing
purchase commitment for the coaches. DC Investments Leasing also
entered into a management agreement with Pyramid under which all nine
coaches described above will be leased by Pyramid.
o On January 3, 2003, Obsidian Leasing repaid debt due to former
shareholders in the amount of $928 with a loan from Fair Holdings at
terms further described in Note 8 to the consolidated financial
statements. The loan with Fair Holdings provided funds to repay
maturing notes with proceeds from a long-term obligation without using
operating capital.
o During January 2003, United and U.S. Rubber obtained modifications to
provide less stringent requirements on certain financial covenants
with their respective lenders.
o On March 28, 2003, Fair Holdings acquired the line of credit and term
debt due to the senior lender of Danzer in the amount of $1,488 under
an assignment and assumption agreement. The maturity date of the line
of credit included in the assignment and assumption agreement was
extended to April 2006, increased maximum borrowings under the line of
credit from $1,000 to $1,500 and the debt covenants required by the
senior lender were waived through the end of the term. All other terms
of the assumed notes remain the same.
o During March 2003, United completed a compensation review and update
and provided a revised pay scale which realigns the Company with its
industry and reduces compensation costs. United also continues to
develop its new production facility to increase productivity and plant
efficiency.
o During 2003, U.S. Rubber has continued to consolidate its butyl
reclaiming operations from two plants to one to maximize production
and efficiently utilize equipment. The consolidation has provided some
pieces of equipment to be at times temporarily idle until the Company
completes its implementation of a new production process for "fine
grind rubber." Existing and new equipment will be required to complete
the "fine grind" production line.
o In October 2003, we received $250 in proceeds from the issuance of
14,285 shares of Series D Preferred Stock to Partners under an
existing capital contribution agreement further described under
"Guarantee of Partners." The proceeds were used to maintain compliance
with certain debt covenants with the senior lender of U.S. Rubber.
o We secured an additional financial commitment from Fair Holdings to
provide, as needed, additional borrowings under a $12,000 line of
credit agreement, which expires on January 1, 2007. Currently,
approximately $5,955 is available to us under the agreement.
Management believes the steps taken to improve our operations will positively
impact our liquidity and working capital for fiscal 2004. However, success is
dependent on our ability to restore gross profits and capitalize on potential
new markets in the trailer and related transportation manufacturing segment,
obtain consistent material supply in the butyl rubber reclaiming segment and
continue to grow the coach leasing segment. If our operating results are less
than expected, the increased commitment from Fair Holdings will provide
additional liquidity in 2004.
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
rate. We did not meet requirements and covenants in certain debt agreements. At
October 31, 2003, United had violated financial covenants with First Indiana
Bank and Huntington Capital Investment Company. United has received waivers of
these violations through November 1, 2004 from First Indiana along with
modifications to its covenants. Huntington Capital Investment Company also
waived their covenant violations and we are currently in discussions regarding
modifications to the covenants.
Various subsidiary companies were in violation of requirements to provide
year-end financial statements to various lenders within 90 days of the close of
the 2003 year end. Management has received extensions of time from the lenders.
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 Partners."
They are also mitigated by the divestiture of Champion, and the completed
refinancing efforts with respect to U.S. Rubber and the coach leasing segment.
Long-Term Assets
Long-term assets as of October 31, 2003 were $32,300 compared to $32,900 as of
October 31, 2002. The net decrease was $600 and primarily due to amortization of
intangible assets and the disposal of assets held for sale related to Champion.
Net property and equipment increased due to higher spending on production
equipment and new coaches.
Capital Structure
The following table details our total capitalization components:
2003 2002
--------- ---------
Short-term debt $ 2,379 $ 5,667
Long-term debt, including Redeemable Preferred Stock 40,842 30,797
Stockholders' deficit $ (3,253) $ (689)
Total debt increased in fiscal 2003 by $6,757 compared to fiscal 2002. The
increase relates primarily to the increase in working capital needs by funding
operational losses, financing of operational equipment and coaches and an
increase in the valuation of Mandatory Redeemable Preferred Stock. Shareholders
equity decreased as a result of the current year loss.
CASH AVAILABILITY
On a consolidated basis, at October 31, 2003, we had approximately $1,100 of
cash and cash equivalents. Danzer Industries, U.S. Rubber, United, and Obsidian
Enterprises each have revolving credit lines available for working capital at
each individual entity. Borrowings under the credit facilities are available to
the lesser of the maximum amount or the borrowing base as defined in the credit
agreement. At October 31, 2003, additional current availability under these
credit lines and maximum availability if supported by their individual borrowing
base are:
Company Current Availability Maximum Availability
Danzer Industries (1) $ 200 $ 200
U.S. Rubber 344 1,941
United -- 150
Obsidian Enterprises (1) 5,955 5,955
(1) Additional borrowings only through Fair Holdings, Inc., a Related Party
PARTNERS EQUITY TRANSACTIONS
Partners, our major shareholder, was 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 Partners.
The amounts expended through October 31, 2002 approximated $1,275. Pursuant to
the agreement with Partners, we converted these amounts to equity in exchange
for issuance to Partners of convertible preferred stock in October 2002.
Additional expenses of $270 in excess of amounts Partners was obligated to pay
were funded by Fair Holdings, Inc. and subsequently converted to Series D
Preferred Stock. The total liability of $1,545 converted to equity was incurred
as follows: $364 capitalized in the reverse merger transaction; $376 as expenses
incurred in 2001; and $805 as expenses incurred in 2002.
In 2002, Partners converted $1,290 of notes payable and accrued interest from us
to Partners to 402,906 shares of our Series C Preferred Stock.
In October 2003, Partners acquired 14,285 shares of the Company's Series D
Preferred Stock for $250 under the capital contribution agreement described
under "Guarantee of Partners" below.
GUARANTEES OF PARTNERS
We have an agreement with Partners that gives us the right to mandate 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 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. During 2003 Partners acquired
14,285 shares of Series D Preferred stock for $250 under the above agreement.
The proceeds were loaned 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
In 2002, the Board of Directors authorized the Chairman of the Board of the
Company to explore various options to divest Champion Trailer or, at a minimum,
restructure this operation of the business. As a result, DC Investments
negotiated the purchase of the loans of Bank One to Champion.
In 2002, Champion was also indebted to Markpoint under a subordinated credit
facility in the amount of $1,250 and was in violation of certain covenants
related to the loan. 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 from Champion or the Company
under a guarantee agreement.
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 the 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, Inc. 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, Inc. 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.
CASH FLOWS
A summary of our contractual cash obligations for the fiscal years ending 2004
through 2007 and 2008 and thereafter at October 31, 2003 is as follows:
2008 and
Contractual Obligations Total 2004 2005 2006 2007 Thereafter
--------------------------------------- ------------ ------------- ------------ ------------ ------------ ------------
Long-term debt, and all debt service
interest payments $ 51,616 $ 5,182 $ 17,563 $ 11,377 $ 10,226 $ 7,268
Operating leases 1,177 452 314 220 173 18
Mandatory redeemable preferred stock 2,140 337 -- 1,803 -- --
------------ ------------- ------------ ------------ ------------ ------------
Total contractual cash obligations $ 54,933 $ 5,971 $ 17,877 $ 13,400 $ 10,399 $ 7,286
============ ============= ============ ============ ============ ============
Cash flow and liquidity are discussed further below, and in the footnotes to our
consolidated financial statements.
We also have commercial commitments as described below:
Other Commercial Commitment Total Amount Committed Outstanding at October 31, Date of Expiration
2003
------------------------------- ---------------------------- ---------------------------- ----------------------------
Line of credit, related party $ 1,500 $ 1,300 April 1, 2006
Line of credit, bank 4,400 4,250 February 1, 2004
Line of credit, bank 4,000 2,059 October 1, 2005
Line of credit, related party 12,000 6,045 January 1, 2007
Our net cash used in continuing operations for the year ended October 31, 2003
was $2,604. This is comprised of a loss from continuing operations of $3,824,
offset by noncash depreciation and amortization of $2,850, increases in accounts
receivable of $357, inventories of $140, other assets of $54, and customer
deposits of $51 and decreases in deferred taxes of $1,003, accounts payable of
$709 and accrued expenses of $96. In addition, we had noncash losses on sale of
equipment of $10, loss on marketable securities of $72, minority interest of
$172, accretion of interest of $394 and stock-based compensation of $30.
Net cash flow provided from financing activities for the year ended October 31,
2003 was $6,496. This is comprised of borrowings of long-term debt and net
borrowings of short-term debt of $11,091 and proceeds from capital contributions
of $250, offset by principal repayments of long-term debt of $3,865 and payments
to related parties of $885. We also paid debt issuance costs of $95.
Cash flow was used in investing activities for the year ended October 31, 2002
of $3,623. This is comprised of purchases of property and equipment of $3,654
and proceeds from the sale of property and equipment of $31.
The total increase in cash is summarized as follows:
Ten Months Ended
Year Ended October 31, October 31,
------------------- ------------------
2003 2002 2001
------------------- ------------------ ------------------
Net cash provided by (used in) continuing operations $ (2,604) $ 322 $ 1,763
Net cash provided by (used in) investing activities (3,623) (588) (17,772)
Net cash provided by financing activities 6,496 618 16,321
Net cash flow provided by (used in) discontinued
operations (41) 39 --
------------------- ------------------ ------------------
Increase in cash and cash equivalents $ 228 $ 391 $ 312
=================== ================== ==================
Inflation
We are subject to the effects of inflation and changing prices. In our opinion,
changes in net sales and net earnings that have resulted from inflation have not
been material to the fiscal years presented but there is no assurance that
inflation and changing prices will not materially affect us in the future. We
attempt to deal with these inflationary and pricing pressures by actively
pursuing internal cost reduction efforts and introducing corresponding price
increases.
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.
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, although the filing of Chapter 11 bankruptcy during 2002 of a
customer resulted in a bad debt charge of $379. However, we believe our reserve
for doubtful accounts of $496 should be adequate for any exposure to loss in our
October 31, 2003 accounts receivable. We have also established reserves for
slow-moving and obsolete inventories and believe the reserve of $321 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. Currently, operating results at our truck
body manufacturing facility, including the bankruptcy of a significant truck
body customer, indicate the assets of this facility may become subject to
impairment. Accordingly, we are analyzing these assets for impairment in
conjunction with our analysis of the continuing operations of this facility. In
addition, consolidation of facilities at our butyl rubber reclaiming operation
has resulted in some equipment at the facility being temporarily idle as we
implement a new production line for "fine grind" rubber. Should this new process
not utilize all of the idle equipment, we will analyze such equipment for
impairment. As of October 31, 2003, we determined there is no impairment of our
property and equipment.
Goodwill and intangibles are reviewed annually for impairment or more frequently
when events and circumstances indicate potential impairment factors are present.
We have established the first day of the fourth quarter as the date for our
annual goodwill impairment test. In assessing the recoverability of our
goodwill, 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 their related assumptions change in the future, we may be
required to record impairment charges for these assets in future periods. Based
on the annual goodwill and intangibles test for impairment as of October 31,
2003, we determined there is no impairment of our goodwill and intangibles.
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 ten years, with an average age of approximately four years. Actual value
of coaches after 15 years is dependent on several factors including the level of
maintenance and the market conditions at the time of disposal. We have not
disposed of a material number of coaches, and our estimate of depreciation is
based on information other than actual disposal experience. Accordingly, we
continue to evaluate our estimates with respect to the actual depreciation of
such vehicles based on market conditions and our experience in disposals when
they occur. Depreciation expense related to the coaches for the year ended
October 31, 2003 was approximately $575. If future factors indicate that our
salvage value on the coaches should be reduced to 20%, depreciation expense
would have to be increased approximately $166 to $741. If it is determined that
the coaches have no salvage value, estimated depreciation expense for the
coaches for the year ended October 31, 2003 would have approximated $927.
In conjunction with financing of the acquisition of United, we issued 386,206
shares of Series C preferred stock to Huntington Capital Investment Company
("Huntington"). The note purchase agreement includes a provision that gives
Huntington the option to require us 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 of our assets as defined in the agreement. Increases
in the value of our stock will result in a corresponding increase to this
repurchase requirement. Accordingly, a substantial increase in stock price at
the repurchase date may have an adverse impact on our liquidity. At October 31,
2003, we had violated certain financial covenants defined in the subordinated
debt agreement with Huntington. We received a waiver of these violations and are
negotiating an amendment to the agreement as of October 31, 2003.
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.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Obsidian Enterprises, Inc.
Indianapolis, Indiana
We have audited the accompanying consolidated balance sheets of Obsidian
Enterprises, Inc. and Subsidiaries as of October 31, 2003 and 2002, and the
related consolidated statements of operations, stockholders' equity (deficit)
and comprehensive loss, and cash flows for the years ended October 31, 2003 and
2002 and the ten months ended October 31, 2001. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Obsidian
Enterprises, Inc. and Subsidiaries as of October 31, 2003 and 2002, and the
results of their operations and their cash flows for the years ended October 31,
2003 and 2002 and the ten months ended October 31, 2001, in conformity with
accounting principles generally accepted in the United States of America
As discussed in Note 8 and Note 15 to the financial statements, the Company has
borrowings totaling $14,158,000 from DC Investments, LLC and its subsidiary,
Fair Holdings, LLC, entities controlled by the Company's chairman.
Our audit of the consolidated financial statements of Obsidian Enterprises, Inc.
and Subsidiaries included Schedule II, contained herein, for the years ended
October 31,2003 and 2002 and the ten months ended October 31, 2001. In our
opinion, such schedule presents fairly the information required to be set forth
therein, in conformity with accounting principles generally accepted in the
United States of America.
/s/ McGladry & Pullen, LLP
Elkhart, Indiana
February 2, 2004
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
October 31, October 31,
2003 2002
----------------------------------
Assets
Current assets:
Cash and cash equivalents $ 1,148 $ 920
Marketable securities 114 137
Accounts receivable, net of allowance for doubtful accounts
of $496 for 2003 and $495 for 2002 (Note 8) 3,665 3,307
Accounts receivable, related parties (Note 15) 52 206
Inventories, net (Notes 6 and 8) 7,455 7,315
Prepaid expenses and other assets 531 384
Deferred income tax assets (Note 14) 550 665
----------------------------------
Total current assets 13,515 12,934
Property, plant and equipment, net (Notes 7 and 8) 24,480 23,048
Other assets:
Intangible assets (Notes 3 and 5):
Goodwill not subject to amortization 6,434 6,434
Noncompete agreements, less accumulated amortization
of $399 for 2003 and $222 for 2002 487 664
Trade name and customer relations, less accumulated
amortization of $290 for 2003 and $208 for 2002 637 719
Deferred debt costs, less accumulated amortization
of $218 for 2003 and $97 in 2002 320 470
Other 9 116
Assets of subsidiary held for sale (Note 4) -- 1,538
----------------------------------
$ 45,882 $ 45,923
==================================
The accompanying notes are an integral part of the consolidated financial
statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
October 31, October 31,
2003 2002
----------------------------------
Liabilities and Stockholders' Deficit
Current liabilities:
Current portion of long-term debt (Note 8) $ 2,379 $ 5,667
Accounts payable, trade 2,742 3,450
Accounts payable, related parties (Note 15) 837 668
Accrued compensation 666 810
Accrued expenses 560 514
Customer deposits 286 234
----------------------------------
Total current liabilities 7,470 11,343
Long-term debt, net of current portion (Note 8) 24,765 23,879
Long-term debt, related parties (Note 8 and 15) 13,937 5,518
Deferred income tax liabilities (Note 14) 651 1,624
Liabilities of subsidiary held for sale (Note 4) -- 2,848
Commitments and contingencies (Note 16)
Minority interest 172 --
Mandatory redeemable preferred stock (Note 11):
Class of Series C Preferred Stock: 386,206 shares outstanding for
2003 and 2002 (Note 11) 1,803 1,400
Class of Series D Preferred Stock: 16,071 shares outstanding for
2003 (Note 11) 337 --
Stockholders' deficit (Note 12):
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 Preferred
Stock, par value $.001, 4,600,000 authorized, 3,982,193 shares issued and
outstanding in 2003 and 2002; 200,000 shares of undesignated Preferred
Stock authorized 5 5
Preferred stock, 200,000 shares authorized; Class of Series D
convertible preferred stock, par value $.001, 118,687 and 88,330 shares
issued and outstanding in 2003 and 2002 -- --
Additional paid-in capital 11,743 10,184
Accumulated other comprehensive loss -- (49)
Accumulated deficit (15,004) (10,832)
----------------------------------
Total stockholders' deficit (3,253) (689)
----------------------------------
$ 45,882 $ 45,923
==================================
The accompanying notes are an integral part of the consolidated financial
statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share and share data)
Year Ended October 31, Ten Months Ended
October 31,
-------------------------------------
2003 2002 2001
--------------------------------------------------------
Net sales $ 59,295 $ 57,274 $ 24,689
Cost of sales 51,736 47,841 19,457
--------------------------------------------------------
GROSS PROFIT 7,559 9,433 5,232
Selling, general and administrative expenses (8,537) (8,589) (4,251)
Loss on asset impairment (Note 3) -- (720) --
Insurance settlement -- 325 --
--------------------------------------------------------
Income (loss) from operations (978) 449 981
Other income (expense):
Interest expense (Note 8) (3,547) (3,552) (2,312)
Other income 17 12 --
Other expense (81) (217) (60)
--------------------------------------------------------
Loss before income taxes, discontinued operations, and
cumulative effect of change in accounting principle (4,589) (3,308) (1,391)
Income tax benefit (Note 14) 937 33 372
--------------------------------------------------------
Loss from continuing operations before discontinued
operations and cumulative effect of change in accounting
principle (3,652) (3,275) (1,019)
Loss from discontinued operations, net of tax (Note 4) (49) (1,040) (3,376)
--------------------------------------------------------
Loss before cumulative effect of change in accounting
principle (3,701) (4,315) (4,395)
Cumulative effect of change in accounting principle, net
of tax (Note 3) -- (2,015) --
--------------------------------------------------------
Loss before minority interest (3,701) (6,330) (4,395)
Minority interest (172) -- --
--------------------------------------------------------
Net loss $ (3,873) $ (6,330) $ (4,395)
========================================================
Basic and diluted loss per share attributable to common shareholders (Note 2):
From continuing operations $ (.12) $ (.09) $ (.04)
Discontinued operations, net of tax -- (.03) (.13)
Cumulative effect of accounting change, net of tax -- (.06) --
--------------------------------------------------------
Net loss per share $ (.12) $ (.18) $ (.17)
========================================================
Weighted average common and common equivalent shares
outstanding, basic and diluted: 36,007,855 36,007,855 25,830,856
========================================================
The accompanying notes are an integral part of the consolidated financial
statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE LOSS
(dollars in thousands)
Comprehensive Series C Convertible Series D Convertible
Income Common Stock Preferred Stock Preferred Stock
-----------------------------------------------------------------
(Loss) Shares Amount Shares Amount Shares Amount
-------------------------------------------------------------------------------
Balance at December 31, 2000 -- 17,760,015 1 -- -- -- --
Conversion of debt to common stock -- 1,750,000 -- -- -- -- --
To record the effect of the reverse merger June 21,
2001 (Note 6) -- -- 1 1,970,962 2 -- --
Conversion of Series C Preferred Stock to common
stock -- 16,497,840 1 (824,892) (1) -- --
Issuance of 2,593,099 shares of Series C Preferred
