**Securities And ExchangeCommission**

**Washington, D.C. 20549**

** **

# **Form 10-K**

 
| **(Mark  One)** |
|-----------------|
| ** **      |
| **ý**      | ** ** | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **      | ** ** | ** ** |
| ** **      | ** ** | **FOR  THE FISCAL YEAR ENDED OCTOBER 31, 2005** |
| ** **      | ** ** | ** ** |
| ** **      | ** ** | **OR** |
| ** **      |
| **o**           | ** ** | **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, includingarea code)

 

Securities registered pursuant to Section12(b) of the Act: **None**

 

Securities registered pursuant to Section12(g) of the Act:

 

Common Stock ($0.0001 par value)

(Title of Class)

 

Indicate bycheck mark if the registrant is a well-known seasoned issuer, as defined inRule 405 of the Securities Act. YES oNO ý

 

Indicate bycheck mark if the registrant is not required to file reports pursuant toSection 13 or Section 15(d) of the Act. YES oNO ý

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. YES ý    NO o

 

Indicate bycheck mark if disclosure of delinquent filers pursuant to Item 405 of theRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K.  ý

 

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

 

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

 

As of April30, 2005, the aggregate market value of the Company’s common stock held bynon-affiliates of the registrant, based on the average bid and ask price onsuch date, was approximately $829,550.

 

As of January30, 2006, the registrant had 3,109,333 shares of common stock outstanding.

 

 

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### **DOCUMENTSINCORPORATED BY REFERENCE**

 

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

 

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## **Part  I**

## **Item 1.**                        Business.

 

**Description of Business**

 

**Overview**

Obsidian Enterprises, Inc. (“Obsidian Enterprises”) is a holdingcompany headquartered in Indianapolis, Indiana. We have historically investedin and acquired small and mid-sized companies in industries such asmanufacturing and transportation.

 

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

 

Butyl-RubberReclaiming

 

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

 

Coach Leasing

 

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

 

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

 

Trailer andRelated Transportation Equipment Manufacturing

 

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

 

•                  DanzerIndustries, Inc. (“Danzer”), the only subsidiary of the Company until fiscal2001, manufactures metal parts and truck bodies for the service and utilitiesmarkets;  and

 

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

 

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

 

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

 

In March 2004, Obsidian Capital Partners converted all of its shares ofour Series C Preferred Stock and our Series D Preferred Stock into a total of2,218,725 shares of our common stock. Following this conversion, no shares of our Series C or Series DPreferred Stock are currently outstanding. Also in fiscal 2004, the shareholders approved a 50-to-1 reverse stocksplit. As a result of the reverse stock split and the amendment to theCertificate of Incorporation we reduced the number of shares of common stockoutstanding and the number of authorized shares were also reduced.

 

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#### **Segments**

 

We operate inthree industry segments:

 

•                  butyl rubberreclaiming;

 

•                  trailer andrelated transportation equipment manufacturing; and

 

•                  coach leasing.

 

All sales arein North and South America, primarily in the United States, Canada andBrazil.  For quantitative and geographicsegment information, see Note 13 in the Notes to Consolidated FinancialStatements.

*** ***

***Butyl Rubber Reclaiming***

 

Our butylrubber processing facilities are located in two adjacent plants in Vicksburg,Mississippi. We collect various used and scrap butyl rubber products, primarilyinner tubes from tires, and then reprocess these into reclaimed butyl rubbersheets. We sell reclaimed butyl rubber products through an internal salesforce.

 

Customers mixour reclaimed butyl rubber with virgin butyl rubber and use the productpredominately as the inner liner of tubeless tires and also as inner tubes fortires and for tapes and mastics for pipelines. The combination of reclaimedbutyl rubber with virgin butyl rubber facilitates some manufacturing processes,but the primary reason manufacturers use reclaimed butyl rubber is the costsavings offered compared to virgin butyl rubber.

 

Three otherenterprises engaged in reclaiming butyl rubber worldwide are:

 

•                  The GujaratCompany in India;

 

•                  Han Cook in Korea;and

 

•                  Vrederstein N.V.in the Netherlands.

 

Theseenterprises are not major competitors of ours for sales in the North and SouthAmerica, because price is the primary competitive factor and cost oftransportation increases the prices these other enterprises can offer. Theseenterprises do compete with us for the purchase of used and scrap butyl rubberproducts, our primary raw material.

 

Twoenterprises manufacture virgin butyl rubber for sale in the United States:

 

•                  ExxonCorporation; and

 

•                  Bayer AG.

 

Theseenterprises are much larger than we are, are well capitalized and have largersales staffs.  The prices theseenterprises charge for virgin butyl rubber place an upper limit on the pricesthat we can charge for reclaimed butyl rubber.

 

We obtain oursupply of scrap inner tubes primarily from approximately 1,000 scrap merchantslocated principally in the United States. We also import a supply of scrapinner tubes from sources in Brazil, Venezuela, and India.  Our ability to produce reclaimed butyl rubberis potentially restrained by the limited supply of scrap butyl rubberproducts.  Since the introduction oftubeless tires for automobiles in the 1970s, the number of scrap inner tubesfrom sources in the United States has declined substantially. In the UnitedStates, inner tubes are now primarily limited to the agricultural and largetruck tire market.  We also obtain someadditional supplies with reclaiming scrap butyl rubber pads from themanufacturers of other butyl rubber products. This pad scrap is created as a result of the manufacturing process formolded butyl rubber products and is available at approximately 60% of the costof scrap inner tubes.  The pad scrap is apartial substitute for inner tubes as raw material for our reclaimed butyl rubberproduct.

 

We recentlyintroduced new processing equipment to improve our operating efficiencies andreduce our cost to produce our products. We also added additional equipmentincluding a wet grind and cryogenic systems to

 

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increase ourability to utilize additional rubber products in our butyl rubber reclaimprocess and to add new natural rubber products to this segment.

 

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

 

•                  Michelin: 42.8 %

 

•                  KelleySpringfield: 26.3%

 

•                  Tyco Adhesives:16.1%

 

The loss ofany of the largest customers would materially and adversely affect ourrevenues. Our reclaimed butyl rubber products are generally ordered bycustomers monthly and shipped promptly after the order.  Customers generally pay accounts on 30- to60-day terms.

*** ***

***Trailer and Related Transportation EquipmentManufacturing***

* *

*Manufacturing*

 

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

* *

*Customers,Sales and Marketing*

 

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

 

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

 

Sales of bothtrailers and related transportation equipment manufacturing products areconducted through an internal sales force maintained by our subsidiaries.

* *

*Competitors*

 

A significantnumber of companies manufacture specialty racing, cargo and ATV carriers in theUnited States. Although many of these companies are relatively small and do notpossess our technical capability, a number of our competitors are much largerand possess equal or greater technical and financial resources.  Four of our larger competitors are:

 

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•                  HaulmarkIndustries;

 

•                  Pace American;

 

•                  U.S. Cargo; and

 

•                  Wells Cargo.