Stock associated with the acquisition of United
and capital contribution (Note 6) -- -- -- 2,206,893 3 -- --
Unrealized gain on available-for-sale marketable
securities 140 -- -- -- -- -- --
Fair value adjustment on redeemable preferred stock -- -- -- -- -- -- --
2001 net loss (4,395) -- -- -- -- -- --
-------------------------------------------------------------------------------
Total comprehensive loss $ (4,255)
==============
Balance at October 31, 2001 36,007,855 3 3,352,963 4 -- --
Issuance of 30,000 shares of Series C Preferred
Stock associated with U.S. Rubber, net of tax $ -- -- -- 30,000 -- -- --
Issuance of 589,230 shares of Series C Preferred
Stock associated with Fair Holdings and Obsidian
Capital Partners, LP -- -- -- 589,230 1 -- --
Issuance of 88,330 shares of Series D Preferred
Stock associated with Fair Holdings and Obsidian
Capital Partners, LP -- -- -- -- -- 88,330 --
Exercise of stock warrants in exchange for 10,000
shares of Series C Preferred Stock -- -- -- 10,000 -- -- --
Distributions to members of DW Leasing -- -- -- -- -- -- --
Unrealized loss on available-for-sale marketable
securities (86) -- -- -- -- -- --
Fair value adjustment on redeemable preferred stock -- -- -- -- -- -- --
2002 net loss (6,330) -- -- -- -- -- --
-------------------------------------------------------------------------------
Total comprehensive loss $ (6,416)
==============
Balance at October 31, 2002 36,007,855 3 3,982,193 5 88,330 --
Contribution to capital from sale of Champion to
related party -- -- -- -- -- --
Tax effect of sale of coaches to DC Investments
Leasing, LLC -- -- -- -- -- --
Extension of stock options -- -- -- -- -- --
Assignment of 16,072 shares of Series D mandatory
redeemable Preferred Stock -- -- -- -- 16,072 --
Issuance of 14,285 shares of Series D Preferred
Stock associated with Obsidian Capital Partners, LP -- -- -- -- 14,285 --
Loss on available-for-sale marketable securities -- -- -- -- -- -- --
Fair value adjustment on redeemable Preferred Stock -- -- -- -- -- --
2003 net loss (3,873) -- -- -- -- -- --
-------------------------------------------------------------------------------
Total comprehensive loss $ (3,873)
==============
Balance at October 31, 2003 36,007,855 3 3,982,193 5 118,687 --
=================================================================
[Remainder of table on following page]
[Remainder of table on previous page]
Additional Other Earnings
Paid-in Comprehensive(Accumulated
Capital Income Deficit) Total
(Loss)
-----------------------------------------------
Balance at December 31, 2000 -- -- 4,938 4,939
Conversion of debt to common stock 355 -- -- 355
To record the effect of the reverse merger June 21,
2001 (Note 6) 3,760 (103) (4,938) (1,278)
Conversion of Series C Preferred Stock to common
stock -- -- -- --
Issuance of 2,593,099 shares of Series C Preferred
Stock associated with the acquisition of United
and capital contribution (Note 6) 1,497 -- -- 1,500
Unrealized gain on available-for-sale marketable
securities -- 140 -- 140
Fair value adjustment on redeemable preferred stock 70 -- -- 70
2001 net loss -- -- (4,395) (4,395)
-----------------------------------------------
Total comprehensive loss
Balance at October 31, 2001 5,682 37 (4,395) 1,331
Issuance of 30,000 shares of Series C Preferred
Stock associated with U.S. Rubber, net of tax 1,017 -- -- 1,017
Issuance of 589,230 shares of Series C Preferred
Stock associated with Fair Holdings and Obsidian
Capital Partners, LP 1,885 -- -- 1,886
Issuance of 88,330 shares of Series D Preferred
Stock associated with Fair Holdings and Obsidian
Capital Partners, LP 1,545 -- -- 1,545
Exercise of stock warrants in exchange for 10,000
shares of Series C Preferred Stock 20 -- -- 20
Distributions to members of DW Leasing -- -- (107) (107)
Unrealized loss on available-for-sale marketable
securities -- (86) -- (86)
Fair value adjustment on redeemable preferred stock 35 -- -- 35
2002 net loss -- -- (6,330) (6,330)
-----------------------------------------------
Total comprehensive loss
Balance at October 31, 2002 10,184 (49) (10,832) (689)
Contribution to capital from sale of Champion to
related party 1,142 -- -- 1,142
Tax effect of sale of coaches to DC Investments
Leasing, LLC (96) -- -- (96)
Extension of stock options 30 -- -- 30
Assignment of 16,072 shares of Series D mandatory
redeemable Preferred Stock 337 -- -- 337
Issuance of 14,285 shares of Series D Preferred
Stock associated with Obsidian Capital Partners, LP 250 -- -- 250
Loss on available-for-sale marketable securities -- 49 49
Fair value adjustment on redeemable Preferred Stock (104) -- (299) (403)
2003 net loss -- -- (3,873) (3,873)
-----------------------------------------------
Total comprehensive loss
Balance at October 31, 2003 $ 11,743 $ -- $(15,004) $ (3,253)
===============================================
The accompanying notes are an integral part of the consolidated financial
statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended October 31, Ten Months
Ended October
31,
-----------------------------
2003 2002 2001
--------------------------------------------
Cash flow from operating activities from continuing operations:
Loss from continuing operations $ (3,824) $ (5,290) $ (1,019)
Adjustments to reconcile loss from continuing operations
to net cash provided by (used in) operating activities:
Cumulative effect of change in accounting principle -- 2,015 --
Loss on asset impairment -- 720 --
Depreciation and amortization 2,850 2,568 2,055
Loss on debt refinancing -- 181 --
Loss (gain) on sale of equipment 10 41 (4)
Loss on marketable securities 72 -- 81
Stock-based compensation 30 -- --
Minority interest 172 -- --
Accretion of interest 394 162 35
Deferred income taxes (1,003) (40) (408)
Changes in operating assets and liabilities net of
effect of acquisitions:
Accounts receivable, net (357) 264 767
Inventories, net (140) (1,752) (630)
Other assets (54) 336 71
Accounts payable, trade (709) 545 810
Accrued expenses (96) (339) 321
Customer deposits 51 473 (316)
--------------------------------------------
Net cash provided by (used in) operating activities from continuing
operations (2,604) (116) 1,763
--------------------------------------------
Cash flows from investing activities from continuing operations:
Capital expenditures (3,654) (910) (1,185)
Proceeds from sale of equipment 31 322 1,321
Acquisition-related closing costs -- -- (146)
Purchase of marketable equity securities -- -- (213)
Cash received in reverse merger and other acquisitions -- -- 26
Cash payments in connection with the purchase of
U.S. Rubber, net of cash acquired -- -- (5,730)
Cash payments in connection with the purchase of assets
of United, net of cash acquired -- -- (12,040)
Proceeds from sale of marketable equity securities -- -- 195
--------------------------------------------
Net cash used in investing activities from continuing operations (3,623) (588) (17,772)
--------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Ten Months
Ended October
Year Ended October 31, 31,
-----------------------------
2003 2002 2001
--------------------------------------------
Cash flows from financing activities from continuing operations:
Advances from (repayments to) related parties (885) 1,066 (238)
Net borrowings on lines of credit 1,352 1,265 5,226
Borrowings on long-term debt, including related parties 9,739 2,318 11,220
Principal repayments on long-term debt, including related parties (3,865) (3,258) (2,255)
Debt issuance costs (95) (248) (105)
Distributions to members of DW Leasing -- (107) --
Exercise of warrant -- 20 --
Proceeds from capital contributions and
sale of common stock 250 -- 2,473
--------------------------------------------
Net cash provided by financing activities from continuing operations 6,496 1,056 16,321
Net cash flow provided by (used in) discontinued operations (41) 39 --
--------------------------------------------
Increase in cash and cash equivalents 228 391 312
Cash and cash equivalents, beginning of year 920 529 217
--------------------------------------------
Cash and cash equivalents, end of year $ 1,148 $ 920 $ 529
============================================
Interest paid $ 2,956 $ 3,415 $ 2,241
============================================
Taxes paid $ 96 $ 22 $ 44
============================================
Noncash:
Contribution to capital from sale of Champion to related party $ 1,142 $ -- $ --
Issuance of mandatory redeemable preferred stock in conjunction
with the sale of Champion $ 675 $ -- $ --
Assignment and assumption of mandatory redeemable preferred stock
to Fair Holdings $ 337 $ -- $ --
Tax effect of sale of coaches to a related party recorded as a
reduction of equity $ 96 $ -- $ --
Reclassification of debt due to assumption of credit agreement by
Fair Holdings $ 1,488 $ -- $ --
Refinancing of debt, including related-party amounts $ -- $ 12,122 $ --
Conversion of contributed amounts to equity $ -- $ 5,104 $ 355
Coaches and equipment purchased with debt $ 221 $ 1,220 $ 1,059
Fair value changes of mandatory redeemable preferred stock $ 403 $ 35 $ 70
Purchase price adjustment and conversion of
accounts payable to debt $ -- $ 225 $ --
Seller note on acquisition of United $ -- $ -- $ 1,500
Seller note on acquisition of U.S. Rubber $ -- $ -- $ 2,573
The accompanying notes are an integral part of the consolidated financial
statements.
OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except per share and share data)
1. DESCRIPTION OF BUSINESS AND CHANGE OF NAME
Obsidian Enterprises, Inc. ("Obsidian Enterprises"), formerly Danzer
Corporation, was reorganized (the "Reorganization") through an Acquisition and
Plan of Reorganization with U.S. Rubber Reclaiming, Inc. and Related Entities
("U.S. Rubber Companies"), which was consummated on June 21, 2001 (the
"Effective Date"). The Acquisition and Plan of Reorganization of Obsidian
Enterprises with U.S. Rubber Companies was accounted for as a reverse
acquisition as the shareholders of the U.S. Rubber Companies owned a majority of
the outstanding stock of Obsidian Enterprises subsequent to the Acquisition and
Plan of Reorganization. For accounting purposes, U.S. Rubber Reclaiming, Inc. is
deemed to have acquired Obsidian Enterprises.
Pursuant to the Plan of Acquisition and Reorganization described further in Note
5, United Expressline, Inc. was acquired July 31, 2001.
The resulting entities, considered accounting subsidiaries of U.S. Rubber
Reclaiming, Inc. (the accounting acquirer) and legal subsidiaries of Obsidian
Enterprises, Inc. (formerly Danzer) after the Acquisition and Plan of
Reorganization, are as follows:
U.S. Rubber Reclaiming, Inc. ("U.S. Rubber", the accounting acquirer), which is
engaged in reclaiming scrap butyl rubber into butyl reclaim for resale to
manufacturers of rubber products.
Obsidian Enterprises, Inc. (formerly Danzer, the legal acquirer), a holding
company.
Danzer Industries, Inc. ("Danzer Industries"), which is principally engaged in
the design, manufacture and sale of truck bodies and cargo trailers.
Pyramid Coach, Inc. ("Pyramid"), which is engaged in the leasing of coaches,
designed and fitted out for use for travel by country, rock bands and other
business enterprises, primarily on weekly to monthly leases. The coach leasing
segment also includes the assets, liabilities, equity and results of operations
of DW Leasing, LLC ("DW Leasing"), Obsidian Leasing Company, Inc. ("Obsidian
Leasing"), formed November 1, 2001 and DC Investments Leasing, LLC ("DC
Investments Leasing), formed December 13, 2002. DW Leasing and DC Investments
Leasing are controlled by individuals who are also controlling shareholders of
Obsidian Enterprises, Inc. and, accordingly, Pyramid. In addition, these
entities meet the requirements for consolidation under FASB Interpretation No.
46 (FIN No. 46), Consolidation of Variable Interest Entities, an interpretation
of Accounting Research Bulletin No. 51, as further discussed in Note 2. DW
Leasing, Obsidian Leasing and DC Investments Leasing also own the majority of
the coaches operated by Pyramid. All intercompany transactions are eliminated in
consolidation.
United Expressline, Inc. ("United") manufactures and sells general use cargo
trailers and specialty trailers used in the racing industry and for other
special purposes.
Champion Trailer, Inc. ("Champion"), which manufactures and sells transport
trailers to be used primarily in the auto racing industry. Effective October
2002, the Company's Board of Directors agreed to a plan to dispose of Champion
as further described in Note 4. The sale of Champion was completed January 30,
2003. Accordingly, the operations of Champion are classified as discontinued
operations in the accompanying financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION:
The accompanying consolidated financial statements present the accounts of
Obsidian Enterprises, Inc. and its wholly owned subsidiaries described in Note 1
for the periods ended October 31, 2003, 2002 and 2001. The entities are
collectively referred to herein as the "Company." All significant intercompany
transactions and balances have been eliminated in consolidation. The 2003
results of operations include the operations of DC Investments Leasing from
December 2002 (its inception). The accompanying 2001 statement of operations
includes the operations of U.S. Rubber, Pyramid and its related entity (DW
Leasing) for the ten-month period ended October 31, 2001. January 1, 2001 was
the beginning of the calendar year of the accounting acquirer U.S. Rubber. U.S.
Rubber changed its fiscal year end to adopt Danzer's (legal acquirer and
previous registrant) year end. The 2001 financial statements also include the
operating results of Obsidian Enterprises, Inc. (formerly Danzer Corporation)
and Danzer Industries, its wholly owned subsidiary, from June 21, 2001 (date of
acquisition) through October 31, 2001. In addition, they include the results of
United from July 31, 2001 (date of acquisition) through October 31, 2001. See
Note 5 for further discussion.
BASIS OF PRESENTATION:
In the period since June 2001, the Company has incurred losses and reductions in
equity. During this period losses and certain third party debt repayments have
been financed with Fair Holdings, Inc. ("Fair Holdings"), an entity controlled
by the Company's Chairman. Borrowings from Fair Holdings have been on terms that
may not have been available from other sources. As of October 31, 2003, total
debt outstanding to DC Investments, LLC and its subsidiary Fair Holdings was
$14,158.
The Company has continued to address liquidity and working capital through
various means including operational changes and financing matters which are
discussed below. During the period these plans were put in place, the Company
received financial support from Fair Holdings.
During 2003 and 2002, the Company has undertaken various actions to improve its
operations and liquidity. Such actions as described below include the sale of
Champion, conversion of debt to equity and refinancing of certain of its debt
agreements as described in Note 8. Management believes that the Company has
financing agreements in place to provide adequate liquidity and working capital
throughout fiscal 2004. However, there can be no assurance that such working
capital and liquidity will in fact be adequate. Therefore, the Company may be
required to draw upon other liquidity sources. The Company has therefore secured
an increased financial commitment from Fair Holdings to provide, as needed,
additional borrowings under a $12 million line of credit agreement, which
expires January 1, 2007. Currently, availability under the agreement is
approximately $5,995.
In view of these matters realization of assets and satisfaction of liabilities
in the ordinary course of business is dependent on the Company's ability to
generate sufficient cash flow to satisfy its obligations on a timely basis,
maintain compliance with its financing agreements and continue to receive
financing support from Fair Holdings to provide liquidity if needed.
Management, as a part of its plan towards resolving these issues and generating
positive cash flow and earnings, has taken the actions as described below.
Although management believes these actions will improve operations and
liquidity, there can be no assurance that such actions will sufficiently improve
operations or liquidity.
o During fiscal 2003:
o Refinancing activities have reduced interest costs and decreased the
proportion of debt that had been classified as a current liability.
Certain coaches transferred from DW Leasing to Obsidian Leasing were
financed with Fair Holdings and various existing lenders. Two senior
lenders representing approximately 80% of Obsidian Leasing Company's
debt have refinanced their respective loans which included a
substantial reduction in the interest rates and a longer amortization
of the debt. The debt was refinanced by the existing lenders for 80%
of the current amount outstanding. The remaining 20% was financed
through a note payable to Fair Holdings. In addition to the above
refinancing, on December 17, 2002, Obsidian Leasing sold four coaches
to DC Investments Leasing in exchange for DC Investments Leasing's
satisfaction of the debt outstanding on such coaches. DC Investments
Leasing paid this debt through a refinancing at terms that included a
reduction in interest rates. In addition, DC Investments Leasing also
acquired five additional coaches that were previously to be purchased
by us thereby eliminating our existing purchase commitment for the
coaches. DC Investments Leasing also entered into a management
agreement with Pyramid under which all nine coaches described above
will be leased by Pyramid.
o On January 3, 2003, Obsidian Leasing repaid debt due to former
shareholders in the amount of $928 with proceeds from a loan from Fair
Holdings at terms further described in Note 8. The loan with Fair
Holdings provided funds to repay maturing notes with proceeds from a
long term obligation without using operating capital.
o During January 2003, United and U.S. Rubber obtained modifications to
provide less stringent requirements on certain financial covenants
with their respective lenders.
o On March 28, 2003, Fair Holdings acquired the line of credit and term
debt due to the senior lender of Danzer in the amount of $1,488 under
an assignment and assumption agreement. The maturity date of the line
of credit included in the assignment and assumption agreement was
extended to April 2006, and the debt covenants required by the senior
lender were waived through the end of the term. All other terms of the
assumed notes remain the same.
o During March 2003, United completed a compensation review and update
and provided a revised pay scale which realigns the Company with its
industry and reduces compensation costs. United also continues to
develop its new production facility to increase productivity and plant
efficiency.
o During 2003, U.S. Rubber continued to consolidate its butyl reclaiming
operations from two plants to one to maximize production and
efficiently utilize equipment. The consolidation has provided some
pieces of equipment to be at times temporarily idle until the Company
completes its implementation of a new production process for "fine
ground rubber". Existing and new equipment will be required to
complete the "fine grind" production line. The new process will
maximize the use of the existing raw materials in the Company's
existing butyl reclaim production and also provide additional products
of natural rubber.
o The Company's truck body division at Danzer continues to negatively
impact the Company's cash flows. The trailer production line was put
in place in the fourth quarter of 2002 to support the production needs
at United and also provide a new product line to the existing
customers of Danzer, allowing us to enter a potential new market along
the East coast of the U.S. The Company needs to capitalize on this new
market opportunity to reduce the use of working capital at Danzer.
Management will continue to evaluate the operations throughout 2004.
o In October 2003, we received $250 in proceeds from the issuance of
14,285 shares of Series D Preferred Stock to Obsidian Capital
Partners, LP ("Partners") under an existing capital contribution
agreement further described under "Guarantee of Partners." The
proceeds were used to maintain compliance with certain debt covenants
with the senior lender of U.S. Rubber.
o We secured an additional financial commitment from Fair Holdings to
provide, as needed, additional borrowings under an $12,000 line of
credit agreement, which expires on January 1, 2007. Currently,
approximately $5,955 is available to us under the agreement.
o During fiscal 2002:
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 $1,017. The subordinated
lender received 30,000 shares of Series C 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 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 $1,290 of debt and accrued
interest due to Partners, majority owner of the Company, to equity in
exchange for 402,906 shares of Series C Preferred Stock.
o On April 30, 2002, the Company converted $596 of debt and accrued
interest due to Fair Holdings to equity in exchange for 186,324 shares
of Series C Preferred Stock.
o On August 28, 2002, the Company completed refinancing of the line of
credit facility and a term loan at United. The amount of maximum
borrowings on the line of credit facility was increased and the
maturity date extended to February 1, 2004. In addition, the maturity
date of the term note was extended to July 1, 2004 and monthly
principal payments were reduced by approximately 50%.
o On October 24, 2002, the Company refinanced the outstanding bank debt
at U.S. Rubber with a new lender at terms more favorable than the
previous lender.
o During 2002, the Board of Directors authorized the Chairman of the
Board to explore various options regarding the operations at Champion.
Options included divestiture, restructuring of operations or closing
the facility. It was determined in the best interests of the Company
to sell Champion. On January 30, 2003, the Company completed the sale
of substantially all assets of Champion to an entity owned by Messrs.
Durham and Whitesell, Chairman and President of the Company,
respectively, as described in Note 4.
o On October 24, 2002, the Company converted $1,275 of debt to Partners
in exchange for 72,899 shares of Series D Convertible Preferred Stock.
o On October 24, 2002, the Company converted $270 of debt to Fair
Holdings in exchange for 15,431 shares of Series D Convertible
Preferred Stock.
The above factors combined with additional actions by management at the
operating subsidiaries have contributed to the Company's working capital of
$6,045 at October 31, 2003 and $1,591 at October 31, 2002.
REVENUE RECOGNITION:
Sales are recorded when title passes to the customer (FOB shipping point) or
when services are performed in accordance with agreements with customers. The
Company accumulates costs of trailers in work-in-process inventory until
completion. The Company recognizes repair revenue when services are provided to
the customer. Shipping and handling charges billed to the customers are included
in net sales. Shipping and handling costs incurred by the Company are included
in cost of sales.
For operating leases, income is recognized on a straight-line basis over the
lease term. Recognition of income is suspended when management determines that
collection of future income is not probable (generally after 90 days past due).
Recognition is resumed if the receivable becomes contractually current and the
collection of amounts is again considered probable. Operating lease equipment is
carried at cost less accumulated depreciation and is depreciated to estimated
residual value using the straight-line method over the lease term or projected
economic life of the asset.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts of cash and cash equivalents, receivables, accounts
payable, and accrued liabilities approximate fair value because of the short
maturity of these instruments. The carrying amounts of long-term receivables
approximates fair value as the effective rates for these instruments are
comparable to market rates at year end. The carrying amount of investments
approximates fair market value. The carrying amount of variable rate debt and
fixed rate debt to unrelated parties approximates fair value, as a result of the
current interest rates paid on the Company's borrowings being at market. The
fair value of fixed rate debt to related parties is impractical to determine
based on the nature of the obligations and the relationship to the lender. The
carrying value of mandatory redeemable preferred stock approximates market value
determined based on the thirty-day average closing price of the Company's common
stock.
MARKETABLE SECURITIES:
The Company classifies its marketable securities as available for sale. The
securities consist of equity securities, which are stated at fair value, with
net unrealized gains or losses on the securities recorded as accumulated other
comprehensive income (loss) in stockholders' equity (deficit). Realized gains
and losses are included in earnings and are derived using the specific
identification method for determining the cost of the securities. Decreases in
the market value of the securities considered to be other than temporary are
recorded in earnings. For the year ended October 31, 2003, the Company recorded
$72 in the statement of operations related to the permanent decline in the fair
value of the marketable securities. This amount includes a reclassification of
$49 from accumulated other comprehensive income for unrealized losses previously
recorded.
PROPERTY, PLANT AND EQUIPMENT:
Building, equipment, furniture and fixtures are recorded at historical cost with
depreciation taken using primarily the straight-line method over their estimated
useful lives. Life ranges for property and equipment are as follows:
Buildings and improvements 30 - 39 years
Plant machinery and equipment 5 - 7 years
Furniture and fixtures 5 - 7 years
Coach fleet 15 years
Coach refurbishments 5 years
Vehicles 5 - 10 years
The Company's coach leasing business consists of a fleet of luxury coaches
(generally a 45 foot bus shell converted to a luxury coach) that are leased to
entertainment personalities, corporate groups and other traveling programs. The
coach fleet is comprised of a mixture of vehicles ranging from new (the most
recent acquired in September 2003) to approximately 10 years old. The average
age of the coaches is four years. They can be segregated as follows:
Age
1-3 years 20 coaches
4-6 years 10 coaches
7-10 years 8 coaches
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. Actual value of coaches after 15 years is dependent on
several factors including the level of maintenance and the market conditions at
the time of disposal. We have not disposed of a material number of coaches, and
our estimate of depreciation is based on information other than actual disposal
experience. Accordingly, we continue to evaluate our estimates with respect to
the actual depreciation of such vehicles based on market conditions and our
experience in disposals when they occur. Should future factors indicate the
current depreciation policy is not adequate, we will adjust the depreciation
rates, and such adjustments may have an adverse impact on our results of
operations.
CONCENTRATION OF CREDIT RISK:
The Company maintains cash balances at a bank, which at various times throughout
the year exceeded the Federal Deposit Insurance Corporation (FDIC) limit.
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of trade receivables. The Company's customers
are not concentrated in any one specific geographic region. The credit risk
associated with trade receivables within the various industries may be affected
by changes in economic or other conditions and may, accordingly, impact the
Company's overall credit risk. The Company reviews a customer's credit history
before extending credit. Allowances for doubtful accounts are established based
on specific customer risk, historical trends and other information. Also see
major customers described below.
ORGANIZED LABOR:
Certain of Danzer Industries' employees, which represent 10% of total employees,
are currently represented by the United Brotherhood of Carpenters and Joiners of
America, Local Union No. 340, whose contract is in effect to January 2005. The
contract contains provisions that affect compensation to be paid to employees
included in the union.
ALLOWANCE FOR DOUBTFUL ACCOUNTS.
The Company records an allowance for doubtful accounts based on specifically
identified amounts that are believed to be uncollectible. An additional
allowance is recorded based on certain percentages of aged receivables, which
are determined based on historical experience and assessment of the general
financial conditions affecting the Company's customer base. If actual
collections experience changes, revisions to the allowance may be required. The
Company has a limited number of customers with individually large amounts due at
any given balance sheet date. Any unanticipated change in one of those
customer's credit worthiness or other matters affecting the collectibility of
amounts due from such customers could have a material affect on results of
operations in the period in which such changes or events occur. After all
attempts to collect a receivable have failed, the receivable is written off
against the allowance.
GOODWILL, INTANGIBLE ASSETS AND DEFERRED COSTS:
Goodwill, net was $6,434 at October 31, 2003 and 2002. In accordance with
Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other
Intangible Assets, goodwill associated with acquisitions consummated after June
30, 2001 in the amount of $5,829 was not being amortized in the 2001 financial
statements. All other goodwill was being amortized on a straight-line basis over
15 years through October 31, 2001. Effective November 1, 2001, the Company
adopted SFAS No. 142 and completed transitional impairment testing during the
third quarter. This transitional test resulted in an impairment charge of $2,015
in 2002 that has been recorded as a change in accounting principle as discussed
in Note 3. There were no impairment charges recorded in 2003.
Other intangible assets, net were $1,124 and $1,383 at October 31, 2003 and
2002, respectively. These amounts include trade names, customer relations and
backlogs and other items, which are being amortized on a straight-line basis
over lives ranging from three months to 10 years. At October 31, 2003 and 2002,
accumulated amortization amounted to $689 and $430, respectively.
Amortization of goodwill and other intangible assets described above for the
years ended October 31, 2003 and 2002 and the ten months ended October 31, 2001
was $259, $440 and $303, respectively. Estimated amortization expense for each
of the ensuing years through October 31, 2008, is, respectively, $259, $259,
$215, $82 and $82. Accumulated amortization on goodwill in the amount of $76 was
written off in 2002 with the impairment discussed in Note 3.
Deferred debt issuance costs are amortized over the term of the related debt,
primarily four to five years.
STOCK-BASED COMPENSATION:
The Company accounts for stock-based compensation under the provisions of APB
No. 25. The Company has adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. Accordingly, no compensation expense is
recognized if the exercise price of stock options equals the fair market value
of the underlying stock at the date of grant. Had compensation expense for the
Company's stock option plans been determined based on the fair value at the
grant date for awards consistent with the provisions of SFAS No. 123, the
Company's basic and diluted net income (loss) per share would have been as
follows:
Year Ended Year Ended Ten Months Ended
October 31, 2003 October 31, 2002 October 31, 2001
------------------ ------------------- ------------------
Net income (loss) as reported $ (3,873) $ (6,330) $ (4,395)
Deduct total stock-based employee
compensation expense determined under
fair value methods -- -- --
------------------ ------------------- ------------------
Pro forma net income (loss) $ (3,873) $ (6,330) $ (4,395)
================== =================== ==================
Income (loss) per share:
As reported:
Basic and diluted $ (.12) $ (.18) $ (.17)
Pro forma:
Basic and diluted $ (.12) $ (.18) $ (.17)
There were no stock options issued for the years ended October 31, 2003 and 2002
and the ten month period ended October 31, 2001. During the year ended October
31, 2003, certain options were extended. Their effect on pro forma net income
was immaterial.
INCOME TAXES:
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes, as required. Under SFAS No. 109, deferred tax
assets and liabilities are recorded for any temporary differences between the
financial statement and tax bases of assets and liabilities, using the enacted
tax rates and laws expected to be in effect when the taxes are actually paid or
received. (See Note 14.)
USE OF ESTIMATES:
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect reported amounts of
assets, liabilities, revenues and expenses and the related disclosures of
contingent assets and liabilities. Significant items subject to such estimates
and assumptions include valuation allowances for accounts receivable,
inventories and deferred tax assets, the fair values of assets and liabilities
when allocating the purchase price of acquisitions, and the carrying value of
property and equipment and goodwill. Actual results may differ from those
estimates.
CASH EQUIVALENTS:
For purposes of the statement of cash flows presentation, cash equivalents are
unrestricted, highly liquid short-term cash investments with an original
maturity of three months or less.
IMPAIRMENT OF LONG-LIVED ASSETS, INCLUDING INTANGIBLES:
The Company evaluates the carrying value of long-lived assets whenever
significant events or changes in circumstances indicate the carrying value of
these assets may be impaired. The Company evaluates potential impairment of
long-lived assets by comparing the carrying value of the assets to the expected
future cash flows resulting from the use of the assets. In addition, the Company
adopted SFAS No. 142 effective November 1, 2001 and completed transitional
impairment testing that resulted in an impairment charge of $2,015, which is
recorded as a cumulative effect of change in accounting principle in 2002. In
addition, the Company completed additional impairment testing in the fourth
quarter of 2002, as further discussed in Note 3, resulting in an impairment
charge of $720. There were no impairment charges recorded during 2003.
MAJOR CUSTOMERS:
The following is a list of the Company's customers that represent 10% or more of
consolidated net sales:
Ten Months Ended
Year Ended October 31, October 31,
-----------------------------------
2003 2002 2001
-----------------------------------------------------
Butyl rubber sales:
Customer (1) -- -- 13%
Customer (2) -- -- 8%
EARNINGS PER SHARE:
Basic per-share amounts are computed, generally, by dividing net income or loss
attributable to common shareholders by the weighted-average number of common
shares outstanding. Diluted per-share amounts are computed similar to basic
per-share amounts except that the weighted-average shares outstanding are
increased to include additional shares for the assumed exercise of stock options
and warrants, if dilutive.
As described in Note 8, the Company has a note payable agreement which is
convertible by the holder to common stock totaling 5,000,000 shares at a
conversion rate of $0.10 per share. In addition, and as described in Note 12,
the Company has options outstanding to purchase a total of 800,000 shares of
common stock, at a weighted average exercise price of $0.09. The Company also
has outstanding Series C and Series D Preferred Stock that are convertible by
the holders into common shares at a conversion rate of twenty-to-one and
one-hundred-seventy-five-to-one, respectively, as further described below.
However, because the Company incurred a loss for all periods presented, the
inclusion of those potential common shares in the calculation of diluted loss
per share would have an antidilutive effect.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Basic and diluted loss per share have been computed as follows:
Ten Months Ended
Year Ended October 31, October 31,
-------------------------------------
2003 2002 2001
------------------ ------------------ -------------------
Loss before discontinued operations and cumulative effect of
accounting change $ (3,824) $ (3,275) $ (1,019)
Change in fair value of mandatory redeemable preferred stock (403) 35 70
------------------ ------------------ -------------------
Loss attributable to common shareholders before discontinued
operations and cumulative effect of accounting change (4,227) (3,240) (949)
Loss from discontinued operations, net of tax (49) (1,040) (3,376)
Cumulative effect of change in accounting principle -- (2,015) --
------------------ ------------------ -------------------
Net loss attributable to common shareholders $ (4,276) $ (6,295) $ (4,325)
================== ================== ===================
Weighted average common and common equivalent shares
outstanding, basic and diluted 36,007,855 36,007,855 25,830,856
================== ================== ===================
Loss per share, basic and diluted, attributable to common shareholders:
From continuing operations $ (.12) $ (.09) $ (.04)
Discontinued operations -- (.03) (.13)
Cumulative effect of accounting change -- (.06) --
------------------ ------------------ -------------------
Net loss per share $ (.12) $ (.18) $ (.17)
================== ================== ===================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
The Company's Series C Preferred Stock and Series D Preferred Stock, which have
all the rights and privileges of the Company's common stock, are convertible at
rates of 20 to 1 and 175 to 1, respectively. The inclusion of these potential
common shares in the calculation of loss per share would have an antidilutive
effect. The Company's stockholders have approved amendments to our Certificate
of Incorporation and the Certificates of Designation for the Series C Preferred
Stock and Series D Preferred Stock that will allow the holders of the preferred
stock to convert their shares into common stock. We expect that the conversion
of the shares will occur in February 2004. Accordingly, we are presenting the
following pro forma information to indicate the effect on earnings per share had
such shares been converted to common shares for the periods presented.
On December 3, 2003, the stockholders and Board of Directors approved a 50-to-1
reverse stock split. The reverse stock split will be effective February 16,
2004. As a result of the reverse stock split and the amendment to the
Certificate of Incorporation described above, approximately 720,151 shares of
our common stock will be outstanding and the number of authorized shares of
common stock will be reduced to 10,000,000. Pro forma basic and diluted loss per
share have been computed below as if the Series C and Series D Preferred Stock
were converted to common stock. For the years ended October 31, 2003 and 2002
and the ten months ended October 31, 2001, the Series C Preferred Stock has been
reflected on a weighted average basis outstanding as common shares of
87,367,980, 81,194,826 and 75,212,925 respectively. The Series D Preferred Stock
has been reflected on a weighted average basis outstanding as common shares of
19,930,630 and 297,264 for the years ended October 31, 2003 and 2002,
respectively. There were no Series D Preferred Stock shares issued or
outstanding during the ten months ended October 31, 2001.
Year Ended October 31, Ten Months Ended
October 31,
--------------------------------------
2003 2002 2001
------------------- ------------------ -------------------
Pro forma weighted average common shares
outstanding, basic and diluted 143,306,465 117,499,946 73,809,790
=================== ================== ===================
Pro forma net loss per share, basic and
diluted, attributable to common shareholders $ (.03) $ (.05) $ (.06)
=================== ================== ===================
The pro forma net loss per share is presented for informational purposes only
and is not indicative of the weighted average common shares outstanding or net
loss per share presented in accordance with accounting principles generally
accepted in the United States of America.
INSURANCE RECOVERY:
On May 16, 2002, U.S. Rubber was damaged by a fire at an adjacent property. The
Company completed processing its claims with its insurance carrier for damaged
equipment and facilities and business interruption losses on August 16, 2002.
There was no material gain or loss on involuntary conversion as a result of this
fire. An insurance recovery related to the business interruption claim, net of
incurred costs, in the amount of $325 has been recognized as reduction of
operating costs in 2002.
COMPREHENSIVE INCOME:
SFAS No. 130, Reporting Comprehensive Income, establishes standards for
reporting and display of comprehensive income and its components in financial
statements. It requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. Comprehensive income consists of net earnings, the net
unrealized gains or losses on available-for-sale marketable securities and is
presented in the consolidated statement of stockholders' equity.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In January 2003, the Financial Accounting Standards Board (FASB) issued FIN No.
46. This Interpretation addresses the application of Accounting Research
Bulletin No. 51, Consolidated Financial Statements, to certain entities in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
DW Leasing and DC Investments Leasing, which are included in the Company's
consolidated financial statements, are subject to the provisions of FIN No. 46.
Historically, these entities have generated negative operating results and the
operating model did not anticipate income in excess of losses previously
recognized in the consolidated financial statements. However, during 2003, DW
Leasing and DC Investments Leasing reported positive operating results. As a
result, minority interest related to the income of DC Investments Leasing in the
amount of $172 has been recorded as a charge in the 2003 consolidated statement
of operations and has been recognized on the consolidated balance sheet. Future
operating results of DC Investments Leasing, if positive, will continue to be
charged to minority interest. In addition, should DW Leasing generate future
income in excess of previously recognized losses, such amounts would be charged
to minority interest in the consolidated statement of operations and recognized
as minority interest on the consolidated balance sheet. During 2003, DW Leasing
recorded income of $210. As of October 31, 2003, accumulated losses of DW
Leasing recognized in consolidated statements of operations exceeded income by
approximately $331.
In December 2003, the FASB issued FIN 46R, Consolidation of Variable Interest
Entities, which supercedes FIN 46. Application of the revised interpretation is
required in the financial statements of companies that have interests in special
purpose entities for periods ending after December 15, 2003 The adoption of FIN
46R will not have a material impact on our financial statements due to the
previous combination of these entities under EITF 90-15.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, which amends SFAS No. 133. This
statement amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under FASB Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities. This statement is effective
for contracts entered into or modified after June 30, 2003. We do not anticipate
that the adoption of this statement will have a significant impact on our
financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. The standard
further defines the accounting for certain financial instruments that, under
previous guidance, issuers could account for as equity or report between the
liability and equity section of the balance sheet. The standard requires that
those instruments be classified as liabilities in statements of financial
position. This standard is effective for interim periods beginning after June
15, 2003 except for certain provisions which are deferred indefinitely. The
adoption of this standard did not have a material impact on the Company's
financial position, results of operations, cash flows, or its debt covenants, as
the Company's mandatory redeemable preferred stock does not include redemption
provisions under an event certain to occur.
3. CHANGE IN ACCOUNTING PRINCIPLES, GOODWILL AND INTANGIBLE ASSETS, AND
IMPAIRMENT OF LONG-LIVED 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 SFAS No. 142, goodwill is no
longer amortized but is instead subject to an annual impairment test. The
Company completed its transitional impairment test in conjunction with the
adoption of SFAS No. 142 during the quarter ended July 31, 2002. The impairment
test indicated that a portion of the goodwill related to the trailer
manufacturing segment was impaired. Accordingly, $2,015 has been recorded as a
cumulative effect of change in accounting principle in 2002. This charge was
reflected in the first quarter pursuant to the implementation guidelines.
The Company reviews the recoverability of the carrying value of long-lived
assets, primarily property, plant and equipment and related goodwill and other
intangible assets, for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be fully recoverable.
Impairment losses are recognized when the fair value is less than the asset's
carrying value. When indicators of impairment are present, the carrying values
of the assets are evaluated in relation to the operating performance and future
undiscounted cash flows of the underlying business. The net book value of the
underlying assets is adjusted to fair value if the sum of expected future
undiscounted cash flows is less than book value. Fair values are based on quoted
market prices and assumptions concerning the amount and timing of estimated
future cash flows and assumed discount rates, reflecting varying degrees of
perceived risk.
During October 2002, the Company also evaluated the recoverability of the
long-lived assets, including the remaining goodwill associated with Danzer.
Deteriorating performance, including reduced sales and the bankruptcy of a major
customer, brought the recoverability of those assets into question. The
evaluation resulted in an additional goodwill impairment charge of $720. There
were no goodwill impairment charges recorded in 2003.
The Company's truck body division at Danzer continues to negatively impact the
Company's cash flows. The trailer production line was put in place in the fourth
quarter of 2002 to support the production needs at United and also provide a new
product line to the existing customers of Danzer and open a potential new market
along the East coast of the U.S. Given the current state of the
telecommunications industry and economic conditions, management will continue to
evaluate the operations and progress with the implementation of the trailer
production. In conjunction with the analysis of the Danzer operations, the
Company has continued to analyze the potential for asset impairment at the
Danzer operation. Total assets of Danzer as of October 31, 2003 were $3,198,
which consists of $1,260 of current assets and $1,938 of net property and
equipment, and represents approximately 7% of total consolidated assets. The
analysis has not resulted in an impairment charge.
The changes in the carrying amounts of goodwill related to continuing operations
are as follows:
Trailer Holding Company Total
Manufacturing
--------------------- ---------------- ------------------
Balance, October 31, 2001 $ 8,560 $ 650 $ 9,210
Purchase price adjustment (41) -- (41)
Impairment charges (720) -- (720)
Cumulative effect of change in
accounting principle (2,015) -- (2,015)
--------------------- ---------------- ------------------
Balance, October 31, 2002 and 2003 $ 5,784 $ 650 $ 6,434
===================== ================ ==================
Had SFAS No. 142 been effective at the beginning of 2001, the nonamortization
provisions would have reduced the net loss for the ten months ended October 31,
2001 by $76, resulting in an adjusted net loss of $4,319 and no change in
earnings per share.
4. DISCONTINUED OPERATIONS
On October 30, 2002, the Company's Board of Directors agreed to sell the assets
of Champion to an entity controlled by Messrs. Durham and Whitesell (Officers of
the Company) for the assumption of all liabilities of Champion excluding its
subordinated debt. The decision to divest Champion was based on the entity's
inability to achieve profitable operations in the foreseeable future without
substantial cash infusion. The Company also agreed in principal to settle the
outstanding subordinated debt due to Markpoint Equity Fund J.V. ("Markpoint")
from Champion in exchange for a cash payment of $675 and issuance to the debt
holder of 32,143 shares of the Company's Series D Preferred Stock. In addition,
the agreement provided Markpoint the option to require the Company to repurchase
these shares at a price of $21 per share. The sale of Champion was completed on
January 30, 2003. Champion is accounted for as a discontinued operation and
therefore the results of operations and cash flows have been removed from the
Company's continuing operations for all periods presented. In addition, assets
and liabilities of Champion included in the sale have been removed from the
consolidated balance sheet as of October 31, 2003 and are included in the
consolidated balance sheet as of October 31, 2002 as "Assets of subsidiary held
for sale" and "Liabilities of subsidiary held for sale," respectively.