 

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

* *

*RawMaterials*

 

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

* *

*Warranties*

 

We generallywarrant our trailer and related transportation equipment****tobe free from defects in material and workmanship, and we also providewarranties relating to performance under normal use, including service forthree to five years after retail sale. Our obligation under these warranties generally is limited to the repairor replacement of the defective product. Historically, our warranty costs havenot been material to our consolidated financial statements.

* *

*Backlog*

 

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

 

***Coach Leasing***

 

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

 

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

 

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

 

Ourconsolidated financial statements include the assets, liabilities and equity ofDW Leasing and the results of its operations, and since its December 1, 2002inception, the assets, liabilities and equity of DC Investments Leasing and theresults of its operations. Both of these entities are in the business of coachleasing and their coaches are leased exclusively through Pyramid. Foradditional information, see the discussion of FASB Interpretation No. 46included in Note 1 to the Notes to Consolidated Financial Statements containedin Item 8.

 

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

 

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

 

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small and donot possess our amenity qualities, a number of our competitors are much largerand possess equal or greater amenity qualities and financial resources.   Some of our larger competitors include:

 

•                  EntertainerCoaches of America;

 

•                  Florida Coach;

 

•                  Senators Coach;and

 

•                  HemphillBrothers.

 

We believethat amenities are an important factor in leasing coaches to our target marketand we equip our coaches with a full complement of amenities.  We compete with other luxury coach providersbased on a combination of quality, amenities, availability and price. Duringfiscal 2005 and 2004 we experienced turnover in management, and theentertainment touring experienced a significant increase in competition whichhad a negative impact on our operations.

##  

## **GovernmentRegulation**

 

Federal,state, and local agencies regulate areas of our business, includingenvironmental and fire hazard control. They also regulate our work place to ensure safe working conditions forour employees.  The trailers and truckbodies we manufacture must meet standards set by state and federal transportationauthorities and the coaches we lease must comply with those standards andregulations.  These regulatory bodiescould take actions that would have a material adverse affect on our ability todo business.

##  

## **Employees**

 

As of October31, 2005, we had 450 employees.  We havea labor contract through January 2008 with the United Brotherhood of Carpentersand Joiners of America for the approximately 50 production workers at ourfacility in Hagerstown, Maryland.  Noneof the employees at our other facilities is represented by a labor union.  We believe that our employee relations aresatisfactory.

##  

## **Patents andProprietary Technology**

 

We do not relyon any patents, registered trademarks, or special licenses to give us acompetitive advantage.  The “Danzer,” “Pyramid,”“United Trailer,” and “Classic Trailer” brand names have brand recognition inthe relevant market.

####  

#### **Research and Development**

 

We have notincurred any material research and development expenses during any of our lastthree fiscal years and we do not contemplate incurring any material researchand development expenses in fiscal 2006.

####  

#### **Financial Information forbusiness segment data and geographic data**

 

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

####  

#### **Working Capital**

 

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

 

### **Forward-LookingInformation and Risks**

 

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

 

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relatestrictly to historical or current facts. Forward-looking statements involverisks and uncertainties that could cause actual results to differ materially.Factors that might cause or contribute to such differences include, but are notlimited to, those discussed in the section entitled “Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operation.”Readers should carefully review the risks described in this and other documentsthat we file from time to time with the Securities and Exchange Commission,including the quarterly reports on Form 10-Q and other reports filed by theCompany.  Readers are cautioned not toplace undue reliance on the forward-looking statements, which speak only to thedate of this Annual Report on Form 10-K. The Company undertakes no obligationto publicly release any revisions to the forward-looking statements or reflectevents or circumstances after the date of this document.

 

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

##  

## **Item 1A.**     Risk Factors.

 

1.               Agroup of Obsidian Stockholders have filed a transaction statement on Schedule13E-3. The purpose of the transaction is to eliminate the public stockholdersof Obsidian and cause Obsidian to become a private company whose stock will nolonger be traded on the OTC Bulletin Board and which will no longer be subjectto the periodic reporting requirements of the Securities Exchange Act of 1934.Subsequent to fiscal 2005, the group filed amendment 4 to schedule 13-E3notifying all shareholders that the group obtained 90% ownership and theexpected date to complete the going private transaction is March 6, 2006.

 

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

 

3.               Recently, therehave been significant regulatory changes, including the Sarbanes-Oxley Act of2002, and there may be new accounting pronouncements or regulatory rulings thatwill have an impact on our future consolidated financial position and resultsof operations. The Sarbanes-Oxley Act of 2002 and other rule changes andproposed legislative initiatives following several highly publicized corporateaccounting and corporate governance failures are likely to increase general andadministrative costs.

 

4.               Ourfinancial statements have been presented on the basis that the Company willcontinue as a going concern, which contemplates the realization of assets andsatisfaction of liabilities in the normal course of business. The Company’sindependent auditor has included a going concern emphasis paragraph in itsaudit report relating to the Company’s audited financial statements for thefiscal year ended October 31, 2005, based on, among other things, concernsregarding, working capital deficits, loan covenant violations and recurringlosses from operations. The Company’s realization of its assets andsatisfaction of its liabilities in the normal course of business is dependentupon the Company’s ability to generate sufficient cash flow to meet itsfinancial obligations, to comply with the terms of its debt financingagreements, to obtain refinancing of certain obligations and to continue toreceive financial support under its line of credit agreements.

 

5.               Ourinability to obtain additional financing may prevent additional expansion inour current business or acquiring new businesses. Additional financing may notbe available to us on

 

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advantageousterms or at all, if, for example the interest rates are unattractive or we donot have sufficient collateral available to secure the desired increase indebt. Currently all of our assets are being used to secure outstanding debt, sounless we acquire unsecured assets or obtain a partial release from our securedcreditors of their security interests, we will not have available additionalcollateral to pledge to new debtors.

 

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

 

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

 

8.               Ouroverall strategy includes increasing revenue and reducing/controlling operatingexpenses. We have concentrated our efforts in ongoing, company-wide efficiencyactivities intended to increase productivity and reduce costs includingpersonnel reductions, reduction or elimination of non-personnel expenses andrealigning and streamlining operations. We cannot assure that our efforts willresult in increased profitability for any meaningful period of time.

 

9.               Weface significant competition in connection with the products and services weprovide. The level of competition has increased recently and is expected tocontinue at increasing levels in the future. There are many other companiesengaged in the manufacture of cargo trailers, luxury coach leasing and butylrubber reclaiming, and many of these companies have greater financial and otherbusiness resources than those possessed by us. Furthermore, other companies mayenter the our area of business in the future. If competition increases, oursales and profits are likely to decline.

 

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

##  

## **Item 1B.**               UnresolvedStaff Comments.

 

Notapplicable.

 

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## **Item 2.**                        Properties.

 

The followingdescribes the Company’s properties:

 
| **Identification**             | ** ** | **Location**                                             | ** ** | **Ownership/Description**                                                                                                | ** ** | **Segment**                                                 |
|--------------------------------|------------|----------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------|
| Headquarters                   |       | 111 Monument Circle, Suite 4800,  Indianapolis, IN 46204 |       | 3,700 square feet leased commercial office  space                                                                        |       | N/A                                                         |
|                           |       |                                                     |       |                                                                                                                     |       |                                                        |
| Butyl Rubber Processing Plants |       | Vicksburg, Mississippi                                   |       | Two adjacent plants aggregating 87,000  square feet, each owned by the Company and encumbered by a mortgage to PNC  Bank |       | Butyl Rubber Processing                                     |
|                           |       |                                                     |       |                                                                                                                     |       |                                                        |
| Trailer Manufacturing Plant    |       | Hagerstown, Maryland                                     |       | 75,000 square foot plant owned by the  Company and encumbered by a mortgage to Fair Holdings                             |       | Trailer and related transportation  equipment manufacturing |
|                           |       |                                                     |       |                                                                                                                     |       |                                                        |
| Trailer Manufacturing Plant    |       | Bristol, Indiana                                         |       | Several buildings aggregating 49,000 square  feet owned by the Company and encumbered by a mortgage to LaSalle Bank.     |       | Trailer and related transportation  equipment manufacturing |
|                           |       |                                                     |       |                                                                                                                     |       |                                                        |
| Trailer Manufacturing Plant    |       | White Pigeon, Michigan                                   |       | 47,000 square foot plant owned by the  Company and encumbered by a mortgage to LaSalle Bank.                             |       | Trailer and related transportation equipment  manufacturing |
|                           |       |                                                     |       |                                                                                                                     |       |                                                        |
| Coach Leasing Office           |       | Nashville, Tennessee                                     |       | 12,000 square feet of office space and  other facilities leased by the Company                                           |       | Coach Leasing                                               |
|                           |       |                                                     |       |                                                                                                                     |       |                                                        |
| Trailer Manufacturing Plant    |       | Sturgis, Michigan                                        |       | 54,000 square foot plant leased by the  Company**                                                                        |       | Trailer and related transportation  equipment manufacturing |

 

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** Long termlease from a related party expiring May 2012.

 

We believethat our property, plant and equipment are well maintained and adequate for ourrequirements. We also believe that all of our assets are adequately covered byinsurance.

 

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## **Item 3.**                        LegalProceedings.

 

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

 

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

##  

## **Item 4.**                        Submission ofMatters to a Vote of Security Holders.

 

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

 

## **Part II**

 

## **Item 5.**        Market for theRegistrant’s Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities.

 

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

 
| ** **  | ** ** | **Fiscal 2005** | ** ** | **Fiscal 2004** | ** ** |
|-------------|------------|-----------------|------------|-----------------|------------|
| ** **  | ** ** | **High**        | ** ** | **Low**         | ** ** | **High** | ** ** | **Low** | ** ** |
| 1st Quarter |       | $               | 7.00       |            | $          | 2.25 |   | $ | 17.50 |   | $ | 11.50 |   |
| 2nd Quarter |       | $               | 3.15       |            | $          | 1.55 |   | $ | 20.00 |   | $ | 5.00 |   |
| 3rd Quarter |       | $               | 1.80       |            | $          | 1.20 |   | $ | 10.00 |   | $ | 2.50 |   |
| 4th Quarter |       | $               | 1.90       |            | $          | 1.50 |   | $ | 6.25 |   | $ | 2.95 |   |

 

The abovequotations reflect inter-dealer prices, and may not include retail mark-up,mark down or commissions and may not necessarily represent actualtransactions.  At October 31, 2005, therewere approximately 707 holders of record of the Company’s common stock. Some ofthe shares of common stock are held in street name for an unknown number ofbeneficial owners. To date the Company has not paid a cash dividend on itscommon stock. The payment and amount of any future cash dividends would berestricted by the Company’s lenders and will necessarily depend upon conditionssuch as the Company’s earnings, financial condition, working capitalrequirements and other factors. The Company does not anticipate paying anydividends in the near future. As of October 31, 2005 the Company has nooutstanding options or warrants under any equity compensation plan.  For the year ended October 31, 2005, therewas no equity compensation under any equity compensation plan.

##  

## **Item 6.**                        SelectedFinancial Data.

 

The followingtable sets forth certain selected consolidated financial information concerningthe Company. This information is not covered by the independent auditor’sreport. For further information, see the

 

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accompanyingConsolidated Financial Statements of Obsidian Enterprises, Inc. andsubsidiaries for the years ended October 31, 2005, 2004, and 2003 and theinformation set forth in Item 7, “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations,” and in Item 8, “FinancialStatements and Supplementary Data” below.

####  

#### **Operating Data:**

 

(Amounts in thousands, exceptper share data)

 
| ** **                                           | ** ** | **Year Ended October 31,** | ** ** | **Ten  Months  Ended  October 31** | ** ** |
|------------------------------------------------------|------------|----------------------------|------------|-----------------------------------------|------------|
| ** **                                           | ** ** | **2005**                   | ** ** | **2004**                                | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|                                                 |       |                       |       |                                    |       |   |   |   |   |   |   |
| Net sales                                            |       | $                          | 65,774     |                                    | $          | 64,360 |   | $ | 59,295 |   | $ | 57,274 |   | $ | 24,689 |   |
|                                                 |       |                       |       |                                    |       |   |   |   |   |   |   |
| Income  (loss) from operations                       |       | (5,795                     | )          | (3,867                                  | )          | (978 | ) | 449 |   | 981 |   |
|                                                 |       |                       |       |                                    |       |   |   |   |   |   |   |
| Discontinued  operations, net of tax                 |       | —                     |       | —                                  |       | (49 | ) | (1,040 | ) | (3,376 | ) |
|                                                 |       |                       |       |                                    |       |   |   |   |   |   |   |
| Cumulative effect of change in accounting  principle |       | —                     |       | —                                  |       | — |   | (2,015 | ) | — |   |
|                                                 |       |                       |       |                                    |       |   |   |   |   |   |   |
| Net income  (loss)                                   |       | (10,909                    | )          | (8,033                                  | )          | (3,873 | ) | (6,330 | ) | (4,395 | ) |
|                                                 |       |                       |       |                                    |       |   |   |   |   |   |   |
| Basic and  diluted loss per share:                   |       |                       |       |                                    |       |   |   |   |   |   |   |
|                                                 |       |                       |       |                                    |       |   |   |   |   |   |   |
| From continuing operations                           |       | (3.37                      | )          | (2.47                                   | )          | (5.87 | ) | (4.50 | ) | (2.00 | ) |
|                                                 |       |                       |       |                                    |       |   |   |   |   |   |   |
| Discontinued operations                              |       | —                     |       | —                                  |       | (.07 | ) | (1.44 | ) | (6.50 | ) |
|                                                 |       |                       |       |                                    |       |   |   |   |   |   |   |
| Cumulative effect of change in accounting  principle |       | —                     |       | —                                  |       | — |   | (2.80 | ) | — |   |
|                                                 |       |                       |       |                                    |       |   |   |   |   |   |   |
| Net loss per share                                   |       | (3.37                      | )          | (2.47                                   | )          | (5.94 | ) | (8.74 | ) | (8.50 | ) |
|                                                      |            |                            |            |                                         |            |  |  |  |  |  |  |  |  |  |  |  |