The sale of Champion resulted in an increase in equity of the Company of $1,142,
net of tax of $97. No gain or loss was recognized on the sale because of the
involvement of related parties.
A summary of the Company's discontinued operations for the years ended October
31, 2003 and 2002, and ten months ended October 31, 2001 follows.
Year Ended October 31, Ten Months Ended
October 31,
-------------------------------- ---------------
2003 2002 2001
---------------- --------------- ---------------
Net sales $ 170 $ 2,882 $ 3,365
Operating expenses (286) (4,066) (4,148)
Impairment loss -- -- (2,305)
Other income (expense) 127 (4) --
Interest expense (85) (290) (288)
Net loss (49) (1,040) (3,376)
A summary of assets and liabilities of subsidiary held for sale at October 31,
2002 are as follows:
Assets of subsidiary held for sale:
Inventories $ 551
Other current assets 177
Property and equipment, net 715
Other 95
-------------
$ 1,538
=============
Liabilities of subsidiary held for sale:
Accounts payable and accrued expenses $ 709
Customer deposits 313
Long-term debt --
Long-term debt, related parties 1,826
-------------
$ 2,848
=============
5. ACQUISITIONS AND PLAN OF REORGANIZATION
As previously discussed in Notes 1 and 2, on June 21, 2001, a change of control
of the Registrant occurred through an Acquisition Agreement and Plan of
Reorganization by and among Danzer, Danzer Industries, Inc., a wholly owned
subsidiary of Danzer, and Partners, Timothy S. Durham (the newly elected
Chairman of the Board of Danzer), and other individual owners of Pyramid and
Champion. On the Acquisition Date, Danzer acquired: all of the outstanding
capital stock of Pyramid in exchange for 810,099 shares of Danzer Series C
Preferred Stock ("Danzer Preferred"); all of the outstanding capital stock of
Champion for 135,712 shares of Danzer Preferred and all of the outstanding
capital stock of U.S. Rubber for 1,025,151 shares of Danzer Preferred. On July
31, 2001, Danzer acquired all of the outstanding capital stock of United
Acquisition, Inc. ("UAI"), the holding company formed to acquire assets of
United, from Partners for 2,593,099 shares of Danzer Preferred.
After the series of transactions were completed on July 31, 2001, Partners owned
75.42% of the total voting, convertible capital stock (Preferred) of Danzer. The
preacquisiton Danzer shareholders and their successors owned the remaining
capital stock representing 24.58% of the total voting capital stock (Common).
Since the U.S. Rubber Companies are so much larger than Danzer, and the existing
U.S. Rubber shareholders obtained a majority interest in the stock of Danzer,
they have been treated, for accounting purposes, as the acquirer in the
Reorganization (reverse merger). In addition, on July 31, 2001, Partners,
through UAI, acquired substantially all of the assets of United, an
Indiana-based manufacturer of enclosed cargo and specialty trailers, for
approximately $15,358. The purchase price and purchase accounting has been
allocated to the assets and liabilities of United based on their fair values.
Partners exchanged 100% of its shares of UAI for shares of Series C Preferred
Stock of Danzer. As a result, UAI became a wholly owned subsidiary of Danzer and
operates under the name of "United Expressline, Inc."
ACQUISITION OF DANZER AND SUBSIDIARY:
The purchase price and purchase accounting was allocated to the assets and
liabilities of Danzer based on their fair values. The purchase price was based
on the value of Danzer's equity determined to be $3,257 plus acquisition costs
of $964.
The allocation to tangible assets included $2,300 and $1,536 of net liabilities
assumed. The excess of the purchase price over the fair value of the
identifiable tangible and intangible net assets of $3,457 was allocated to
goodwill. Of this amount, $650 was allocated to Danzer and $2,807 allocated to
Danzer Industries, its subsidiary.
ACQUISITION OF UNITED EXPRESSLINE, INC.:
The allocation of purchase price to intangibles include existing brand name,
noncompete, and the customer base. Intangibles included $822 for brand name,
$886 for noncompete, and $105 for the customer base. The excess of the purchase
price of $15,358 over the fair value of the identifiable tangible and intangible
net assets of $5,821 has been allocated to goodwill. The value assigned to
tangible assets totaled $7,563.
The following schedule is a description of acquisition costs of Danzer and
United Expressline, Inc. and the respective purchase price allocations:
Danzer United
---------------------------------------
Purchase price:
Preferred stock $ 3,257 $ --
Cash to seller -- 11,050
Seller note -- 1,500
Liabilities assumed -- 1,670
Acquisition costs, including amounts to related
parties (see Note 15) 964 1,138
---------------------------------------
Total purchase price $ 4,221 $ 15,358
=======================================
Purchase price allocation:
Current assets, including accounts receivable
and inventory, net of current liabilities
assumed $ 329 $ 5,559
Land, property and equipment 2,300 2,004
Goodwill 3,457 5,829
Intangible assets -- 1,813
Other assets 65 153
Less debt assumed (1,930) --
---------------------------------------
Total purchase price allocation $ 4,221 $ 15,358
=======================================
PRO FORMA INFORMATION:
The unaudited condensed consolidated results of operations on a pro forma basis
as if the reorganization had occurred as of the beginning of the periods
projected are as follows:
The unaudited condensed consolidated results of operations shown below are
presented on a pro forma basis and represent the results of Danzer, Danzer
Industries, U.S. Rubber, Pyramid, DW Leasing and Obsidian Leasing on a combined
basis. Champion has been excluded from the amounts below, as it is currently
shown as discontinued operations. In addition, United is treated as if the
business combinations of these entities occurred at the beginning of the periods
presented. The schedule below includes all depreciation, amortization and
nonrecurring charges for all entities for the period shown.
Ten Months Ended
October 31,
2001
--------------------
Net sales $ 49,830
Loss from continuing operations $ (491)
Loss from continuing operations per
share - basic and diluted $ (.02)
The pro forma financial information is presented for informational purposes only
and is not indicative of the operating results that would have occurred had the
Reorganization been consummated as of the above dates, nor are they necessarily
indicative of future operating results.
6. INVENTORIES
Inventories are stated at the lower-of-cost (first-in, first-out method) or
market and are comprised of the following components:
October 31, October 31,
2003 2002
------------------ -------------------
Raw materials $ 4,647 $ 3,655
Work-in-process 499 709
Finished goods 2,630 3,417
Valuation reserve (321) (466)
------------------ -------------------
Total $ 7,455 $ 7,315
================== ===================
6. INVENTORIES, CONTINUED
The Company provides valuation reserves for inventory considered obsolete or not
currently available for use in production. Inventory reserves at U.S. Rubber are
related to excess scrap butyl rubber not currently available for use without
further processing; therefore, it has minimal value. Changes in the valuation
reserve are as follows:
Balance at October 31, 2001 $ (833)
Provision for losses (50)
Use of reserved inventory 417
------------------
Balance at October 31, 2002 (466)
Use of reserved inventory 145
------------------
Balance at October 31, 2003 $ (321)
==================
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized by major classification as follows:
October 31, 2003 October 31,
2002
------------------ -------------------
Land and improvements $ 497 $ 488
Buildings and improvements 3,436 3,520
Plant machinery and equipment 10,497 9,767
Furniture and fixtures 326 334
Coach fleet and vehicles 15,982 12,971
Coach refurbishments 474 341
------------------ -------------------
Total 31,212 27,421
Less accumulated depreciation (6,732) (4,373)
------------------ -------------------
Net property, plant and equipment $ 24,480 $ 23,048
================== ===================
Depreciation expense of property, plant and equipment for the years ended
October 31, 2003 and 2002, and the ten months ended October 31, 2001 included in
continuing operations was $2,401, $2,128, and $1,752, respectively.
8. FINANCING ARRANGEMENTS
The Company has the following outstanding debt as of October 31, 2003 and 2002:
Debt Amount
-------------------------------------
October 31, October 31,
2003 2002
------------------ ------------------
U.S. Rubber
Line of credit to a bank, bearing interest at prime (4.00% at October 31, 2003),
borrowings not to exceed the greater of $4,000 or the borrowing base (85% of
eligible accounts receivable and 42% of eligible inventories), interest payable
monthly, balance due October 2005, collateralized by
substantially all assets of U.S. Rubber $ 2,059 $ 1,528
Note payable to a bank, interest payable monthly at prime plus .50% (4.50% at
October 31, 2003), monthly principal payments of $48, due October 2005,
collateralized by substantially all assets of U.S. Rubber. 3,476 4,000
Note payable to DC Investments, LLC, interest payable monthly at 15%, balloon
payment due March 2007, subordinate to bank debt. 700 700
Other 50 76
------------------ ------------------
Subtotal U.S. Rubber 6,285 6,304
------------------ ------------------
8. FINANCING ARRANGEMENTS, CONTINUED
Debt Amount
-------------------------------------
October 31, October 31,
2003 2002
------------------ ------------------
Pyramid, DW Leasing, Obsidian Leasing and DC Investments Leasing
Various installment loans, repayable in monthly installments totaling $135
including interest ranging from the three-month LIBOR rate plus .12% (1.24% at
October 31, 2003) to 13.1% through November 2007 and applicable balloon
payments thereafter through December 2007, less unamortized discount ($212 at
October 31, 2003) first lien on assets financed (finance acquisition and asset
purchases). A portion of the borrowings guaranteed by the members of
DW Leasing. $ 11,186 $ 10,170
Former shareholders of Pyramid and related companies installment loans,
repayable in monthly installments of interest at 9% through December 2002 with
a balloon payment in January 2003, collateralized by Security Agreements for
Pyramid, DW Leasing and the members of DW Leasing (finance
acquisition). -- 928
Notes payable to Fair Holdings, Inc., repayable in monthly installments of
interest ranging from 10% to 14% through October 2012 and applicable balloon
payments through November 2012. 4,056 2,138
Other 31 37
------------------ ------------------
Subtotal Pyramid, DW Leasing, Obsidian Leasing and DC Investments Leasing 15,273 13,273
------------------ ------------------
8. FINANCING ARRANGEMENTS, CONTINUED
Debt Amount
-------------------------------------
October 31, October 31,
2003 2002
------------------ ------------------
Danzer Industries
Line of credit to Fair Holdings, maximum borrowing equal to $1,500, interest
payable monthly at the LIBOR Daily Floating Rate plus 3.2% (4.32% at October
31, 2003), due April 2006. Collateralized by substantially all assets of
Danzer and guaranteed by Obsidian Enterprises. $ 1,331 $ --
Note payable to Fair Holdings, requires monthly principal installments of $6,
interest accrues at the LIBOR Daily Floating Rate plus 3.2% (4.32% at October
31, 2003), due April, 2006. Collateralized by substantially all
assets of Danzer and guaranteed by Obsidian Enterprises. 961 --
Line of credit to a bank -- 875
Note payable to a bank -- 917
Term loans payable to US Amada, Ltd. Monthly payments currently aggregating $13
including interest at 10%, loans due January 2003, collateralized by
equipment financed 14 157
Equipment loans payable--monthly payments currently aggregating $2 including
interest of 9.50% to 11.30% through November 2006. Collateralized by
equipment financed. 85 88
Other 19 27
------------------ ------------------
Subtotal Danzer Industries 2,410 2,064
------------------ ------------------
8. FINANCING ARRANGEMENTS, CONTINUED
Debt Amount
-------------------------------------
October 31, October 31,
2003 2002
------------------ ------------------
United
Line of credit to a bank, maximum borrowing equal to $4,000, with a base of 80%
of eligible accounts receivable plus 50% of raw material, work-in-process and
finished goods inventory. Interest payable monthly at prime plus .75% (4.75% at
October 31, 2003), due November 1, 2004. Collateralized by substantially all
assets of United and guaranteed by
Obsidian Enterprises, Inc.* $ 4,000 $ 3,088
Temporary overline of credit with bank, interest payable monthly at prime plus
.75% (4.75% at October 31, 2003), due on demand, collateralized by
substantially all assets of United and guaranteed by Obsidian Enterprises,
Inc. * 250 --
Notes payable to a bank, requires monthly principal installments of $48 plus
interest ranging from prime plus 1% (5.00% at October 31, 2003) to prime plus
2% (6.00% at October 31, 2003), due through July 2006, collateralized by
substantially all assets of United and guaranteed by Obsidian
Enterprises, Inc.* 1,484 2,054
Subordinated note payable to Huntington Capital Investment Company, interest
payable quarterly at 14% per annum, balloon payment of outstanding principal
balance due July 26, 2006, less unamortized discount ($1,091 and $1,309 at
October 31, 2003 and 2002, respectively). Unsecured and subordinate to line
of credit and notes payable above.* 2,409 2,191
Note payable to former shareholder, interest payable monthly at 9% per annum,
balloon payment of outstanding principal balance due July 27, 2006. Unsecured
and subordinate to line of credit, notes payable and Huntington
debt above.* 1,500 1,500
Note payable to Renaissance (formerly parent of Danzer Corporation), interest
payable monthly at 8% per annum, with monthly principal payments beginning July
2004 at a rate of $10 for each $1,000 of outstanding principal, due July 2008.
Convertible at the option of the holder to common stock of Obsidian Enterprises
at a conversion price of $.10 per share. The loan agreement also restricts
dividend payments without the prior consent of the
lender.* 500 500
Note payable to a former shareholder, requires monthly principal installments
of $16 including interest at 9%, due March 2003 -- 77
8. FINANCING ARRANGEMENTS, CONTINUED
Debt Amount
-------------------------------------
October 31, October 31,
2003 2002
------------------ ------------------
United, continued
Other including 41 to Fair Holdings 122 83
------------------ ------------------
Subtotal United 10,265 9,493
------------------ ------------------
*United was in technical default of certain loan covenants with its senior and
subordinated lender at October 2003. United has obtained waivers of the
violations from the lenders and modifications of various covenants with these
lenders.
Obsidian Enterprises, Inc.
Line of credit to Fair Holdings, maximum borrowing equal to $12,000, interest
payable monthly at 10%, due January 2007, collateralized by all assets of
Obsidian Enterprises and guaranteed by certain officers 6,045 1,798
Note payable to Fair Holdings, interest payable monthly at 15%, balloon
payment due March 2007, guaranteed by certain officers 803 774
Note payable to Fair Holdings, interest payable monthly at 5.25%, paid during
2003 -- 108
Note payable to The Markpoint Company, interest payable monthly at 13.50%,
commencing June 1, 2000, balloon payment of outstanding principal balance due
May 2005, collateralized by substantially all assets of Champion and
subordinate to Champion notes payable to DC Investments LLC -- 1,250
------------------ ------------------
Subtotal Obsidian Enterprises, Inc. 6,848 3,930
------------------ ------------------
Champion
Notes payable to DC Investments, LLC, interest payable monthly at rates
ranging from 5.25% to 5.50%, balloon payments due January 2004 and June 2005 -- 1,794
Other -- 32
------------------ ------------------
Subtotal Champion -- 1,826
------------------ ------------------
Total all companies 41,081 36,890
Less liabilities of subsidiary held for sale -- (1,826)
Less related-party amounts presented separately (13,937) (5,518)
Less current portion (2,379) (5,667)
------------------ ------------------
$ 24,765 $ 23,879
================== ==================
Following are the maturities of long-term debt for each of the next five years
and thereafter:
2004 $ 2,379
2005 20,494
2006 8,446
2007 3,455
2008 547
Thereafter 5,760
-------------------
$ 41,081
===================
Various subsidiary companies were in violation of requirements to provide year
end financial statements to various lenders within 90 days of the close of the
2003 year end. Management has received an extension of time from the lenders.
Renaissance US Growth & Income Trust PLC and FBSUS Special Opportunities Trust
PLC, the holders of debentures that completed the financing of United, provided
the Company an extension in exchange for warrants to the debenture holders to
purchase up to 16,000 shares of the Company's common stock at an exercise price
of $.20 per share.
The Company has an agreement with Partners that gives the Company the right to
mandate a capital contribution from Partners if the lenders to U.S. Rubber
and/or United were to declare a default. In that event, the Company has the
right to enforce a capital contribution agreement with Partners up to $1,370 on
U.S. Rubber and $1,000 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. During 2003 a capital call was made
for $250 for U.S. Rubber to bring the Company in compliance with certain bank
covenants. Partners received 14,285 shares of Series D Preferred Stock in
exchange for the capital call.
The following details significant changes in debt during the year ended October
31, 2003:
PYRAMID, DW LEASING AND OBSIDIAN LEASING AND DC INVESTMENTS LEASING:
On January 3, 2003, Obsidian Leasing paid off debt in the amount of $928 to
former shareholders of Pyramid and related companies with proceeds from a note
with Fair Holdings which includes monthly interest payments of 13% of the
outstanding principal amount and a balloon principal payment in January 2006.
On December 17, 2002, Obsidian Leasing sold four coaches to DC Investments
Leasing in exchange for DC Investments Leasing's satisfaction of the debt
outstanding on such coaches. In addition, DC Investments Leasing also acquired
five additional coaches that were previously to be purchased by the Company
thereby eliminating the Company's existing purchase commitment for such coaches.
The Company refinanced the debt on the four coaches in addition to financing the
five additional coaches. DC Investments Leasing entered into an agreement with
First Indiana for $2,741 of the debt with interest payable at prime plus 1/2%
and a maturity of December 2007. DC Investments Leasing also incurred debt with
Fair Holdings for the remaining 20% of the net book value of the transferred and
new coaches. Terms of the debt with Fair Holdings include monthly interest
payments on the principal amount of $677 at 14% and a maturity of January 2008.
DC Investments Leasing also entered into a management agreement with Pyramid
under which all nine coaches described above will be leased by Pyramid.
DANZER:
As of January 31, 2003, Danzer was in violation of certain covenants included in
its credit agreement and First Forbearance Agreement dated October 14, 2002 with
its senior lender. On February 28, 2003, the Company and the lender entered into
a Second Forbearance Agreement waiving these violations. On March 28, 2003, the
credit agreement was assumed by Fair Holdings under an assumption and
continuation agreement. An amendment was made as of the effective date of the
agreement to extend the maturity date of the line of credit agreement to April
1, 2006 and the debt covenants required by the senior lender were waived through
the end of the term. In September 2003 the line of credit was amended to
increase the total availability from $1,000 to $1,500. All other terms of the
agreement will continue as stated in the original agreement dated August 15,
2001.
UNITED:
On December 26, 2002, United amended its credit agreement to provide additional
working capital. The amendment included a "temporary overline" line of credit
with maximum borrowings not to exceed the lesser of $650 or the remainder of the
borrowing base less the outstanding principal amount of the revolving line of
credit. Interest is payable monthly at a rate of prime plus 3/4%.
On January 28, 2004, United amended its line of credit agreement to extend the
maturity date of the original $4,000 line to November 2004, waive United's
current debt violations, and modify the covenants for future reporting periods.
In addition, United is required to pay the additional $250 outstanding on their
line of credit at October 31, 2003 during 2004. Therefore, $4,000 of United's
line of credit amount has been reclassified as long-term debt at October 31,
2003.
OBSIDIAN ENTERPRISES:
On February 2, 2004, Obsidian Enterprises, Inc.'s line of credit with Fair
Holdings was amended. Maximum borrowings were increased from $8,000 to $12,000,
and the maturity date was extended from January 2005 to January 2007.
9. LEASING ARRANGEMENTS
In October 2001, the Company entered into a sales-leaseback arrangement. Under
the arrangement, the Company sold equipment and leased it back for a period of
five years. The leaseback has been accounted for as an operating lease. The loss
of $218 realized in the transaction was deferred and was being amortized to
income in proportion to rental expense over the term of the lease. Proceeds from
the sale of $1,050 were used to reduce borrowings under the line of credit.
During October 2002, in conjunction with the refinancing described in Note 8,
the Company repurchased the equipment. The unamortized loss of $175 as of
October 24, 2002 was included as part of the equipment purchase price
capitalized.