####  

#### **Balance Sheet Data:**

 
| ** **                                                      | ** ** | **October 31,** | ** ** |
|-----------------------------------------------------------------|------------|-----------------|------------|
| ** **                                                      | ** ** | **2005**        | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|                                                            |       |            |       |   |   |   |   |   |   |   |   |
| Working capital (deficit)                                       |       | $               | (18,289    | ) | $ | (10,784 | ) | $ | 6,045 |   | $ | 1,591 |   | $ | (2,528 | ) |
|                                                            |       |            |       |   |   |   |   |   |   |   |   |
| Total assets                                                    |       | 46,734          |       | 49,123 |   | 45,882 |   | 45,923 |   | 48,850 |   |
|                                                            |       |            |       |   |   |   |   |   |   |   |   |
| Long-term debt, including current portion  and redeemable stock |       | 57,101          |       | 48,796 |   | 43,221 |   | 36,464 |   | 35,382 |   |
|                                                            |       |            |       |   |   |   |   |   |   |   |   |
| Stockholders’ equity (deficit)                             |       | (24,230         | )          | (13,769 | ) | (7,559 | ) | (689 | ) | 1,331 |   |
|                                                                 |            |                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

No dividendshave been declared or paid in any period presented.

 

The Companyadopted Statement of Financial Accounting Standards (“SFAS”) No. 142, *Goodwill and Other Intangible Assets*, on November 1,2001.  SFAS No. 142 changed theaccounting for goodwill from a model that required amortization supplemented byimpairment tests to an accounting model based solely upon impairmenttests.  The consolidated operating datapresented includes goodwill amortization only for the ten months ended October31, 2001.  Had the nonamortization provisionsof SFAS No. 142 been effective prior

 

12

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to fiscal2001, the net loss for the ten months ended October 31, 2001 would have beenreduced by $76 to $4,319.  There would beno change in earnings per share.  Allother periods presented would be unchanged.

 

## **Item 7.**        Management’s Discussionand Analysis of Financial Condition and Results of Operations.

 

All dollaramounts in this Item 7 are in thousands (except for share and per shareinformation).

 

**Organization of Financial Information**

 

ThisManagement’s Discussion and Analysis provides material historical andprospective disclosures intended to enable investors and other users to assessour financial condition and results of operations. Statements that are nothistorical are forward-looking and involve risks and uncertainties discussedunder the caption “Forward-Looking Statements” in Item 1 and the Risk Factorsdiscussed in Item 1B of this Annual Report on Form 10-K.

 

Theconsolidated financial statements and notes are presented in Item 8 of thisAnnual Report on Form 10-K. Included in the consolidated financial statementsare the consolidated statements of operations, consolidated balance sheets,consolidated statements of cash flows, and consolidated statements ofstockholders’ deficit and comprehensive loss. The notes, which are an integralpart of the consolidated financial statements, provide additional informationrequired to fully understand the nature of amounts included in the consolidatedfinancial statements.

 

**Significant Transactions and Financial Trends**

 

Throughoutthese financial sections, you will read about significant transactions orevents that materially contribute to, or reduce, earnings and materially affectfinancial trends. Significant transactions discussed in this Management’sDiscussion and Analysis include:

 

•                  Rawmaterial price increases;

 

•                  Costreduction initiatives including plant closings and elimination of productlines;

 

•                  Chargefor discontinued product line; and

 

•                  Changein estimates for reserves.

 

Thesesignificant transactions or events resulted from unique facts and circumstancesthat are not expected to recur with similar materiality or impact on continuingoperations. While these items are important in understanding and evaluatingfinancial results and trends, other transactions or events such as thosediscussed later in this Management’s Discussion and Analysis may also have amaterial impact. An understanding of these transactions or events is necessaryin order to estimate the likelihood that current trends will continue or theseevents will recur.

 

13

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### **Introduction**

 

ObsidianEnterprises is a holding company headquartered in Indianapolis, Indiana. Weconduct business through our subsidiaries:

 

Butyl RubberReclaiming

 

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

 

Coach Leasing

 

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

 

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

 

Trailer andRelated Transportation Equipment Manufacturing

 

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

 

•                  Danzer, the onlysubsidiary of the Company until fiscal 2001, manufactures steel-framed cargotrailers. Prior to October 31, 2005 the Company also manufactured metal partsand truck bodies for the service and utilities markets; and

 

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

 

While each ofthe subsidiaries markets its products or services independently, our emphasisis to provide high quality products and services by taking advantage ofcross-selling opportunities, manufacturing and other operational efficienciesthrough each of the subsidiaries.

 

### **Results ofOperations**

 

**OVERVIEW**

 

The Company’s financial statements have been presented on the basisthat it is a going concern which contemplates the realization of assets andsatisfaction of liabilities in the normal course of business. In the periodsince June 2001, Obsidian Enterprises and its subsidiaries have incurred lossesand reductions in equity on a consolidated basis. Recurring losses, workingcapital deficits and loan covenant violations have led the Company’sindependent auditor, Somerset CPAs P.C. to include a going concern emphasisparagraph in its audit report relating to the Company’s audited consolidatedfinancial statements for the year ended October 31, 2005.  Historically, certain cash deficits have beenfinanced with DC Investments, LLC (“DC Investments”) and its subsidiary FairHoldings, Inc. (“Fair Holdings”), entities controlled by the Company’sChairman.  As of October 31, 2005, totaldebt outstanding to DC Investments and Fair Holdings was $31,173.

 

During fiscal2005, our results of operations were negatively impacted by various eventsdiscussed below.  During fiscal 2006, we intend to focus our efforts ongenerating positive cash flow and increasing our working capital throughimproved operations and pursuing significant strategic initiatives.

 

During fiscal2005 a group of Obsidian Stockholders filed a transaction statement on Schedule13E-3 and announced their intention to take Obsidian private. The purpose ofthe transaction is to eliminate the public stockholders of Obsidian and causeObsidian to become a private company whose stock will no longer be

 

14

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

 

Our trailer segment was negatively affected by the significantincreases in raw material prices during fiscal 2005 which reduced our grossmargins. We were able to pass some of the increases through to our customersthrough price increases of approximately 17%. Our price increases lagged behindthe raw material price increases throughout fiscal 2005, which reduced ouroverall gross margins. We expect market conditions to remain very competitiveand raw material prices to remain somewhat volatile in this segment. As rawmaterial prices begin to level off, we expect our price increases to return ourmargins to a profitable level. We are also implementing programs with a goal ofreducing the costs of raw material. Our cost of materials percentagehistorically has been above the industry average. Our cost reductioninitiatives for fiscal 2006 include the closing of our White Pigeon plant andconsolidation of operations with our Bristol facility to reduce our overhead costsand improve operating efficiencies. We also discontinued our truck body line inHagerstown to reduce our overhead costs and increase our trailer manufacturingcapacity. Additional strategies in the trailer segment include: building salesgrowth through market expansion, cross selling and additional geographicalproduction. We continue to evaluate strategic acquisitions to determine whetherthey can improve the performance of this segment.

 

Our butyl rubber reclaiming segment sales remained flat during fiscal2005. Additional costs were incurred to maintain the equipment in this verycapital intensive operation. The primary reason for this decrease is lower production efficiencybecause a major piece of production equipment was taken out of commission formaintenance for the last six months of the year.  During the downtime, we relied on backupequipment for our production needs, which increased our cost to producematerial and reduced our throughput efficiency. We also incurred significant increases in energy costs and weincreased our reserve on slow moving raw materials which reduced our grossprofit by $500,000. During fiscal 2005 we implemented an additional fivepercent price increase as our cost to pass through some of the additional costsof producing our products. Subsequent to fiscal 2005 we purchased a new pieceof equipment that, based upon preliminary testing, should ultimately increaseour production efficiency and lowering our overhead costs by lowering our costof utilities and automating a portion of the production process which iscurrently manually intensive.  For fiscal2006 we expect the market demand for our product in this segment to be high dueto our current order backlog. The availability of raw material for butyl rubberreclaiming to meet the market demands continues to be a concern. We willcontinue to modify our Fine Grind and cryogenic operations to increase ourrubber resource utilization of existing material and expand our product linesof natural rubber in new markets.

 

Our luxury coach leasing segment was negatively affected by a decreasein sales from a lower utilization of our fleet. The lower utilization is due toincreased market competition in the industry and a significant decrease in thenumber of entertainers touring. We also had various turnover in management forthe leasing segment.  As noted in thelegal matters under Item 3, the company filed a law suit against the formerowners of Pyramid for violation of their non-compete agreement.  Utilization of our fleet for fiscal 2005decreased approximately 10.9% which in turn had a significantnegative impact on the earnings of this segment. In the future sales and grossprofits and profitability for this segment will depend on the industry marketconditions and a continued effort to upgrade the management of thissegment.  We are continually working toimprove our utilization of our owned coaches to increase our revenues andminimize additional costs from leasing third party buses. In addition, wecontinue to explore other non-traditional uses for our coaches to improve theutilization and therefore increase our cash flow and working capital in thissegment. We are also evaluating our coaches and, as noted above, selling theolder coaches in our fleet to reduce our costs.

 

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

 

15

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**Fiscal 2005 Compared with Fiscal 2004**

 

The followingtable details our results of operations as a percentage of sales:

 
| ** **                                    | ** ** | **Year Ended October 31,** | ** ** |
|-----------------------------------------------|------------|----------------------------|------------|
| ** **                                    | ** ** | **2005**                   | ** ** | **2004** | ** ** |
|                                          |       |                       |       |   |   |
| Net sales                                     |       | 100.0                      | %          | 100.0 | % |
| Cost of sales                                 |       | 93.2                       |       | 90.0 |   |
| Selling, general and administrative  expenses |       | 15.6                       |       | 16.8 |   |
| Interest expense                              |       | 7.8                        |       | 6.5 |   |

 

***Net Sales***

 

Net sales infiscal 2005 were $65,774 compared to $64,360 in fiscal 2004, an increase of2.2%.  The sales growth relates primarilyto the inclusion of Classic for twelve months compared to six months from thedate of acquisition in fiscal 2004. In addition, cargo trailer sales haveincreased due to the increased capacity and sales growth from our HagerstownMaryland facilities along with an average price increase of 17.0% to offset rawmaterial price increases.  Sales in thebutyl rubber reclamation segment increased slightly and sales in the coachleasing segment decreased by approximately $2,121.

 

***Gross Profit***

 

Gross profitas a percentage of sales decreased by 3.4% from 10.2% in fiscal 2004 to 6.8% infiscal 2005. The decrease was mainly the result of increased raw material costsin our trailer and related transportation equipment segment.  In addition, our rubber reclaim segmentincurred additional costs during fiscal 2005 for repair and maintenance andadditional processing of materials while a critical piece of equipment wasunder repair of their capital intensive equipment. Also additional reserveswere established on slow moving inventory and an increase in purchases of butylraw materials from foreign sources which is at a premium compared to domesticmarkets.  We were able to pass some ofthe price increases through to our customers although our price increases did lagbehind the material cost increases throughout fiscal 2005 and 2004, thereforereducing our overall gross profit.

 

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

 

**•**                  Consolidated a portion of ouroperations in the trailer segment and closed one of our manufacturingfacilities in White Pigeon Michigan. This is expected to reduce our overheadexpenses and improve our overall production efficiency through a realignment ofour existing manufacturing facilities.

** **

**•**                  Discontinued our truck body andrelated equipment product lines and realigned our plant to produce additionaltrailers at our Hagerstown, Maryland facilities. This is expected to reduce ouroverhead expenses and improve our overall production efficiency.

** **

**•**                  New equipment purchases for our ButylRubber Reclaim segment is expected to reduce our overhead expensessignificantly by eliminating various labor intensive portions of production andreducing our utilities expenses.

 

***Selling, General and Administrative (SG&A) Expenses***

 

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

 

16

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Looking ahead,SG&A expenses are expected to decrease. During fiscal 2005 a group ofObsidian Stockholders filed a transaction statement on Schedule 13E-3 andannounced their intention to take Obsidian private. The purpose of thetransaction is to eliminate the public stockholders of Obsidian and causeObsidian to become a private company whose stock will no longer be traded onthe OTC Bulletin Board and which will no longer be subject to the periodicreporting requirements of the Securities Exchange Act of 1934. Once thistransaction is completed, the overall general and administrative expenses byapproximately $700,000 on a recurring basis. In addition, the Company will notbe required to comply with the Sarbanes Oxley section 404 implementation, forwhich the cost of implementation was estimated at approximately $1.2 million.

*** ***

***Interest Expense***

 

Interestexpense for the year ended October 31, 2005 as a percentage of average debtborrowings of $51,477 was 10%.  Interestexpense for the year ended October 31, 2004 as a percentage of average debtborrowings of $44,088 was 9.5%.  Theincrease is primarily due to the increase of the prime rate as well asincreased borrowings on related party debt discussed below in “Liquidity andCapital Resources,” “Refinancing Activities,” and “Partners EquityTransactions.”