9. LEASING ARRANGEMENTS, CONTINUED
The Company has various operating lease commitments, principally related to
machinery and equipment, office equipment, and facilities. The approximate
future minimum annual rentals under the terms of these leases, which expire on
various dates through the year ending October 31, 2008, are as follows:
Year Ending October 31,
2004 $ 452
2005 314
2006 220
2007 173
2008 18
------------
$ 1,177
============
Rental expense under operating leases for the years ended October 31, 2003 and
2002 and the ten months ended October 31, 2001 was $594, $562, and $514,
respectively.
10. EMPLOYEE BENEFIT PLANS
The Company, through certain of its subsidiaries, has defined contribution
401(k) plans which permit voluntary contributions up to 20% of compensation and
which provide Company-matching contributions of up to 10% of employee
contributions not to exceed 6% of employee compensation. 401(k) plan expense for
the years ended October 31, 2003 and 2002 and the ten-month period ended October
31, 2001 was approximately $128, $148, $35, respectively.
11. MANDATORY REDEEMABLE PREFERRED STOCK
In conjunction with the United acquisition described in Note 5, the Company
issued 386,206 shares of Series C Preferred Stock to Huntington Capital
Investment Corporation ("Huntington"), the senior subordinated lender of United.
The note purchase agreement included a provision giving Huntington the option to
require the Company to repurchase the Series C Preferred Stock. Under the terms
of the agreement, Huntington has the option of requiring the Company to
repurchase these shares at 90% of market value at the date of redemption upon
the earlier of: a) fifth anniversary of issuance of such shares, b) default
under the subordinated debt agreement, c) other factors related to a sale of
substantially all assets of the Company as defined in the agreement.
A portion of the note purchase agreement proceeds of $3,500 was allocated to the
stock issued based on the thirty day average closing value of the Company's
common stock prior to the transaction. As the redemption value is variable, the
Company recognizes changes in the estimated fair value each quarter. Changes in
fair value are adjusted through additional paid in capital or retained earnings
when additional paid in capital related to the fair value change has been
reduced to zero. At October 31, 2003, the estimated redemption requirement is
$1,803 to be paid July 2006.
11. MANDATORY REDEEMABLE PREFERRED STOCK, CONTINUED
In conjunction with the sale of Champion discussed in Note 4, the Company agreed
to settle the outstanding subordinated debt due to Markpoint from Champion in
exchange for a cash payment of $675 and issuance to the debt holder of 32,143
shares of the Company's Series D Preferred Stock. The agreement provided
Markpoint the option to require the Company to repurchase these shares at a
price of $21 per share. The repurchase option was available to Markpoint as
follows: 16,072 shares during the period May 1, 2003 to June 1, 2003 and 16,071
shares during the period November 1, 2003 to December 1, 2003. On May 12, 2003,
under an Assignment Agreement, the Company transferred all rights, title and
interest in the repurchase option to Fair Holdings. Markpoint exercised the
repurchase option with respect to 16,072 shares on May 12, 2003 and was paid
$338 by Fair Holdings. The exercise of the option resulted in the reduction of
the liability and an increase in additional paid in capital of $337 as of
October 31, 2003. Subsequent to October 31, 2003, Markpoint exercised the option
for the remaining 16,071 shares and those shares also were acquired by Fair
Holdings.
12. STOCKHOLDERS' EQUITY
PREFERRED STOCK:
The original capital structure of Danzer prior to the merger was comprised of
the following: 5,000,000 authorized shares of $.001 par value preferred stock;
10,500 shares authorized of the Class of 10% Cumulative Senior Preferred Stock
(Series A) with no shares issued or outstanding as 7,650 shares were retired;
(Series B) Cumulative Convertible Senior Preferred Stock with 16,000 shares
authorized and no shares issued or outstanding as 16,000 shares were retired. In
addition, the Company had 20,000,000 authorized shares of common stock with
17,760,015 shares outstanding at December 31, 2000.
In June 2001, Danzer issued an aggregate of 1,750,000 shares of Danzer
unregistered common stock in connection with the exchange of $355 of debt. On
June 21, 2001, Danzer amended its articles of incorporation to authorize up to
4,500,000 shares of Series C Preferred Stock. In conjunction with the merger and
acquisitions (described in Note 5) of June 21, the Company issued 1,970,962 of
Series C Preferred Stock. The shareholders of Pyramid and Champion then
converted 824,892 shares of preferred stock to 16,497,840 of common stock. In
addition, on July 5, 2001, the Company increased the authorized shares of common
stock by 20,000,000 to 40,000,000. On July 31, 2001, the Company issued
2,593,099 shares of additional Series C Preferred Stock related to the United
acquisition.
As a result of the reverse merger, U.S. Rubber became the accounting acquirer
and accordingly, under purchase accounting, became the Registrant. Therefore,
the 2000 financial statements became those of U.S. Rubber. However, under
purchase accounting for a reverse merger, the stockholders' equity section of
the Registrant (formerly Danzer Corporation) became the equity of the merged
entity. Accordingly, the statement of changes in stockholders' equity reflects
that purchase accounting.
12. STOCKHOLDERS' EQUITY, CONTINUED
On October 4, 2001, the Company changed its name from Danzer Corporation to
Obsidian Enterprises, Inc. In addition, 5,000,000 shares of Preferred Stock were
authorized with the domestication of Obsidian Enterprises, Inc. in Delaware. On
October 9, 2001, the Company filed designation of preferences, rights and
limitations of 4,600,000 shares of Series C Preferred Stock. This transaction
results in 400,000 shares of authorized but undesignated preferred stock and
cancellation of the Series A and B shares.
The Series C Preferred Stock is convertible at the option of the holder at any
time, unless previously redeemed, into shares of common stock of the Company at
an initial conversion rate of 20 shares of common stock for each share of
convertible stock. However, the convertible preferred stock may not be converted
prior to the corporation filing a registration statement for such shares.
Holders of the convertible preferred stock have voting rights which entitle them
to cast on each matter submitted to a vote of the stockholders of the Company
the number of votes equal to the number of shares of common stock into which
such shares of Series C Preferred could be converted.
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 $1,016. The subordinated lender received 30,000
shares of Series C Preferred Stock in this transaction.
On April 30, 2002, the Company converted $1,290 of debt and accrued interest
owed to Partners and $596 of debt and accrued interest owed to Fair to equity
through the issuance to Partners and Fair of 402,906 shares and 186,324 shares,
respectively, of Series C Preferred Stock which are convertible into an
aggregate of 11,784,600 shares of common stock of the Company.
In August 2002, warrants for 10,000 shares of Series C Convertible Stock were
exercised. The shares were issued in exchange for a cash payment of $20.
On October 24, 2002, the Company amended its Articles of Incorporation to
authorize 200,000 shares of Series D Preferred Stock. The Series D Preferred
Stock is convertible at the option of the holder at any time, unless previously
redeemed, into shares of common stock of the Company at an initial conversion
rate of 175 shares of common stock for each share of Series D Preferred Stock.
However, the stock may not be converted prior to the Company filing a
registration statement for such shares. Holders of the Series D Preferred Stock
have voting rights which entitle them to cast on each matter submitted to a vote
of the stockholders of the Company the number of votes equal to the number of
shares of common stock into which such shares of Series D Preferred could be
converted.
On October 24, 2002, 88,300 of the Series D Preferred Stock shares were sold in
the transactions described below which were exempt from Securities Act
registration under Section 4(2) of the Securities Act, relating to sales by an
issuer not involving a public offering.
On October 24, 2002, the Company converted $1,276 of debt to Partners in
exchange for 72,899 shares of Series D Preferred Stock. The conversion was the
result of Partners' requirement 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 Partners.
12. STOCKHOLDERS' EQUITY, CONTINUED
On October 24, 2002, the Company converted $270 of debt to Fair in exchange for
15,431 shares of Series D Preferred Stock. The conversion was the result of
Fair's agreement to cover similar expenses as Partners as described above in
excess of the amount Partners was obligated to pay.
On May 12, 2003, 16,072 shares of Series D Preferred Stock, previously
classified as mandatory redeemable preferred stock (see Note 11) were acquired
by Fair Holdings from Markpoint.
On October 13, 2003, the Company issued 14,285 shares of Series D Preferred
Stock for $250. The issuance was as a result of a capital call from Partners who
were obligated to fund additional capital required to maintain compliance with
the debt covenants of U.S. Rubber.
STOCK OPTIONS:
On May 7, 1990, Danzer's stockholders approved a stock option plan to issue both
"qualified" and "nonqualified" stock options. Under the plan, 800,000 options to
purchase shares of the Company's common stock may be issued at the discretion of
the Company's Board of Directors. The option price per share is determined by
the Company's Board of Directors, but in no case will the price be less than 85%
of the fair value of the common stock on the date of grant. Options under the
plan will have a term of not more than ten years with accelerated termination
upon the occurrence of certain events.
In April 1998, Danzer granted 600,000 stock options, exercisable at $.10 per
share, to its president. The options vest over two years and expire in April
2004. None of these options have been exercised as of October 31, 2003.
In September 1998, Danzer adopted a qualified incentive stock option plan under
Section 422 of the Internal Revenue Code. Options granted under the plan will be
granted at prices not less than fair value of the Company's stock at the date of
grant, have a term not more than ten years and have other restrictions as
determined by statute.
In September 1998, Danzer granted a total of 604,500 stock options, exercisable
at $.10 per share, to certain employees. The options expired November 2001. As a
result of voluntary termination, 75,000 options expired in 1999 and 192,000
options expired in 2000. The balance of 247,500 options outstanding expired
November 1, 2002.
On July 24, 2001, the Board adopted, and on October 5, 2001, the Company's
stockholders approved, the 2001 Long Term Incentive Plan (the "2001 Plan"). The
2001 Plan authorizes the granting to the Company's directors, key employees,
advisors and consultants of options intended to qualify as Incentive Options
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), options that do not so qualify ("Non-Statutory Options"),
restricted stock and Other Stock-Based Awards that are not Incentive Options or
Non-Statutory Options. The awards are payable in Common Stock and are based on
the formula which measures performance of the Company. There was no performance
award expense in 2003, 2002 or 2001. No options under this plan were granted to
any employees. Options are exercisable for up to 10 years from the date of
grant.
12. STOCKHOLDERS' EQUITY, CONTINUED
On December 13, 2003, the Company's Board of Directors approved the extension of
the expiration date of 200,000 fixed stock options, exercisable at $.05. The
original expiration date of December 31, 2002 was originally extended to
December 31, 2003 and subsequently to June 30, 2004. The Company recognized $30
of compensation expense related to the extension of the options during the year
ended October 31, 2003.
The Company accounts for stock-based compensation under the provisions of APB
No. 25. The Company has adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. Accordingly, no compensation expense is
recognized if the exercise price of stock options equals the fair market value
of the underlying stock at the date of grant. Had compensation expense for the
Company's stock option plans been determined based on the fair value at the
grant date for awards consistent with the provisions of SFAS No. 123, the
Company's basic and diluted net income (loss) per share would not have changed.
See Note 2 for comparison of net income and net income per share as reported and
as adjusted for the pro forma effects of determining compensation expense in
accordance with SFAS 123.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 2000 and 1999, respectively: risk-free interest
rates of 6.4 and 5.5 percent; dividend yield of 0 percent in both years;
expected lives of 5 years; and volatility of 978 and 170 percent. The estimated
weighted average fair value of options granted during 2000 and 1999 were $0.10
and $0.05 per share, respectively. Following is a summary of transactions of
granted shares under option for the years ended October 31, 2003 and 2002 and
the ten months ended October 31, 2001:
2003 2002 2001
----------------------------- ----------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------------- -------------- -------------- -------------- -------------- -------------
Outstanding, beginning of year 800,000 .09 1,047,500 .09 1,137,500 .09
Issued during the year -- -- -- -- -- --
Canceled or expired during the
year -- -- (247,500) .10 (90,000) .10
Exercised during the year -- -- -- -- -- --
-------------- -------------- -------------- -------------- -------------- -------------
Outstanding, end of year 800,000 .09 800,000 .09 1,047,500 .09
============== ============== ============== ============== ============== =============
Eligible, end of year for
exercise 800,000 .09 800,000* .09 1,047,500 .09
============== ============== ============== ============== ============== =============
12. STOCKHOLDERS' EQUITY, CONTINUED
A further summary about fixed options outstanding at October 31, 2003 is as
follows:
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Outstanding Life Price Exercisable Price
---------------- ---------------- ------------- ---------------- -------------
Exercise price of $.10 600,000* .5 yr. .10 600,000 .10
Exercise price of $.05 200,000 .67 yr. .05 200,000 .05
*In accordance with the Plan of Reorganization and Merger and the related
"Letter agreements," the above options cannot be exercised until the Company
amends its articles of incorporation to authorize shares of approximately
120,000,000 and has registered such shares.
STOCK WARRANTS:
The Company has issued warrants to purchase common stock to several parties. In
January 2003, the Company agreed to a modification of terms with the debenture
holders to provide for less stringent covenants. In exchange for this
modification, the Company issued warrants to the debenture holders to purchase
up to 16,000 shares of the Company's common stock at an exercise price of $.20
per share. These warrants expire January 24, 2006. The issuance of the warrants
had no material impact on earnings.
The following table summarizes the outstanding warrants for the years ended
October 31, 2003 and 2002:
Outstanding Outstanding
Warrants Issued Warrants Warrants
October 31, During the Exercised October 31,
2002 Year Exercise Price in Period 2003
--------------- ------------ ----------------- ------------ ---------------
Common Stock:
Renaissance US Growth & Income Trust PLC 8,000 8,000 .20 -- 16,000
BFSUS Special Opportunities Trust PLC 8,000 8,000 .20 -- 16,000
Outstanding Outstanding
Warrants Issued Warrants Warrants
October 31, During the Exercised October 31,
2001 Year Exercise Price in Period 2002
--------------- ------------ ----------------- ------------ ---------------
Common Stock:
Renaissance US Growth & Income Trust PLC -- 8,000 $.20 -- 8,000
BFSUS Special Opportunities Trust PLC -- 8,000 $.20 -- 8,000
Series C Preferred Stock:
Duncan-Smith Co., 10,000 shares, expire
August 31, 2002 10,000 -- $2.00 (10,000) --
Markpoint financing agreement expiring May
2008 associated with Champion** Zero** -- $.01 -- Zero**
**The number of warrants available under the agreement with Markpoint is based
on twenty-five percent of the fair market value of Champion to be determined
based on a formula including a multiple of EBITDA. No warrants are currently
available under this agreement based on the operating results and stockholder's
deficit of Champion. As discussed in Notes 4 and 16, the Company agreed to a
settlement with Markpoint in January 2003. Accordingly, these warrants have been
terminated.
In February 2004, the Company received an extension of the requirement to
provide audited financial statements to debenture holders. In exchange for this
extension, the Company issued warrants to each of the debenture holders to
purchase up to 8,000 shares of the Company's common stock at an exercise price
of $.20 per share. These warrants expire February 9, 2007.
CONVERTIBLE DEBT:
As described in Note 8, the Company has a note payable agreement which is
convertible by the holder to common stock totaling 5,000,000 shares at a
conversion rate of $0.10 per share.
13. BUSINESS SEGMENT DATA AND GEOGRAPHIC DATA
The Company operates in three industry segments comprised of trailer and related
transportation equipment manufacturing; coach leasing; and butyl rubber
reclaiming. All sales are in North and South America primarily in the United
States, Canada and Brazil. All segment information is presented from continuing
operations and before cumulative effect of change in accounting method. Selected
information by segment follows:
Year Ended October 31, 2003
------------------------------------------------------------------------------
Trailer Coach Butyl Rubber Total
Manufacturing Leasing Reclaiming
------------------------------------------------------------------------------
Sales:
Domestic $ 37,590 $ 7,281 $ 9,893 $ 54,764
Foreign 3,419 -- 1,112 4,531
------------------------------------------------------------------------------
Total $ 41,009 $ 7,281 $ 11,005 $ 59,295
Cost of goods sold $ 37,704 $ 4,060 $ 9,972 $ 51,736
Income (loss) before taxes $ (3,480) $ (122) $ (752) $ (4,354)*
Identifiable assets $ 19,722 $ 14,147 $ 11,028 $ 44,897**
Depreciation and amortization expense $ 751 $ 767 $ 1,332 $ 2,850
Interest expense $ 1,395 $ 1,189 $ 556 $ 3,140***
*Identifiable income (loss) before
taxes, as stated above $ (4,354)
Corporate-level loss before taxes,
not identifiable with a specific
segment (407)
--------------------
Total loss before taxes $ (4,761)
====================
**Identifiable assets, as stated above $ 44,897
Corporate-level goodwill 650
Other corporate-level assets 335
--------------------
Total assets $ 45,882
====================
***Identifiable interest expense, as stated above $ 3,140
Corporate-level interest expense, not identifiable with a specific segment 407
--------------------
Total interest expense $ 3,547
====================
13. BUSINESS SEGMENT DATA AND GEOGRAPHIC DATA, CONTINUED
Year Ended October 31, 2002
------------------------------------------------------------------------------
Trailer Butyl Rubber
Manufacturing Coach Leasing Reclaiming Total
------------------------------------------------------------------------------
Sales:
Domestic $ 38,911 $ 6,374 $ 9,336 $ 54,621
Foreign 1,864 -- 789 2,653
------------------------------------------------------------------------------
Total $ 40,775 $ 6,374 $ 10,125 $ 57,274
Cost of goods sold $ 35,077 $ 3,357 $ 9,407 $ 47,841
Loss before taxes $ (1,966) $ (417) $ (732) $ (3,115)*
Identifiable assets $ 20,155 $ 11,760 $ 11,391 $ 43,306**
Depreciation and amortization expense $ 705 $ 779 $ 1,084 $ 2,568
Interest expense $ 1,277 $ 1,468 $ 614 $ 3,359***
*Identifiable income (loss) before
taxes, as stated above $ (3,115)
Corporate-level loss before taxes,
not identifiable with a specific
segment (193)
--------------------
Total loss before taxes $ (3,308)
====================
**Identifiable assets, as stated above $ 43,306
Assets of subsidiary held for sale 1,538
Corporate-level goodwill 650
Other corporate-level assets 429
--------------------
Total assets $ 45,923
====================
***Identifiable interest expense, as stated above $ 3,359
Corporate-level interest expense, not identifiable with a specific segment 193
--------------------
Total interest expense $ 3,552
====================
13. BUSINESS SEGMENT DATA AND GEOGRAPHIC DATA, CONTINUED
Ten Months Ended October 31, 2001
------------------------------------------------------------------------------
Trailer Butyl Rubber
Manufacturing Coach Leasing Reclaiming Total
------------------------------------------------------------------------------
Sales:
Domestic $ 10,100 $ 4,165 $ 9,253 $ 23,518
Foreign 550 -- 621 1,171
------------------------------------------------------------------------------
Total $ 10,650 $ 4,165 $ 9,874 $ 24,689
Cost of goods sold $ 8,955 $ 1,618 $ 8,884 $ 19,457
Loss before taxes $ (96) $ (570) $ (725) $ (1,391)
Identifiable assets $ 22,291 $ 13,330 $ 10,205 $ 45,826*
Depreciation and amortization expense $ 365 $ 785 $ 905 $ 2,055
Interest expense $ 369 $ 1,266 $ 677 $ 2,312
*Identifiable assets, as stated above $ 45,826
Assets of subsidiary held for sale 2,374
Corporate-level goodwill 650
--------------------
Total assets $ 48,850
====================
Obsidian Enterprises, Inc. (legal parent) allocates selling, general and
administrative expenses to the respective companies primarily based on a
percentage of sales. For the years ended October 31, 2003 and 2002 and the ten
months ended October 31, 2001, respectively, allocated corporate expenses by
segment were as follows:
Year Ended October 31, Ten Months Ended
October 31,
------------------- ------------------
2003 2002 2001
------------------- ------------------ ------------------
Trailer manufacturing $ 1,174 $ 934 $ 245
Coach leasing 200 146 96
Butyl rubber reclaiming 317 232 275
------------------- ------------------ ------------------
$ 1,691 $ 1,312 $ 616
=================== ================== ==================
14. INCOME TAXES
The Company files a consolidated federal tax return. The parent and each
subsidiary record their share of the consolidated federal tax expense on a
separate-return basis. Any additional income tax expense or recovery realized as
a result of filing a consolidated tax return is recorded in consolidation. The
Company and each subsidiary file separate state income tax returns. The Company
accounts for income taxes in compliance with SFAS No. 109, Accounting for Income
Taxes. Under SFAS No. 109, deferred tax assets and liabilities are recorded for
any temporary differences between the financial statement and tax bases of
assets and liabilities, using the enacted tax rates and laws expected to be in
effect when the taxes are actually paid or recovered.
The provision for (expenses) benefit for income taxes consists of the following:
2003 2002 2001
------------------------------------------------
Current:
Federal $ -- $ -- $ --
State (66) (15) (36)
------------------------------------------------
(66) (15) (36)
------------------------------------------------
Deferred:
Federal 733 41 350
State 270 7 58
Discontinued operations 25 332 --
------------------------------------------------
1,028 380 408
------------------------------------------------
Total tax benefit 962 365 372
Less tax benefit from discontinued
operations (25) (332) --
Tax benefit from continuing operations $ 937 $ 33 $ 372
================================================
A reconciliation of income tax benefit (expense) from continuing operations at
U.S. statutory rates to actual income tax benefit (expense) is as follows:
2003 2002 2001
-------------------------------------------------
Benefit (tax) at statutory rate (34%) $ 1,536 $ 1,125 $ 1,609
Effect of nontaxable combined entity 138 (18) (166)
State income tax 180 (15) (36)
Goodwill amortization -- -- (26)
Non-deductible goodwill -- (245) --
Valuation reserve applied to equity -- (1,267)* --
(Increase) decrease in valuation reserve (1,028) 380 (1,038)
Other 111 73 29
-------------------------------------------------
$ 937 $ 33 $ 372
=================================================
*On November 1, 2001, 27 coaches owned by DW Leasing were transferred to
Obsidian Leasing in a tax-free exchange, as further described in Note 1. DW
Leasing recorded a charge to equity as a deemed distribution of $1,590 on the
date of the transaction, representing the deferred tax liability associated with
the coaches transferred. A reduction of deferred tax valuation reserve of
$(1,267) was also recorded in the consolidated financial statements as an
increase in equity, as the addition of the above deferred tax liability resulted
in the Company's ability to realize additional deferred tax assets on a
consolidated basis.
14. INCOME TAXES, CONTINUED
Deferred income taxes represent the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and for income tax purposes. Significant components of the Company's
deferred tax assets and liabilities are as follows:
2003 2002
--------------------------------
Deferred tax assets (liabilities):
Accounts receivable $ 195 $ 199
Inventories 215 307
Accrued expenses 143 158
Intangibles 370 1,004
Operating loss carryforwards 5,209 2,961
Property and equipment (4,272) (4,497)
Other 10 80
--------------------------------
1,870 212
Less valuation reserves (1,971) (1,171)
--------------------------------
Deferred tax assets (liabilities), net $ (101) $ (959)
================================
Included in the accompanying balance sheet under the following:
2003 2002
--------------------------------
Deferred tax assets $ 550 $ 665
Deferred tax liabilities (651) (1,624)
--------------------------------
$ (101) $ (959)
================================
The amount of federal tax net operating loss carryforwards available at October
31, 2003 was $13,400. Certain of these loss carryforwards were generated by
certain subsidiaries prior to the reverse merger transaction in June 2001 and
have expiration dates through the year 2021. The use of preacquisition operating
losses is subject to limitations imposed by the Internal Revenue Code.
Utilization of these loss carryforwards is impacted by such limitations.
Accordingly, the deferred tax assets related to premerger operating losses have
been reserved with a valuation allowance to the extent they are not offset by
deferred liabilities.
14. INCOME TAXES, CONTINUED
Federal tax net operating loss carryforwards and expiration dates as of October
31, 2003 are as follows:
Premerger Expiration Dates Postmerger Expiration Dates
-------------- ----------------------- --------------- ---------------------
$ 2,996 2008 through 2021 $ 10,422 2021 through 2023
============== ===============
Cash payments of income taxes for the years ended October 31, 2003 and 2002 and
the ten months ended October 31, 2001 were $96, $22, and $44, respectively.
15. RELATED PARTIES
The Company makes advances, receives loans and conducts other business
transactions with affiliates resulting in the following amounts for the periods
ended:
October 31, October 31,
2003 2002
------------------ ------------------
Balance sheets:
Current assets:
Accounts receivable, Obsidian Capital Partners $ -- $ 181
Accounts receivable, Obsidian Capital Company 8 13
Accounts receivable, other affiliated entities 44 12
------------------ ------------------
Total assets $ 52 $ 206
================== ==================
Current liabilities:
Accounts payable, Obsidian Capital Company $ 275 $ 279
Accounts payable, stockholders 320 338
Accounts payable, DC Investments and Fair Holdings 221 42
Accounts payable, other affiliated entities 21 9
Long-term portion:
Notes payable, DC Investments 700 700
Notes payable, Fair Holdings 7,192 3,020
Line of credit, Fair Holdings 6,045 1,798
------------------ ------------------
Total liabilities $ 14,774 $ 6,186
================== ==================
October 31, 2003 October 31, 2002 October 31, 2001
------------------- ------------------ ------------------
Statements of Operations:
Interest expense, DC Investments and Fair Holdings $ 1,274 $ 322 $ --
Interest expense, Obsidian Capital Partners -- 58 --
Rent expense, Fair Holdings 45 -- --
Rent expense, Obsidian Capital Company -- 56 15
15. RELATED PARTIES, CONTINUED
Related-party amounts classified as current reflect those portions of the total
receivable or payable that were currently due in accordance with the terms, or
were collected or paid subsequent to year end. Amounts classified as long term
represent amounts not currently due or amounts that were converted to equity
subsequent to year end as discussed in Note 17.
On February 13, 2002, DC Investments, LLC, a related party 50% owned by Mr.
Durham (Chairman of the Company), purchased accounts receivable from DW Leasing,
recorded by DW Leasing as deposits on trailers, in the amount of $1,051. DW
Leasing used the proceeds from the purchase of the accounts receivable to pay
off the accounts payable due Obsidian Capital Company in the amount of $624 and
the amount due shareholders and other related parties in the approximate amount
of $300.
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. In addition, the Company has entered into
note payable agreements with other affiliated entities. The details of these
notes payable are included in Note 8.
On December 17, 2002, Obsidian Leasing sold four coaches to DC Investments
Leasing in exchange for DC Investments Leasing's satisfaction of the debt
outstanding on such coaches. DC Investments Leasing paid this debt through a
refinancing at terms that included a reduction in interest rates. In addition,
DC Investments Leasing also acquired five additional coaches that were
previously to be purchased by us thereby eliminating our existing purchase
commitment for the coaches. DC Investments Leasing also entered into a
management agreement with Pyramid under which all nine coaches described above
will be leased by Pyramid.
16. COMMITMENTS AND CONTINGENCIES
In connection with their dealers' wholesale floor-plan financing of cargo
trailers, the Company has entered into repurchase agreements with various
lending institutions. The repurchase commitment is on an individual unit basis
with a term from the date it is financed by the lending institution through
payment date by the dealer, generally not exceeding one year. Outstanding
obligations are approximately $2,000 at October 31, 2003. Such agreements are
customary in the cargo trailer industry and the Company's exposure to loss under
such agreements is limited by the resale value of the inventory which is
required to be repurchased. Losses incurred under such arrangements have not
been significant and the estimated liability for losses on contracts outstanding
at October 31, 2003 is not material.
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.
17. SUBSEQUENT EVENTS
On November 10, 2003, Markpoint exercised its remaining Put Option that was
assigned to Fair Holdings, as discussed in Note 4. Markpoint was paid $337 by
Fair Holdings and the exercise of the option resulted in the reduction of the
liability and an increase in additional paid in capital of $337.
On December 3, 2003, the Company's stockholders and Board of Directors approved
a 50-to-1 reverse stock split. The reverse stock split will be effective
February 16, 2004. As a result of the reverse stock split and the amendment to
the Certificate of Incorporation, approximately 720,151 shares of common stock
will be outstanding and the number of authorized shares of common stock will be
reduced to 10,000,000. On December 15, 2003, the Company commenced an exchange
offer for all of the outstanding shares of Net Perceptions, Inc., a developer of
software products for the retail industry which has been winding down its
operations and whose assets are predominately cash or cash equivalents. The
exchange offer, as fully disclosed in the Registration Statement on Form S-4 and
other filings made with the SEC, is for two common shares of Obsidian stock for
every one share of Net Perceptions stock. The Company cannot predict whether it
will be successful in acquiring some or all of the outstanding shares of Net
Perceptions in exchange for its common shares due to the fact that several
important conditions are with the control of the Board of Directors of Net
Perceptions.
On February 2, 2004, Obsidian Enterprises, Inc.'s line of credit with Fair
Holdings was amended. Maximum borrowings were increased from $8,000 to $12,000,
and the maturity date was extended from January 2005 to January 2007.
18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(dollars in thousands, except per share amounts)
YEAR ENDED OCTOBER 31, 2003
First Qtr. Ended Second Qtr. Ended Third Qtr. Ended Fourth Qtr.
1/31/03 4/30/03 7/31/03 Ended 10/31/03
------------------ ------------------- ------------------ ------------------
Net sales $ 10,899 $ 15,107 $ 16,795 $ 16,494
Gross profit 1,160 1,791 2,405 2,203***
Loss from continuing operations (1,517) (909) (307) (1,091)***
Loss from continuing operations per
basic common and common equivalent
share (.04) (.03) .00 (.05)
YEAR ENDED OCTOBER 31, 2002
First Qtr. Ended Second Qtr. Ended Third Qtr. Ended Fourth Qtr.
1/31/02 4/30/02 7/31/02 Ended 10/31/02
------------------ ------------------- ------------------ ------------------
Net sales $ 11,466 $ 15,598 $ 15,239 $ 14,971
Gross profit 1,518 2,625 2,839 2,653
Income (loss) from continuing operations (1,207) (570) 471 (1,531)**
Income (loss) from continuing
operations per basic common and common
equivalent share (.03) (.02) .00 (.04)
TEN MONTHS ENDED OCTOBER 31, 2001
First Qtr.* Second Qtr. Ended Third Qtr. Ended Fourth Qtr.
Ended 1/31/01 4/30/01 7/31/01 Ended 10/31/01
------------------ ------------------- ------------------ ------------------
Net sales $ 3,626 $ 4,014 $ 4,685 $ 14,474
Gross profit 408 911 1,260 2,764
Loss from continuing operations (218) (408) (196) (541)
Loss from continuing operations per
common and common equivalent share (.01) (.02) (.01) (.02)
*The first quarter for U.S. Rubber includes the first and second month (November
and December) of 2000. **The fourth quarter includes the charge for the
impairment of goodwill of $720 for October 31, 2002.
***The fourth quarter includes a charge related to inventory at United
Expressline of $500.
SCHEDULE II--VALUATION AND QUALIFYING OF ACCOUNTS
Year Ended October 31, 2003
(in thousands)
Column C--Additions
-----------------------------------
Column A--Description Column (1)--Charged to (2)--Charged to Column Column
B--Balance at r
Beginning of Costs and Other ibE--Balance at
Period Expenses Accounts--Describe D--Deductions--Desc End of Period
----------------------------- ---------------- ----------------- ----------------- ----------------- -----------------
Allowance for doubtful
accounts $ 495 $ 20 $ -- $ 19(1) $ 496
================ ================= ================= ================= =================
Inventory valuation
allowances $ 466 $ -- $ -- $ 145(2) $ 321
================ ================= ================= ================= =================
Deferred tax valuation
reserve $ 1,171 $ 1,027 $ 218(3) $ 445(4) $ 1,971
================ ================= ================= ================= =================
Year Ended October 31, 2002
(in thousands)
Column C--Additions
-----------------------------------
Column A--Description Column (1)--Charged to (2)--Charged to Column Column
B--Balance at r
Beginning of Costs and Other ibE--Balance at
Period Expenses Accounts--Describe D--Deductions--Desc End of Period
----------------------------- ---------------- ----------------- ----------------- ----------------- -----------------
Allowance for doubtful
accounts $ 80 $ 415 $ -- $ -- $ 495
================ ================= ================= ================= =================
Inventory valuation
allowances $ 833 $ 50 $ -- $ 417(2) $ 466
================ ================= ================= ================= =================
Deferred tax valuation
reserve $ 1,551 $ -- $ -- $ 380(5) $ 1,171
================ ================= ================= ================= =================
(1) Recovery of amounts previously reserved.
(2) Use of inventory previously reserved.
(3) Additional valuation reserve recorded related to adjustment to net
operating loss carryforwards. No income or loss recorded in the financial
statements.
(4) Reduction from the sale of Champion to a related party. No income or loss
recorded due to involvement of related parties.
(5) Realization of operating losses against deferred tax liabilities.
ITEM 9A. CONTROLS AND PROCEDURES.
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the reports we file pursuant
to the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms. Such
information is accumulated and communicated to the Company's management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. The
Company's management recognizes that, because the design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events and also is subject to other inherent limitations, any controls
and procedures, no matter how well designed and operated, can provide only
reasonable, and not absolute, assurance of achieving the desired objectives. The
Company's management believes, however, that the Company's disclosure controls
and procedures provide reasonable assurance that the disclosure controls and
procedures are effective.
The Company has carried out as of October 31, 2003, an evaluation, under the
supervision and with the participation of the Company's management, including
the Company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on this evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures were effective.
We have been taking steps to improve our financial infrastructure to account for
complex transactions on a consolidated basis since the reorganization which
occurred in 2001. Our auditors identified our limited financial infrastructure
and the failure to physically inventory our United Expressline operations on
quarterly basis as a material weaknesses in internal control in connection with
the audit of our financial statements for the period ending October 31, 2003.
Effective November 1, 2003, the Company implemented an enterprise wide,
integrated accounting system that replaced the separate accounting systems
previously maintained by the several subsidiaries and since that date has
implemented an enhanced segregation of duties of various accounting personnel
and plans to physically inventory our United Expressline operations on a
quarterly basis. Management will continue to evaluate whether additional steps
are needed to improve our financial infrastructure. There have been no other
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls subsequent to the date of the
October 31, 2003 evaluation.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information with respect to all directors and
executive officers of the Company, including their ages, present principal
occupations, other business experience during the last five years.
Name Age Position Director Since
---- --- --------
Timothy S. Durham 41 Chief Executive Officer and Chairman of the Board 2001
Terry G. Whitesell 64 President, Chief Operating Officer and Director 2001
Jeffrey W. Osler 35 Executive Vice President, Secretary, Treasurer and 2001
Director
Goodhue W. Smith, III+ 54 Director 1997
John A. Schmit*+ 36 Director 2001
D. Scott McKain* 49 Vice Chairman and Director 2001
Daniel S. Laikin+ 41 Director 2001
Rick D. Snow 40 Executive Vice President and Chief Financial Officer N/A
Anthony P. Schlichte 48 Executive Vice President of Corporate Finance N/A
---------
*Members of the Compensation Committee
+Members of the Audit Committee
Mr. Durham has served as the Chief Executive Officer and Chairman of the Board
and as a director of the Company since June 2001. He has served as a Managing
Member and Chief Executive Officer of Obsidian Capital Company LLC, which is the
general partner of Obsidian Capital Partners LP, since April 2000. Beginning in
1998, Mr. Durham founded and maintained a controlling interest in several
investment funds, including Durham Capital Corporation, Durham Hitchcock
Whitesell and Company LLC, and Durham Whitesell & Associates LLC. From 1991 to
1998, Mr. Durham served in various capacities at Carpenter Industries, Inc.,
including as Vice Chairman, President and Chief Executive Officer. Mr. Durham
also serves as a director of National Lampoon, Inc. Mr. Durham is Mr. Osler's
brother-in-law.
Mr. Whitesell has served as the President and Chief Operating Officer and as a
director of the Company since June 2001. Prior to that time he co-founded
several entities with Mr. Durham, including Obsidian Capital Company, LLC,
Durham Hitchcock Whitesell and Company LLC and Durham Whitesell & Associates
LLC. Mr. Whitesell also is a Managing Member of Obsidian Capital Company LLC.
From April 1992 until September 1998, Mr. Whitesell served as Executive Vice
President of Carpenter Industries, Inc.
Mr. Osler has served as the Executive Vice President, Secretary and Treasurer
and as a director of the Company since June 2001. He also is a Managing Member
of Obsidian Capital Company LLC. and has served as Senior Vice President at
Durham Whitesell & Associates LLC and Durham Capital Corporation since September
1998. Prior to that time, Mr. Osler served as the General Manager of Hilton Head
National Golf Club. Mr. Osler is Mr. Durham's brother-in-law.
Mr. Smith has been a director of the Company since 1997. Mr. Smith founded
Duncan-Smith Investments, Co., an investment banking firm in San Antonio, Texas,
in 1978 and since that time has served as its Secretary and Treasurer. Mr. Smith
also is a director of Citizens National Bank of Milam County, and Ray Ellison
Mortgage Acceptance Co.
John A. Schmit has been a director since July 2001. Mr. Schmit joined
Renaissance Capital Group, Inc. in 1997 and is a Vice President--Investments.
Prior to joining Renaissance Capital Group, Mr. Schmit practiced law with the
law firm of Gibson, Ochsner & Adkins in Amarillo, Texas from September 1992 to
September 1994. Between August 1994 and May 1996, Mr. Schmit attended Georgetown
University where he earned his L.L.M. in International and Comparative Law.
Mr. McKain has been a director of the Company since September 2001. He has
served as the Chairman of McKain Performance Group since 1981. Mr. McKain also
has been the Vice Chairman of Durham Capital Corporation since 1999. From 1983
to 1998, Mr. McKain was a broadcast journalist and television commentator. Mr.
McKain has also authored several books and is a keynote speaker who presents
high content workshops across the nation.
Mr. Laikin has served as a director of the Company since September 2001. Mr.
Laikin is Chief Operating Officer and a director of National Lampoon, Inc., the
owner of the "National Lampoon" trademark and engaged in the entertainment
business. He has been a Managing Member of Fourleaf Management LLC, a management
company of an investment fund that invests in technology related entities, since
1999. Mr. Laikin served as the Chairman of the Board of Biltmore Homes from 1993
to 1998.
Mr. Snow was named Executive Vice President and Chief Financial Officer in April
2003. He continues to serve as Chief Financial Officer for Fair Finance, Inc., a
company for which Mr. Durham, the Company's Chairman and Chief Executive
Officer, also serves as Chief Executive Officer. Prior to joining Fair Finance,
Inc., in 2002, Mr. Snow had served as Senior Manager of Brockman, Coats,
Gedelian & Co., a regional accounting firm. Prior to joining Brockman, Coats,
Gedelian & Co., he was an accountant with Grant Thornton LLP.
Mr. Schlichte has served as Executive Vice President of Corporate Finance since
April 2003. Previously he held vice president and senior lending officer
positions at First Indiana Bank.
AUDIT COMMITTEE FINANCIAL EXPERT
The Company's Board of Directors has determined that the three members of the
Audit Committee, Daniel S. Laikin, Goodhue W. Smith III, and John A. Schmit,
qualify as "audit committee financial experts" as defined by Item 401(h) of
Regulation S-K adopted pursuant to the Securities Exchange Act of 1934, as
amended. Mr. Schmit has a degree in Finance and seven years of experience in
reading, interpreting and analyzing financial statements in his role as Vice
President, Investments for RENN Capital Group, Inc., a registered Investment
Adviser. Mr. Laikin and Mr. Smith also have extensive business experience that
has involved the review of financial statements. Messrs. Laikin, Smith and
Schmit also qualify as "independent" under the criteria applicable to
Nasdaq-listed companies (the SEC rules require that we apply either the Nasdaq
or exchange definitions of independence even though our securities are not
listed on Nasdaq or an exchange).
CODE OF ETHICS
The Company has adopted a Code of Ethics for Chief Executive Officer and Senior
Financial Officers ("Code of Ethics"), which applies to the Company's principal
executive officer and to its principal financial and accounting officers. A copy
of the Code of Ethics is attached as Exhibit 14 to this Annual Report on Form
10-K.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Compliance with Section 16(a) of the Securities Exchange Act of 1934 requires
the Company's directors, executive officers, and persons who own more than ten
percent of the Company's Common Stock ("10% Shareholders") to file reports of
ownership and reports of changes in ownership of the Company's Common Stock with
the Securities Exchange Commission ("SEC"). Officers, Directors and Shareholders
are required by SEC regulation to furnish the Company with copies of all forms
they file under Section 16 (a). Based solely on its review of the copies of such
forms received by it with respect to its fiscal year ended October 31, 2003, and
written representations from certain reporting persons that no other reports
were required to those persons, the Company believes that its officers,
directors and 10% Shareholders have complied with all Section 16(a)
requirements, except that Mr. Schmit was late in reporting the grant of warrants
in which he may be deemed to have a beneficial interest, and Mr. Snow and Mr.