*** ***

***Income Tax Provision***

 

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

 

**Fiscal2004 Compared with Fiscal 2003**

 

The followingtable details our results of operations as a percentage of sales:

 
| ** **                                    | ** ** | **Year Ended October 31,** | ** ** |
|-----------------------------------------------|------------|----------------------------|------------|
| ** **                                    | ** ** | **2004**                   | ** ** | **2003** | ** ** |
|                                          |       |                       |       |   |   |
| Net sales                                     |       | 100.0                      | %          | 100.0 | % |
| Cost of sales                                 |       | 90.0                       |       | 87.3 |   |
| Selling, general and administrative  expenses |       | 16.8                       |       | 14.4 |   |
| Interest expense                              |       | 6.5                        |       | 6.0 |   |

 

***Net Sales***

 

Net sales infiscal 2004 were $64,360 compared to $59,295 in fiscal 2003, an increase of8.5%.  The sales growth relates primarilyto the purchase of Classic in May 2004. In addition, cargo trailer sales haveincreased due to the increased capacity and sales growth from our HagerstownMaryland facilities along with an average price increase of 4.5% to offset rawmaterial price increases.  Sales in thebutyl rubber reclamation segment decreased slightly and sales in the coachleasing segment decreased approximately by $1,800.

 

***Gross Profit***

 

Gross profitas a percentage of sales decreased 2.5 from 12.7% in fiscal 2003 to 10.2% infiscal 2004. The decrease was mainly the result of increased raw material costsin our trailer and related transportation equipment segment related to steeland wood which are the most significant components of our cost of goods sold.In addition, our rubber reclaim segment incurred additional costs during fiscal2004 for repair and maintenance of their capital intensive equipment and thepurchase of raw materials from foreign sources. We were able to pass some of the price increases through to ourcustomers although our price increases did lag behind the material costincreases throughout fiscal 2004 therefore reducing our overall gross profit.

 

17

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***Selling, General and Administrative (SG&A) Expenses***

 

The Company’s SG&A expenses increased $2,290 or 26.8% for the yearended October 31, 2004 compared to 2003. The increase in expenses wasprofessional fees and other expenses related to the unsuccessful exchange offerfor Net Perceptions, Inc. These expenses are non-recurring and totaledapproximately $600. Other increases include the additional SG&A expenses of$500 for Classic, depreciation and amortization of $375, insurance of $500 andthe remaining increase of $315 for salaries, marketing expenses for websiteadvertising and other general expenses.

 

***Interest Expense***

 

Interestexpense for the year ended October 31, 2004 as a percentage of average debtborrowings of $44,088 was 9.5%.  Interestexpense for the year ended October 31, 2003 as a percentage of average debtborrowings of $39,819 was 8.9%.  Theincrease is primarily due to the increase of the prime rate as well asincreased borrowings on related party debt discussed below in “Liquidity andCapital Resources,” “Refinancing Activities,” and “Partners EquityTransactions.”

*** ***

***Income Tax Provision***

 

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

 

**Business Segments**

 

The followinginformation provides perspective on our business segments’ sales and operatingresults by segment for the years ended October 31, 2005, 2004, and 2003.  The comments that follow should be read inconjunction with our consolidated financial statements and related notescontained in this Form 10-K.  Thefollowing table shows net sales by product segment:

 
| ** **              | ** ** | **Year Ended October 31,** | ** ** |
|-------------------------|------------|----------------------------|------------|
| ** **              | ** ** | **2005**                   | ** ** | **2004** | ** ** | **2003** | ** ** |
|                    |       |                       |       |   |   |   |   |
| Trailer manufacturing   |       | $                          | 51,469     |   | $ | 48,184 |   | $ | 41,009 |   |
| Butyl rubber reclaiming |       | 10,962                     |       | 10,712 |   | 11,005 |   |
| Coach leasing           |       | 3,343                      |       | 5,464 |   | 7,281 |   |
|                    |       |                       |       |   |   |   |   |
| Total                   |       | $                          | 65,774     |   | $ | 64,360 |   | $ | 59,295 |   |

 

We allocatecorporate SG&A expenses to the respective subsidiaries primarily based on apercentage of sales.  Amounts allocatedby segment are as follows:

 
| ** **              | ** ** | **Year Ended October 31,** | ** ** |
|-------------------------|------------|----------------------------|------------|
| ** **              | ** ** | **2005**                   | ** ** | **2004** | ** ** | **2003** | ** ** |
|                    |       |                       |       |   |   |   |   |
| Trailer manufacturing   |       | $                          | 1,798      |   | $ | 2,280 |   | $ | 1,174 |   |
| Butyl rubber reclaiming |       | 383                        |       | 507 |   | 317 |   |
| Coach leasing           |       | 181                        |       | 259 |   | 200 |   |
|                    |       |                       |       |   |   |   |   |
| Total                   |       | $                          | 2,362      |   | $ | 3,046 |   | $ | 1,691 |   |

 

18

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#### **Trailer and RelatedTransportation Equipment Manufacturing**

 

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

 
| ** **                              | ** ** | **Year Ended October 31,** | ** ** |
|-----------------------------------------|------------|----------------------------|------------|
| ** **                              | ** ** | **2005**                   | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                    |       |                       |       |   |   |   |   |
| Net sales                               |       | $                          | 51,469     |   | $ | 48,184 |   | $ | 41,009 |   |
| Cost of sales                           |       | 47,473                     |       | 44,116 |   | 37,704 |   |
|                                    |       |                       |       |   |   |   |   |
| Gross profit                            |       | $                          | 3,996      |   | $ | 4,068 |   | $ | 3,305 |   |
|                                    |       |                       |       |   |   |   |   |
| Gross profit %                          |       | 7.8                        | %          | 8.4 | % | 8.1 | % |
|                                    |       |                       |       |   |   |   |   |
| Loss before taxes and minority interest |       | $                          | (2,736     | ) | $ | (4,110 | ) | $ | (3,480 | ) |

 

Sales

 

Netsales in this segment for fiscal 2005 were $51,469, an increase of $3,285 or6.8% compared to net sales of $48,184 for fiscal 2004. The increase wasprimarily due to Classic, which increased sales by $4,997 due to twelve monthsvs. six months in 2004 from the acquisition date.  Additionally, there was an increase in Danzer’ssales of $2,295 for cargo trailers and $454 for truck bodies, which was due theaddition of new customers on the East coast for cargo trailers and a modestincrease in orders from the telecommunications industry.   Salesof United products decreased by $4,461, primarily due to the increased sales ofthe economy line trailers, which sell at a lower price and the closing of theWhite Pigeon  facility that had adecrease in sales order volume.

 

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

 

Gross profit

 

Thegross profit in this segment for fiscal 2005 was $3,996, a slight decrease of0.6% to 7.8% of revenues, compared to $4,068, or 8.4% of revenues for fiscal2004. The acquisition of Classic contributed to the improvement of the segment’sgross profit by enabling us to add synergistic products to our trailer lineproduct line which, historically, has had higher gross margins than ourcomparable products.  This increase inthe gross margin from Classic is offset by the significant increase in rawmaterials during fiscal 2005. Although we raised our selling prices an averageof 17% to offset the significant price increases, we were not able to pass allthe cost increases through to our customers on a timely basis which reduced ouroverall gross profit margins.