Schlichte were late in filing Form 3s to report that they had become executive
officers.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information concerning the compensation
paid or accrued by the Company for services rendered during the Company's past
three fiscal years ended October 31, 2003 by the CEO. (No executive officers of
the Company received a salary and bonus for fiscal 2003 in excess of $100,000 so
as to require their inclusion in the table.)
------------------------- --------------------------------------------------- -------------------- -----------------
Long-Term
Annual Compensation Compensation Awards
------------------------- --------------------------------------------------- -------------------- -----------------
Name and Securities All Other
Underlying
Principal Position Year Salary Bonus Options/SARs Compensation
------------------------- ---------- ------------------- -------------------- -------------------- -----------------
Timothy S. Durham, 2003 $75,000 $0 0 $0
Chief Executive 2002 $75,000 $0 0 $0
Officer(1) 2001 $27,404 $0 0 $0
------------------------- ---------- ------------------- -------------------- -------------------- -----------------
(1) Mr. Durham was elected Chief Executive Officer and Chairman of the Board on
June 21, 2001.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
No grants were made to the Company's Chief Executive Officer during fiscal 2003
pursuant to the Company's 1999 Stock Option Plan or the Company's 2002 Long Term
Incentive Plan.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
No options have been granted to the Company's Chief Executive Officer, who is
the only person named in the Summary Compensation Table.
COMPENSATION OF DIRECTORS
Directors who are not employees of the Company are entitled to a board meeting
attendance fee of $750 plus reimbursement of expenses.
EMPLOYMENT AND CHANGE OF CONTROL AGREEMENTS
The Company does not have an employment agreement with its Chief Executive
Officer, who is the only person named in the Summary Compensation Table.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to beneficial ownership
of common stock as of February 10, 2004, by (i) all persons known to the Company
to be the beneficial owner of five percent or more of the common stock, (ii)
each director of the Company, (iii) the chief executive officer and each of the
Company's other most highly compensated executive officers whose total annual
compensation for 2003 based on salary and bonus earned during 2003 exceeded
$100,000 (the "named executive officers"); (iv) the current executive officers;
and (v) all Company directors and executive officers as a group. This table does
not include shares of common stock that may be purchased pursuant to options not
exercisable within 60 days of the record date. All persons listed have sole
voting and investment power with respect to their shares unless otherwise
indicated.
Common Stock Series C Preferred Stock Series D Preferred Stock
------------ ------------------------ ------------------------
Number of Percentage of Number of Percentage of Number of Percentage of
Shares Shares Shares Shares Shares Shares
Name and Address of Beneficially Beneficially Beneficially Beneficially Beneficially Beneficially
Beneficial Owner Owned Owned Owned Owned Owned Owned
---------------- ----- ----- ----- ----- ----- -----
Executive Officers and
Directors:
Timothy S. Durham (1) 111,880,119 80.8% 3,942,193 90.2% 134,758 100.0%
D. Scott McKain 810,100 2.2% -- -- -- --
Jeffrey W. Osler (2) 91,201,780 72.2% 3,755,869 86.0% 87,184 64.7%
John A. Schmit (3) 5,032,000 14.0% -- -- -- --
Goodhue W. Smith, III (4) 298,334 * 5,000 * -- --
Terry G. Whitesell (5) 97,287,560 77.0% 3,755,869 86.0% 87,184 64.7%
Daniel S. Laikin -- -- -- -- -- --
Rick D. Snow -- -- -- -- -- --
Anthony P. Schlichte -- -- -- -- -- --
All current officers and
directors as a group (9
persons) 125,733,593 90.8% 3,947,193 90.4% 134,758 100.0%
Other 5% Owners:
Fair Holdings, Inc.(6) 12,051,930 25.1% 186,324 4.3% 47,574 35.3%
Huntington Capital
Investment Company (7) 7,724,126 17.7% 386,206 8.8% -- --
Obsidian Capital Partners,
L.P. (8) 90,374,580 71.5% 3,755,869 86.0% 87,184 64.7%
Richard W. Snyder 1,946,667 5.4% -- -- -- --
The number of shares of common stock above also includes the preferred stock
converted to common equivalents.
---------
*less than one percent
(1) Includes 7,338,103 shares of common stock directly owned by Mr. Durham;
2,088,366 shares held by Diamond Investments, LLC, for which Mr. Durham
serves as Managing Member and for which shares Mr. Durham may be deemed to
share voting and dispositive power; 3,755,869 shares of Series C preferred
stock and 87,184 shares of Series D preferred stock over which Mr. Durham
shares voting and dispositive power and that may be deemed to be
beneficially owned by Mr. Durham due to his position as a managing member
of Obsidian Capital Company, LLC, which is the general partner of Obsidian
Capital Partners, LP, which directly owns such shares; 186,324 shares of
Series C preferred stock and 47,574 shares of Series D preferred stock over
which Mr. Durham shares voting and dispositive power and that may be deemed
to be beneficially owned by Mr. Durham due to his position as an executive
officer and shareholder of Fair Holdings, Inc. which directly owns such
shares; and 27,140 shares of common stock over which Mr. Durham shares
voting and dispositive power and that may be deemed to be beneficially
owned by Mr. Durham due to his position as a managing member of Durham
Whitesell and Associates, LLC, which directly owns such shares. The address
of Mr. Durham is 111 Monument Circle, Suite 4800, Indianapolis, Indiana
46204.
(2) Includes 827,200 shares of common stock directly owned by Mr. Osler; and
3,755,869 shares of Series C preferred stock and 87,184 shares of Series D
preferred stock over which Mr. Osler shares voting and dispositive power
and that may be deemed to be beneficially owned by Mr. Osler due to his
position as a managing member of Obsidian Capital Company, LLC, which is
the general partner of Obsidian Capital Partners, LP, which directly owns
such shares. The address of Mr. Osler is 111 Monument Circle, Suite 4800,
Indianapolis, Indiana 46204.
(3) Represents shares that may be acquired pursuant to convertible debentures
issued by the Registrant on July 19, 2001, to Renaissance US Growth
Investment Trust PLC ("RUSGIT") and BFSUS Special Opportunities Trust PLC
("BFS") and pursuant to warrants issued on January 24, 2003, and February
9, 2004, in consideration of waivers granted in connection with the
convertible debentures. Mr. Schmit is Vice President of Renaissance Capital
Group, Inc., the investment manager of RUSGIT and BFS. Mr. Schmit disclaims
beneficial ownership as to the shares beneficially owned by RUSGIT and BFS.
The address of Mr. Schmit is 8080 North Central Expressway, Suite 210,
Dallas, Texas 75206.
(4) Includes 81,667 shares of common stock and 5,000 shares of Series C
Preferred Stock directly owned by Mr. Smith. The address of Mr. Smith is
711 Navarro, San Antonio, Texas 78205.
(5) Includes 6,885,840 shares of common stock directly owned by Mr. Whitesell;
3,755,869 shares of Series C preferred stock and 87,184 shares of Series D
preferred stock over which Mr. Whitesell shares voting and dispositive
power and that may be deemed to be beneficially owned by Mr. Whitesell due
to his position as a managing member of Obsidian Capital Company, LLC,
which is the general partner of Obsidian Capital Partners, LP, which
directly owns such shares; and 27,140 shares of common stock over which Mr.
Whitesell shares voting and dispositive power and that may be deemed to be
beneficially owned by Mr. Whitesell due to his position as a managing
member of Durham Whitesell and Associates, LLC, which directly owns such
shares. The address of Mr. Whitesell is 111 Monument Circle, Suite 4800,
Indianapolis, Indiana 46204.
(6) Consists of 186,324 shares of Series C preferred stock and 47,574 shares of
Series D preferred stock directly owned by Fair Holdings, Inc.
(7) Based on the information reported in a Schedule 13G filed with the SEC on
August 6, 2001.
(8) Consists of 3,755,869 shares of Series C preferred stock and 87,184 shares
of Series D preferred stock directly owned by Obsidian Capital Partners,
L.P. Voting and dispositive power over the shares may be deemed to be held
by Obsidian Capital Partners, LP, Obsidian Capital Company, LLC and the
managing members of Obsidian Capital Company LLC, which include Messrs.
Durham, Whitesell and Osler.
EQUITY COMPENSATION PLAN INFORMATION
The following table presents information regarding grants under all equity
compensation plans of the Company through October 31, 2003.
------------------------------- ---------------------------- ---------------------------- ----------------------------
Number of securities
remaining available for
future issuance under
Number of securities to be Weighted-average exercise equity compensation plans
issued upon exercise of price of outstanding (excluding securities
outstanding options, options, warrants and reflected in the first
Plan Category warrants and rights rights column)
------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity compensation plans
approved by security
holders(1) 800,000 $0.09 2,150,000
------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity compensation plans not
approved by security holders 0 0 0
------------------------------- ---------------------------- ---------------------------- ----------------------------
Total 800,000 $0.09 2,150,000
------------------------------- ---------------------------- ---------------------------- ----------------------------
(1) The grants were made pursuant to the Company's 1990 Stock Option Plan and
1999 Stock Compensation Plan ("1999 Plan"). Shares remain available for
grant under the 1999 Plan and the Company's 2001 Long Term Incentive Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
All dollar amounts in this Item 13 are in thousands (except for share and per
share information).
The Company subleases its headquarters space from Fair Holdings, Inc. under a
sublease with a monthly rental of $3,675. Prior to the sublease with Fair, the
Company sublet space from Obsidian Capital Company and paid $56 to Obsidian
Capital Company for its space in 2002.
Fair Holdings, Inc. leased certain computer equipment to Danzer under a twelve
month lease effective August 1, 2002. The aggregate rental due under the twelve
month lease is $8.
DW Trailer, a company owned by Messrs. Durham and Whitesell, has leased a
forklift to Danzer under a 38 month lease at $1 per month.
On October 30, 2002, the Company entered into a Memorandum of Agreement with
Messrs. Durham and Whitesell pursuant to which Champion agreed to sell all of
its assets to an entity to be designated by Messrs. Durham and Whitesell subject
to the payment by Messrs. Durham and Whitesell of $1.00 and the assumption by
the entity acquiring the assets of all of the liabilities of Champion except for
the liability of Champion to Markpoint Equity Growth Fund IV, which was settled
by the Company. This transaction closed on January 30, 2003.
On December 17, 2002, Obsidian Leasing sold four coaches to DC Investments
Leasing in exchange for DC Investments Leasing's satisfaction of the debt
outstanding on such coaches. DC Investments Leasing paid this debt through a
refinancing at terms that included a reduction in interest rates. In addition,
DC Investments Leasing acquired five additional coaches that were previously to
be purchased by us thereby eliminating our existing purchase commitment for the
coaches. DC Investments Leasing also entered into a management agreement with
Pyramid under which all nine coaches described above will be leased by Pyramid.
On January 3, 2003, Obsidian Leasing refinanced debt due to former shareholders
in the amount of $928 with Fair Holdings at terms further described in Note 8 to
the consolidated financial statements.
On March 28, 2003, Fair Holdings acquired the line of credit and term debt due
to the senior lender of Danzer in the amount of $1,488 under an assignment and
assumption agreement. The maturity date of the line of credit included in the
assignment and assumption agreement was extended to April 2006, increased
maximum borrowings under the line of credit from $1,000 to $1,500 and the debt
covenants required by the senior lender were waived through the end of the term.
All other terms of the assumed notes remain the same.
In October 2003, we received $250 in proceeds from the issuance of 14,285 shares
of Series D Preferred Stock to Partners under an existing capital contribution
agreement further described under "Guarantee of Partners." The proceeds were
used to maintain compliance with certain debt covenants with the senior lender
of U.S. Rubber.
On February 2, 2004, we secured an additional financial commitment from Fair
Holdings to provide, as needed, additional borrowings under a line of credit
agreement from $8,000 to $12,000. The line of credit arrangement expires on
January 1, 2007.
Management believes that the transactions described in this Item were on terms
no less favorable to the Company and its subsidiaries than would have been the
case for transactions with unrelated third parties.
ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
McGladrey & Pullen, LLP ("McGladrey & Pullen") served as the Company's
independent auditors for 2003 and 2002. The services performed by McGladrey &
Pullen in this capacity included conducting an examination in accordance with
generally accepted auditing standards of, and expressing an opinion on, the
Company's consolidated financial statements. The Board of Directors has selected
McGladrey & Pullen as the independent public accountants for the year ending
October 31, 2004.
Audit Fees
McGladrey & Pullen's fees for professional services rendered in connection with
the audit and review of Forms 10-Q and all other SEC regulatory filings were
$267,850, including an unbilled estimate of $50,000, for the 2003 fiscal year
and $290,477 for the 2002 fiscal year. In addition, fees for the audit related
services in connection with the Company's Form 8-K filings were $45,513 for the
2002 fiscal year. The Company has paid and is current on all billed fees.
Audit-Related Fees
McGladrey & Pullen's fees for audit related services rendered in connection with
the audit of a subsidiary's defined contribution plan were $7,035 for the 2003
fiscal year and $6,955 for the 2002 fiscal year. All of such fees have been
paid.
Tax Fees
McGladrey & Pullen did not render any tax compliance advice or planning services
for the 2003 and 2002 fiscal years.
RSM McGladrey, Inc., an affiliate of McGladrey & Pullen had fees of $695 for the
preparation of Form 5500 in relation to the subsidiary's defined contribution
plan. All such fees have been paid.
All Other Fees
McGladrey & Pullen's fees for the 2003 and 2002 fiscal years related to
management advisory services were none and $19,666, respectively. All of such
fees have been paid.
PART IV
ITEM 16. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this Annual Report on Form 10-K:
(1) Financial Statements.
See the Financial Statements included in Item 8.
(2) Financial Statement Schedules Required to be Filed by Item 8 on
this Form.
See Item 8
(3) Exhibits.
The exhibits filed as part of this Annual Report on Form 10-K 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
No Reports on Form 8-K were filed during the last quarter of the
fiscal year ended October 31, 2003.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf, by the undersigned, thereunto
duly authorized.
Dated: February 12, 2004 OBSIDIAN ENTERPRISES, INC.
By /s/ Timothy S. Durham
-----------------------------------------
Timothy S. Durham
Chief Executive Officer
In accordance with the Exchange Act, this report was signed by the following
persons on behalf of the Registrant and in the capacities and on the dates
indicated.
Dated: February 12, 2004 /s/ Timothy S. Durham
--------------------------------------------
Timothy S. Durham
Chief Executive Officer (Principal Executive
Officer) and Chairman of the Board and
Director
Dated: February 12, 2004 /s/ Rick D. Snow
--------------------------------------------
Rick D. Snow, Executive Vice President/Chief
Financial Officer (Principal Financial and
Accounting Officer)
Dated: February 12, 2004 /s/ Jeffrey W. Osler
--------------------------------------------
Jeffrey W. Osler, Executive Vice President,
Secretary and Treasurer and Director
Dated: February 12, 2004 /s/ Terry G. Whitesell
--------------------------------------------
Terry G. Whitesell, Director
Dated: February 12, 2004 /s/ Goodhue W. Smith
--------------------------------------------
Goodhue W. Smith, III, Director
Dated: February 12, 2004 /s/ John A. Schmit
--------------------------------------------
John A. Schmit, Director
Dated: February 12, 2004 /s/ D. Scott McKain
--------------------------------------------
D. Scott McKain, Vice Chairman and Director
Dated: February 12, 2004 /s/ Daniel S. Laikin
--------------------------------------------
Daniel S. Laikin, Director
EXHIBIT INDEX
Exhibit No. Incorporated by Reference/Attached
Description
2.1 Acquisition Agreement and Plan of Reorganization, dated Incorporated by reference to Exhibit
June 21, 2001, by and among Registrant, Danzer Industries, 2.1 to the Registrant's Report on Form
Inc., Pyramid Coach, Inc., Champion Trailer, Inc., United 8-K filed on August 15, 2001
Acquisition, Inc., U.S. Rubber Reclaiming, Inc., Obsidian
Capital Partners, L.P. and Timothy S. Durham
2.2 Memorandum of Agreement, dated October 30, 2002, between Incorporated by reference to Exhibit
Champion Trailer, Inc. and Timothy S. Durham and Terry G. 2.1 to the Registrant's Report on Form
Whitesell 8-K filed on November 6, 2002
2.3 Agreement for the Purchase and Sale of Business Assets of Incorporated by reference to Exhibit
Champion Trailer, Inc., dated January 31, 2003, among 2.2 to the Current Report on Form 8-K
Obsidian Enterprises, Inc., Champion Trailer, Inc. and filed by the Registrant on February
Champion Trailer Acquisition Company, LLC, and related 11, 2003.
Assumption Agreement.
3.1 Amended Certificate of Incorporation. Incorporated by reference to Exhibit
3.1 to Amendment No. 1 to the
Registration Statement on Form S-4
filed on December 17, 2003.
3.2 Certificate of Designations, Preferences, Rights and Incorporated by reference to Exhibit
Limitations of Series C Preferred Stock 3.2 to the Registrant's Annual Report
on Form 10-K for the Year Ended
October 31, 2001
3.3 Amended Certificate of Designations, Preferences, Rights Incorporated by reference to Exhibit
and Limitations of Series C Preferred Stock 3.1 to Amendment No. 1 to the Registration
Statement on Form S-4 filed on
December 17, 2003.
3.4 Certificate of Designations, Preferences, Rights and Incorporated by reference to Exhibit
Limitations of Series D Preferred Stock 3.4 to the Registrant's Annual Report
on Form 10-K for the Year Ended
October 31, 2002
3.5 Amended Certificate of Designations, Preferences, Rights Incorporated by reference to Exhibit
and Limitations of Series D Preferred Stock 3.4(b) to Amendment No. 1 to the Registration
Statement on Form S-4 filed on
December 17, 2003.
3.6 Bylaws of the Registrant (Restated Effective as of Incorporated by reference to Exhibit
September 27, 2002) 3.3 to the Registrant's Annual Report
on Form 10-K for the Year Ended
October 31, 2002
4.1 Registration Rights Agreement, dated June 21, 2001 Incorporated by reference to Exhibit
4.1 to the Registrant's Annual Report
on Form 10-K for the Year Ended
October 31, 2001
4.2 Amendment and Joinder to Registration Rights Agreement, Incorporated by reference to Exhibit
dated July 27, 2001 4.2 to the Registrant's Annual Report
on Form 10-K for the Year Ended
October 31, 2001
4.3 8.00% Convertible Debenture Issued by Registrant on July Incorporated by reference to Exhibit 2
19, 2001 to HSBC Global Custody Nominee Due July 19, 2008 to Schedule 13D filed September 20,
2001 by Russell Cleveland, Renaissance
Capital Group, Inc.
4.4 8.00% Convertible Debenture Issued by Registrant on July Incorporated by reference to Exhibit 3
19, 2001 to Renaissance US Growth & Income Trust PLC Due to Schedule 13D filed September 20,
July 19, 2008 2001 by Russell Cleveland, Renaissance
Capital Group, Inc.
4.5 Convertible Loan Agreement, dated July 19, 2001, Among Incorporated by reference to Exhibit
Registrant, BFSUS Special Opportunities Trust PLC, 4.5 to the Registrant's Annual Report
Renaissance US Growth & Income Trust PLC and Renaissance on Form 10-K for the Year Ended
Capital Group, Inc. October 31, 2001
10.1 2001 Long Term Incentive Plan* Incorporated by reference to Appendix
E to the Registrant's Proxy Statement
filed on September 18, 2001
10.2 Asset Purchase Agreement, dated April 20, 2000, between Incorporated by reference to Exhibit
Champion Trailer Company, L.P. and Harold Peck, Mary Peck, 10.2 to the Registrant's Annual Report
Champion Trailer, Ltd. (f/k/a) Champion Trailer, LLC, on Form 10-K for the Year Ended
Champion Collision, Ltd. (f/k/a) Champion Collision, October 31, 2001
L.L.C. and Brandonson, Inc.
10.3 Stock and Asset Purchase Agreement, dated December 20, Incorporated by reference to Exhibit
1999, among Timothy S. Durham, Terry Whitesell, DW 10.3 to the Registrant's Annual Report
Leasing, LLC, Bobby Michael, Becky Michael, Jennifer on Form 10-K for the Year Ended
George, Pyramid Coach, Inc., Precision Coach, Inc., October 31, 2001
American Coach Works, Inc., Transport Trailer Service,
Inc., Rent-A-Box, Inc. and LBJ, LLC
10.4 Assumption Agreement and Second Amendment to Credit Incorporated by reference to Exhibit
Agreement, dated June 18, 2001, among Bank One, Indiana, 10.4 to the Registrant's Annual Report
N.A., Champion Trailer, Inc. and Champion Trailer Company, on Form 10-K for the Year Ended
L.P. October 31, 2001
10.5 Credit Agreement, dated December 29, 2000, between USRR Incorporated by reference to Exhibit
Acquisition Corp. and Bank One, Indiana, N.A. 10.5 to the Registrant's Annual Report
on Form 10-K for the Year Ended
October 31, 2001
10.6 First Amendment to Credit Agreement, dated June 20, 2001, Incorporated by reference to Exhibit
between U.S. Rubber Reclaiming, Inc. and Bank One, 10.6 to the Registrant's Annual Report
Indiana, N.A. on Form 10-K for the Year Ended
October 31, 2001
10.7 Note Purchase Agreement, dated May 2, 2000, between Incorporated by reference to Exhibit
Champion Trailer, Inc. and Markpoint Equity Growth Fund, 10.7 to the Registrant's Annual Report
J.V., and Related Documents on Form 10-K for the Year Ended
October 31, 2001
10.8 Warrant, dated May 2, 2000, from Champion Trailer Company, Incorporated by reference to Exhibit
LP to Markpoint Equity Growth Fund, J.V. 10.8 to the Registrant's Annual Report
on Form 10-K for the Year Ended
October 31, 2001
10.9 Management Agreement, dated December 29, 2000, between Incorporated by reference to Exhibit
Obsidian Capital Company, LLC and USRR Acquisition Corp. 10.9 to the Registrant's Annual Report
on Form 10-K for the Year Ended
October 31, 2001
10.10 Management Agreement, dated June 16, 2001, between Incorporated by reference to Exhibit
Pyramid, Inc. and D.W. Leasing 10.10 to the Registrant's Annual
Report on Form 10-K for the Year Ended
October 31, 2001
10.11 Promissory Note, dated June 1, 2001, from Obsidian Capital Incorporated by reference to Exhibit
Company, LLC to U.S. Rubber Reclaiming, Inc. 10.11 to the Registrant's Annual
Report on Form 10-K for the Year Ended
October 31, 2001
10.12 Promissory Note, dated June 11, 2001, from Champion Incorporated by reference to Exhibit
Trailer, Inc. to Obsidian Capital Partners, LP 10.12 to the Registrant's Annual
Report on Form 10-K for the Year Ended
October 31, 2001
10.13 Purchase Agreement, dated June 5, 2001, between United Incorporated by reference to Exhibit
Expressline, Inc., United Acquisition, Inc., J.J.M. 10.13 to the Registrant's Annual
Incorporated and the Shareholders of United Expressline, Report on Form 10-K for the Year Ended
Inc. and J.J.M. Incorporated October 31, 2001
10.14 Promissory Note, dated July 27, 2001, from United Incorporated by reference to Exhibit
Acquisition, Inc. to United Expressline, Inc. 10.14 to the Registrant's Annual
Report on Form 10-K for the Year Ended
October 31, 2001
10.15 Credit Agreement, dated July 27, 2001, between United Incorporated by reference to Exhibit
Acquisition, Inc. and First Indiana Bank 10.15 to the Registrant's Annual
Report on Form 10-K for the Year Ended
October 31, 2001
10.16 Loan and Security Agreement, dated January 21, 2000, Incorporated by reference to Exhibit
between Danzer Industries, Inc. and Banc of America 10.16 to the Registrant's Annual
Commercial Finance Corp. Report on Form 10-K for the Year Ended
October 31, 2001
10.17 Warrant, dated August 1997, by Danzer Corp. to Incorporated by reference to Exhibit
Duncan-Smith Co. and Letter Agreement, dated June 21, 10.17 to the Registrant's Annual
2001, between Danzer Corp. and Duncan-Smith Co. Report on Form 10-K for the Year Ended
October 31, 2001
10.18 Stock Purchase Agreement, dated December 29, 2000, between Incorporated by reference to Exhibit
USRR Acquisition Corp. and SerVaas, Inc. 10.18 to the Registrant's Annual
Report on Form 10-K for the Year Ended
October 31, 2001
10.19 Subordinated Secured Promissory Note, dated December 29, Incorporated by reference to Exhibit
2000, from USRR Acquisition Corp. to SerVaas, Inc. 10.19 to the Registrant's Annual Report
on Form 10-K for the Year Ended
October 31, 2001.
10.20 Supply and Consignment Agreement, dated December 29, 2000, Incorporated by reference to Exhibit
between U.S.R.R. Acquisition and SerVaas, Inc. 10.20 to the Registrant's Annual
Report on Form 10-K for the Year Ended
October 31, 2001
10.21 Form of Installment Loan from Edgar County Bank & Trust Incorporated by reference to Exhibit
Co. to DW Leasing Company, LLC, Related Documents and 10.21 to the Registrant's Annual
Schedule Identifying Material Details Report on Form 10-K for the Year Ended
October 31, 2001
10.22 Loan Agreement, dated December 10, 1999, between Old Incorporated by reference to Exhibit
National Bank and DW Leasing Company, LLC, and Related 10.22 to the Registrant's Annual
Documents Report on Form 10-K for the Year Ended
October 31, 2001
10.23 Form of Promissory Note from DW Leasing Company, LLC, to Incorporated by reference to Exhibit
Former Shareholders of Pyramid Coach, Inc., Related 10.23 to the Registrant's Annual
Security Agreement, and Schedule Identifying Material Report on Form 10-K for the Year Ended
Details October 31, 2001
10.24 Form of Promissory Note from DW Leasing Company, LLC to Incorporated by reference to Exhibit
Star Financial Bank, Related Documents and Schedule 10.24 to the Registrant's Annual
Identifying Material Details Report on Form 10-K for the Year Ended
October 31, 2001
10.25 Form of Lock-Up Agreement, dated July 19, 2001, and Incorporated by reference to Exhibit
Schedule Identifying Material Details 10.25 to the Registrant's Annual
Report on Form 10-K for the Year Ended
October 31, 2001
10.26 Master Lease Agreement, dated May 17, 2000, between Old Incorporated by reference to Exhibit
National Bank and DW Leasing Company, LLC, and Related 10.26 to the Registrant's Annual
Documents Report on Form 10-K for the Year Ended
October 31, 2001
10.27 Loan Agreement, dated June 1, 2000, between DW Leasing Incorporated by reference to Exhibit
Company LLC and Regions Bank and Security Agreement 10.27 to the Registrant's Annual
Report on Form 10-K for the Year Ended
October 31, 2001
10.28 Business Loan Agreement (Asset Based), dated August 15, Incorporated by reference to Exhibit
2001, between Danzer Industries, Inc. and Bank of America, 10.28 to the Registrant's Annual
N.A. Report on Form 10-K for the Year Ended
October 31, 2001
10.29 1999 Stock Option Plan* Incorporated by reference to Exhibit
10.29 to the Registrant's Annual
Report on Form 10-K for the Year Ended
October 31, 2001
10.30 Amendment to Acquisition Agreement and Plan of Incorporated by reference to Exhibit
Reorganization, dated December 28, 2001, between 10.30 to the Registrant's Annual
Registrant and Obsidian Leasing Company, Inc. Report on Form 10-K for the Year Ended
October 31, 2001
10.31 Agreement and Plan of Reorganization and Corporate Incorporated by reference to Exhibit
Separation, dated December 28, 2001, between DW Leasing 10.31 to the Registrant's Annual
LLC and Obsidian Leasing Company, Inc. Report on Form 10-K for the Year Ended
October 31, 2001
10.32 Assignment and Assumption Agreement, dated February 19, Incorporated by reference to Exhibit
2002, between Champion Trailer, Inc. and DW Leasing, LLC 10.1 to the Registrant's Quarterly
Report on Form 10-Q for the Quarter
Ended April 30, 2002
10.33 Assignment and Assumption Agreement, dated February 20, Incorporated by reference to Exhibit
2002, between DW Leasing, LLC and Fair Holdings, Inc. 10.2 to the Registrant's Quarterly
Report on Form 10-Q for the Quarter
Ended April 30, 2002
10.34 Agreement to Purchase Subordinated Secured Promissory Note Incorporated by reference to Exhibit
and Supply and Consignment Agreement, dated February 26, 10.3 to the Registrant's Quarterly
2002, among SerVaas, Inc., the Beurt SerVaas Revocable Report on Form 10-Q for the Quarter
Trust, U.S. Rubber Reclaiming, Inc., Obsidian Enterprises, Ended April 30, 2002
Inc. and DC Investments, LLC
10.35 Replacement Promissory Note, dated February 26, 2002, from Incorporated by reference to Exhibit
Obsidian Enterprises, Inc. to Fair Holdings, Inc. in the 10.35 to the Registrant's Annual
principal amount of $700,000 due March 1, 2007 Report on Form 10-K for the Year Ended
October 31, 2002
10.36 Promissory Note from Obsidian Enterprises, Inc. in favor Incorporated by reference to Exhibit
of Fair Holdings, Inc. in the principal amount of $570,000 10.5 to the Registrant's Quarterly
due February 1, 2007 Report on Form 10-Q for the Quarter
Ended April 30, 2002
10.37 Subscription Agreement of Fair Holdings, Inc. for 186,324 Incorporated by reference to Exhibit
shares of Series C Preferred Stock 10.6 to the Registrant's Quarterly
Report on Form 10-Q for the Quarter
Ended April 30, 2002
10.38 Subscription Agreement of Obsidian Capital Partners, LP Incorporated by reference to Exhibit
for 402,906 shares of Series C Preferred Stock 10.7 to the Registrant's Quarterly
Report on Form 10-Q for the Quarter
Ended April 30, 2002
10.39 Second Amendment to Credit Agreement, dated August 28, Incorporated by reference to Exhibit
2002, between United Expressline, Inc. and First Indiana 10.1 to the Registrant's Quarterly
Bank, N.A. Report on Form 10-Q filed for the
Quarter Ended July 31, 2002
10.40 Promissory Note, dated January 17, 2002, from DW Leasing Incorporated by reference to Exhibit
Company, LLC, to Fair Holdings, Inc. 10.40 to the Registrant's Annual
Report on Form 10-K for the Year Ended
October 31, 2002
10.41 Promissory Note, dated September 3, 2002, from Obsidian Incorporated by reference to Exhibit
Enterprises, Inc., to Fair Holdings, Inc. 10.41 to the Registrant's Annual
Report on Form 10-K for the Year Ended
October 31, 2002
10.42 Promissory Note, dated January 9, 2002, from Obsidian Incorporated by reference to Exhibit
Enterprises, Inc. to Fair Holdings, Inc. 10.42 to the Registrant's Annual
Report on Form 10-K for the Year Ended
October 31, 2002
10.43 Credit Agreement, dated October 31, 2002, between Obsidian Incorporated by reference to Exhibit
Leasing Company, Inc. and Old National Bank, N.A. and 10.43 to the Registrant's Annual
Related Documents Report on Form 10-K for the Year Ended
October 31, 2002
10.44 Stock Purchase Agreement, dated July 27, 2001, between Incorporated by reference to Exhibit A
Danzer Corporation and The Huntington Capital Investment to the Schedule 13G filed by The
Company. Huntington Capital Investment
Company on August 6, 2001.
10.45 Loan Agreement, dated September 24, 2002, between Edgar Incorporated by reference to Exhibit
County Bank & Trust Co. and Obsidian Leasing Company, Inc. 10.45 to the Registrant's Annual
Report on Form 10-K for the Year Ended
October 31, 2002
10.46 Term Promissory Note, dated September 26, 2002, from Incorporated by reference to Exhibit
Obsidian Leasing Company, Inc. to Fair Holdings, Inc. 10.46 to the Registrant's Annual
Report on Form 10-K for the Year Ended
October 31, 2002
10.47 Note Purchase Agreement, dated July 27, 2001, between Incorporated by reference to Exhibit
United Acquisition, Inc. and The Huntington Capital 10.47 to the Registrant's Annual
Investment Company. Report on Form 10-K for the Year Ended
October 31, 2002
10.48 Limited Forbearance Agreement, dated October 14, 2002, Incorporated by reference to Exhibit
among Danzer Industries, Inc., Obsidian Enterprises, Inc. 10.48 to the Registrant's Annual
and Bank of America, N.A. Report on Form 10-K for the Year Ended
October 31, 2002
10.49 Revolving Credit, Term Loan and Security Agreement, dated Incorporated by reference to Exhibit
October 25, 2002, between PNC Bank, N.A. and U.S. Rubber 10.49 to the Registrant's Annual
Reclaiming, Inc. and Related Documents Report on Form 10-K for the Year Ended
October 31, 2002
10.50 Term Promissory Note, dated October 31, 2002, from DW Incorporated by reference to Exhibit
Leasing Company, LLC to Fair Holdings, Inc. 10.50 to the Registrant's Annual
Report on Form 10-K for the Year Ended
October 31, 2002
10.51 Rental Agreement, dated October 1, 2002, between DW Incorporated by reference to Exhibit
Trailer, LLC and Danzer Industries, Inc. 10.51 to the Registrant's Annual
Report on Form 10-K for the Year Ended
October 31, 2002
10.52 Commercial Equipment Lease Agreement, dated August 1, Incorporated by reference to Exhibit
2002, between Fair Holdings, Inc. and Danzer Industries, 10.52 to the Registrant's Annual
Inc. Report on Form 10-K for the Year Ended
October 31, 2002
10.53 Commercial Equipment Lease Agreement, dated August 1, Incorporated by reference to Exhibit
2002, between Fair Holdings, Inc. and Obsidian 10.53 to the Registrant's Annual
Enterprises, Inc. Report on Form 10-K for the Year Ended
October 31, 2002
10.54 Promissory Term Note, dated November 18, 2002, from Incorporated by reference to Exhibit
Obsidian Leasing Company, Inc. to Fair Holdings, Inc. 10.1 to the Registrant's Quarterly
Report on Form 10-Q for the Quarter
Ended January 31, 2003
10.55 Third Amendment to Credit Agreement, dated December 26, Incorporated by reference to Exhibit
2002, between United Expressline, Inc. and First Indiana 10.2 to the Registrant's Quarterly
Bank, N.A. Report on Form 10-Q for the Quarter
Ended January 31, 2003
10.56 Credit Agreement, dated December 18, 2002, between DC Incorporated by reference to Exhibit
Investments Leasing, LLC and First Indiana Bank, N.A. and 10.3 to the Registrant's Quarterly
Related Documents. Report on Form 10-Q for the Quarter
Ended January 31, 2003
10.57 Term Promissory Note, dated January 3, 2003, from Obsidian Incorporated by reference to Exhibit
Leasing, Inc. to Fair Holdings, Inc. 10.4 to the Registrant's Quarterly
Report on Form 10-Q for the Quarter
Ended January 31, 2003
10.58 Stock Purchase Warrant, dated January 24, 2003, issued by Incorporated by reference to Exhibit
Obsidian Enterprises, Inc. to Frost National Bank, 10.5 to the Registrant's Quarterly
Custodian, FBO Renaissance US Growth Investment Trust PLC Report on Form 10-Q for the Quarter
Trust No. WOO740100. Ended January 31, 2003
10.59 Stock Purchase Warrant, dated January 24, 2003, issued by Incorporated by reference to Exhibit
Obsidian Enterprises, Inc., to HSBC Global Custody Nominee 10.6 to the Registrant's Quarterly
(UK) Limited, FBO BFS US Special Opportunities Trust PLC. Report on Form 10-Q for the Quarter
Ended January 31, 2003
10.60 Second Limited Forbearance Agreement, dated February 28, Incorporated by reference to Exhibit
2003, between Danzer Industries, Inc. and Obsidian 10.7 to the Registrant's Quarterly
Enterprises, Inc. Report on Form 10-Q for the Quarter
Ended January 31, 2003
10.61 Form of Letter Amending Stock Options and Schedule Incorporated by reference to Exhibit
Identifying Material Details* 10.8 to the Registrant's Quarterly
Report on Form 10-Q for the Quarter
Ended January 31, 2003
10.62 First Amendment to Promissory Note, dated January 9, 2003. Incorporated by reference to Exhibit
10.9 to the Registrant's Quarterly
Report on Form 10-Q for the Quarter
Ended January 31, 2003
10.63 Sublease, effective as of January 1, 2003, between Fair Incorporated by reference to Exhibit
Holdings, Inc. and Obsidian Enterprises, Inc. 10.10 to the Registrant's Quarterly
Report on Form 10-Q for the Quarter
Ended January 31, 2003
10.64 Commercial Equipment Lease Agreement, commencing November Incorporated by reference to Exhibit
20, 2002, between Fair Holdings, Inc. and United 10.11 to the Registrant's Quarterly
Expressline, Inc. Report on Form 10-Q for the Quarter
Ended January 31, 2003
10.65 Assignment Agreement, dated May 12, 2003, between Incorporated by reference to Exhibit
Obsidian Enterprises, Inc. and Fair Holdings, Inc. 10.1 to the Registrant's Quarterly
Report on Form 10-Q for the Quarter
Ended April 30, 2003
10.66 Assignment of Note and Other Loan Documents, dated March Incorporated by reference to Exhibit
28, 2003, between Bank of America, N.A. and Fair Holdings, 10.2 to the Registrant's Quarterly
Inc. Report on Form 10-Q for the Quarter
Ended April 30, 2003
10.67 First Amendment to Business Loan Agreement and Incorporated by reference to Exhibit
Promissory Note (Line of Credit), dated March 28, 2003, 10.3 to the Registrant's Quarterly
between Danzer Industries, Inc. and Fair Holdings, Inc. Report on Form 10-Q for the Quarter
Ended April 30, 2003
10.68 Second Amendment to Promissory Note (Line of Credit), Incorporated by reference to Exhibit
dated April 1, 2003, between Obsidian Enterprises, 10.4 to the Registrant's Quarterly
Inc. and Fair Holdings, Inc. Report on Form 10-Q for the Quarter
Ended April 30, 2003
10.69 Employment Agreement, dated April 30, 2003, between Incorporated by reference to Exhibit
Obsidian Enterprises, Inc. and Rick D. Snow.* 10.1 to the Registrant's Quarterly
Report on Form 10-Q for the Quarter
Ended July 31, 2003
10.70 Third Amendment to Promissory Note (Line of Credit), dated Attached
February 2, 2004, between Obsidian Enterprises, Inc. and
Fair Holdings, Inc.
10.71 Term Promissory Note, dated September 19, 2003, from DC Attached
Investments Leasing, LLC to Fair Holdings, Inc.
10.72 Promissory Note, dated August 31, 2003, from DC Attached
Investments, Inc. to Fair Holdings, Inc.
10.73 Second Amendment to Revolver Promissory Note, dated Attached
September 30, 2003, between Danzer Industries, Inc. and
Fair Holdings, Inc.
10.74 Stock Purchase Warrant, dated February 9, 2004, issued by Attached
Obsidian Enterprises, Inc. to HSBC Global Custody Nominee
(UK) Limited, FBO BFS US Special Opportunities Trust PLC.
10.75 Stock Purchase Warrant, dated February 9, 2004, issued by Attached
Obsidian Enterprises, Inc. to Frost National Bank,
Custodian, FBO Renaissance US Growth Investment Trust PLC,
Trust No. W00740100.
14 Code of Ethics for Chief Executive Officer and Senior Attached
Financial Officers
21 List of Subsidiaries Attached
31.1 Sarbanes-Oxley Act Section 302 Certification Attached
31.2 Sarbanes-Oxley Act Section 302 Certification Attached
32.1 Sarbanes-Oxley Act Section 906 Certification Attached
32.2 Sarbanes-Oxley Act Section 906 Certification Attached
*Indicates Exhibits that describe or evidence management contracts or
compensatory plans or arrangements required to be filed as Exhibits to this
Annual Report on Form 10-K.