 

19

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The gross profit for fiscal 2004 increased slightly to 8.4% of revenuesas compared to 8.1% for fiscal 2003. The cost of plywood and steel, majorcomponents of our cargo trailers increased significantly starting in August2003 and continued through October 31, 2004. Material cost surcharges wereinitiated in April 2004 to our customers to offset the significant priceincreases we incurred from our vendors. Our gross margins improved somewhat throughout the year, but we wereunable to pass all the increases through during fiscal year 2004. For thatreason, our margins were negatively affected for 2004. Our gross margins werealso negatively impacted by a fire at the Hagerstown, Maryland facility in May2004 which interrupted production. These negative affects on our gross marginswere offset somewhat by the purchase of Classic in May 2004. The gross marginsfor the Classic trailer lines typically are higher than our historical grossmargins.

 

Loss beforetaxes and minority interest

 

In fiscal2005, the loss before taxes and minority interest decreased by $1,374 whencompared to fiscal 2004, and $783 when compared to fiscal 2003. This improvementis primarily related to the overall reduction in SG&A expenses as a resultof our cost reduction initiatives.

 

Looking ahead

 

Futureimprovement in this segment will depend on our ability to continue to passthrough our raw material cost increases to our customers.  The increased volume of Classic is expectedto continue to improve our gross margin as Classic’s product line historicallyhad higher gross margins than our comparable products. We expect our plantclosing and the elimination of the truck body line to decrease our overheadexpenses and improve our operating efficiencies.  We are also implementing a process to poolall of our related resources together for our trailer manufacturingsubsidiaries to increase our purchasing power, obtain volume discounts andincrease our Brand awareness.

 

## **Butyl RubberReclaiming**

 

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

 
| ** **                              | ** ** | **Year Ended October 31,** | ** ** |
|-----------------------------------------|------------|----------------------------|------------|
| ** **                              | ** ** | **2005**                   | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                    |       |                       |       |   |   |   |   |
| Net Sales                               |       | $                          | 10,962     |   | $ | 10,712 |   | $ | 11,005 |   |
| Cost of Sales                           |       | 11,897                     |       | 10,472 |   | 9,972 |   |
|                                    |       |                       |       |   |   |   |   |
| Gross Profit                            |       | $                          | (935       | ) | $ | 240 |   | $ | 1,033 |   |
|                                    |       |                       |       |   |   |   |   |
| Gross Profit %                          |       | (8.5                       | )%         | 2.2 | % | 9.4 | % |
|                                    |       |                       |       |   |   |   |   |
| Loss before taxes and minority interest |       | $                          | (2,488     | ) | $ | (1,606 | ) | $ | (752 | ) |

 

Sales

 

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

 

20

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our ability toprocess other types of products for our butyl reclaim products as well as othernatural rubber products.

 

Net sales inthis segment for fiscal 2004 as compared to fiscal 2003 decreased by $293 or2.7%.  Sales in this segment remain flatdue to the limited availability of raw materials.

 

Gross profit

 

Grossprofit as a percentage of sales decreased by 10.7% to $(935) for fiscal 2005 ascompared to $240 for fiscal 2004. The primary reason for this decrease is dueto lower production because of an electrical fire that closed the plant forseven days in December 2004. In addition, our rubber reclaim segmentincurred additional costs during fiscal 2005 for repair and maintenance andadditional processing of materials while a critical piece of equipment wasunder repair of this capital intensive equipment. Also additional reserves ofapproximately $500 were established on slow moving inventory that decreased ourgross margins by approximately 4.5%. In addition, an increase in purchases ofraw materials from foreign sources, a significant increase in the cost of natural gas and electricity alsoaffected gross profit.

 

Gross profit as a percentage of sales decreased by 7.2% for fiscal 2004as compared to fiscal 2003. The primary reason for this decrease is a lack of aconsistent supply of raw materials and increasing energy costs. As a result ofhaving to use less than optimum raw material mix in the reclaiming process,additional processing time is incurred to ensure delivery of quality product.Our processes require significant amounts of natural gas and electricity whichincrease significantly during fiscal 2004. Additional costs were incurred tomaintain the equipment in this very capital intensive operation. During fiscal2004 we initiated price increases of 5% to partially offset increasing costs ofproduction and materials.

 

Loss beforetaxes and minority interest

 

In fiscal2005, the loss before taxes and minority interest increased by $882 as comparedto fiscal 2004, and $1,736 as compared to fiscal 2003. The decrease inprofitability and negative trend as noted above has been primarily due to thesignificant increases in energy costs, inefficiencies in production and highermaintenance costs and additional reserves on our raw materials.

 

Looking ahead

 

The Company’smanagement has put into place new process for our Butyl, cryogenic and finegrind systems. We anticipate the new processes will improve our efficienciesand provide additional profitability for this segment.

 

## **Coach Leasing**

 

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

 
| ** **                              | ** ** | **Year Ended October 31,** | ** ** |
|-----------------------------------------|------------|----------------------------|------------|
| ** **                              | ** ** | **2005**                   | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                    |       |                       |       |   |   |   |   |
| Net Sales                               |       | $                          | 3,343      |   | $ | 5,464 |   | $ | 7,281 |   |
| Cost of Sales                           |       | 1,936                      |       | 3,216 |   | 4,060 |   |
|                                    |       |                       |       |   |   |   |   |
| Gross Profit                            |       | $                          | 1,407      |   | $ | 2,248 |   | $ | 3,221 |   |
|                                    |       |                       |       |   |   |   |   |
| Gross Profit %                          |       | 42.1                       | %          | 41.1 | % | 44.2 | % |
|                                    |       |                       |       |   |   |   |   |
| Loss before taxes and minority interest |       | $                          | (2,211     | ) | $ | (1,574 | ) | $ | (122 | ) |

 

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Sales

 

Net salesfor fiscal 2005 were $3,343, a decrease of $2,121 or 38.8% compared to netsales of $5,464 for fiscal 2004.  Thedecrease in sales relates to a lower utilization of our fleet. Managementbelieves the lower utilization is due to increased market competition in theindustry and a significant decrease in the number of professional acts touring.We also experienced turnover in management which also contributed to the lossof several tours. Utilization of our fleet decreased 10.9% for the fiscal yearend 2005 as compared to 2004 which had a negative impact on our operations. At this time, we cannotestimate when tours for the entertainment industry will return to previoushistorical levels.  As noted in Part II, Item 1 “Legal Proceedings”, theCompany filed a lawsuit against the former owners of Pyramid for violation oftheir non-compete agreement.

 

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

 

Gross profit

 

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

 

Gross profit percentage for this segment was41.1% for fiscal 2004 compared to 44.2% for fiscal 2003. The decrease isattributable primarily to the increase of costs for maintaining a larger fleetwhile revenues per coach have decreased. In addition, some of our increasedcosts as a percentage of revenue were offset by the mix of utilization of thecoaches owned in our fleet and the need to sublease additional buses from thirdparties to meet demand. Subleasing third party buses are typically at lowergross margins. As current demand has decreased our need for third party coacheshas decreased.

 

Loss beforetaxes and minority interest

 

In fiscal2005, the loss before taxes and minority interest increased $637 from fiscal2004 and $2,089 since fiscal 2003. The decrease in profitability and negativetrend as noted above has been primarily due to the significant increase inindustry competition in fiscal 2005 and 2004.

 

Looking ahead

 

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

 

22

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

 

### **Liquidity AndCapital Resources**

## **Overview**

 

The Company’s financial statements have been presented on the basisthat it is a going concern which contemplates the realization of assets andsatisfaction of liabilities in the normal course of business. ObsidianEnterprises and its subsidiaries have incurred losses and reductions in equityon a consolidated basis. These recurring losses, working capital deficits andcertain loan covenant violations and have led the Company’s independentauditor, Somerset CPAs P.C. to include a going concern emphasis paragraph inits audit report relating to the Company’s audited consolidated financialstatements for the year ended October 31, 2005. Historically certain cash losses have been financed with DC Investmentsand its subsidiary Fair Holdings, entities controlled by the Company’sChairman. As of October 31, 2005, our total debt outstanding to Fair Holdingswas $31,173.

 

We are continuing to address our liquidity and working capital needsthrough various means including operational changes and financing matters whichare discussed below. During fiscal 2006 we expect to refinance current debt of$17,000 on a long-term basis. We also expect to generate approximately $5,200in cash from operations which will be used to satisfy current obligations. Anypotential cash shortage is expected to be supported through our existing linesof credit with Fair Holdings.  Up to$5,600 was available under our lines of credit with Fair Holdings at October31, 2005.  We also believe, based on oralrepresentation of Fair Holdings, additional financial support is available fromFair Holdings, if necessary.

 

## **WorkingCapital**

 

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

 

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

 

•                  Cost reductionand other initiatives are being put in place for raw materials in the trailerand related transportation manufacturing segment with the consolidation ofplant operations and the discontinuation of production on the truck bodyproduct line to reduce overhead costs, implementation of alternative materialsand additional discounts through volume purchasing by pooling our purchasingpower from all affiliated companies. Significant increases in raw materialcosts are passed through to our customers through price increases.

 

•                  Wehave financial commitments available from Fair Holdings to provide, additionalborrowings under a line of credit agreements, which expire through April2012.  Approximately $5,600 is currentlyavailable

 

23

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to us under these agreements.

 

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

 

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

 

•                  Weare actively working to restructure or refinance our high interest rate debt onmore favorable terms. Approximately $22,271 of our debt bears interest fromrates ranging from 10% to 15%.

 

•                  Asfully described under the “Guarantees of Obsidian Capital Partners”, we have anagreement that gives us the right to mandate a capital contributions if thelenders to U.S. Rubber or United were to declare a default.  In either of those events, the Company hasthe right to enforce a capital contribution agreement up to $1,370 on U.S.Rubber and $1,000 on United to fund the respective subsidiary’s shortfall.  These payments, if any, would be applieddirectly to reduce the respective subsidiary’s debt obligations to the lender.

 

Managementbelieves the steps taken to improve operations will positively impact our liquidityand working capital for fiscal 2006.  Inaddition, we continue to look for ways to strengthen our liquidity, equity andworking capital through ongoing evaluations of merger and acquisitioncandidates and other recapitalization methods.

 

## **FinancialCovenants**

 

Significant financial covenants in our credit agreements are themaintenance of minimum ratios, levels of earnings to funded debt and fixedcharge coverage ratios.  The Company didnot meet requirements and covenants in certain debt agreements.

 

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

 

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

 

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

 

US Rubber didnot meet its financial covenant related to its fixed charged ratio and thedelivery of audited statements within 90 days. The bank debt has matured andthe Company is currently working with the bank on a short term extension untilit is refinanced.  The total debt of $5,005is classified as current.

 

Obsidian Enterprisesdid not meet its financial covenant related to a minimum working capitalrequirement and delivery of audited statements within 90 days with RENNCapital. No waiver was received and the total balance of $500 is classified ascurrent.

 

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

 

24

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**Long-TermAssets**

 

Long-termassets as of October 31, 2005 were $31,431 compared to $32,810 as of October31, 2004. The net decrease of $1,379 was primarily due to amortization ofintangible assets, depreciation of assets net of capitalized purchases and thedisposal of assets.

 

**CapitalStructure**

 

The followingtable details our total capitalization components:

 
| ** **                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                  |       |     |       |     |       |
| Short-term debt                                       |       | $        | 25,029     |     | $          | 18,383 |   |
| Long-term debt, including Redeemable  Preferred Stock |       | 32,072   |       | 30,413   |       |
| Stockholders’ deficit                            |       | $        | (24,230    | )        | $          | (13,769 | ) |

 

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

##  

## **CashAvailability**

 

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

 
| **Company**              | ** ** | **Current Availability** | ** ** | **Maximum Availability** | ** ** |
|--------------------------|------------|--------------------------|------------|--------------------------|------------|
| United Expressline (1)   |       | $                        | 696        |                     | $          | 696 |   |
| Classic Manufacturing    |       | 213                      |       | 213                      |       |
| U.S. Rubber (1)          |       | 938                      |       | 938                      |       |
| Danzer Industries (1)    |       | 1,720                    |       | 1,720                    |       |
| Obsidian Enterprises (1) |       | 2,096                    |       | 2,096                    |       |
| Pyramid Coach (1)        |       | 170                      |       | 170                      |       |
|                          |            |                          |            |                          |            |  |  |

 

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

 

### **PartnersEquity Transactions**

 

ObsidianCapital Partners (“Partners”), our major shareholder, was required under theAgreement and Plan of Reorganization to fund through the purchase of additionalpreferred stock certain ongoing administrative expenses of the Company tocomplete the Plan of Reorganization, complete all required current and prioryear audits to meet the regulatory filing requirements, and ensure all annualand quarterly SEC filings are completed to enable the registration of the preferredstock issued to Partners.

 

In October2003, Partners acquired shares of the Company’s Series D Preferred Stock for$250 under the capital contribution agreement described under “Guarantee ofPartners” below.

 

25

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In March 2004,Partners converted all of the outstanding Series C and D Preferred Stock to1,807,492 shares of common stock.

 

### **Guarantees OfObsidian Capital Partners**

 

We have anagreement with Partners that gives us the right to mandate under the debtobligations with third parties a capital contribution from the Partners if thelenders to U.S. Rubber or United were to declare a default.  In either of those events, the Company hasthe right to enforce a capital contribution agreement with Partners requiring acontribution of up to $1,370 to be made to U.S. Rubber and $1,000 to be made toUnited to fund the respective subsidiary’s shortfall.  These payments, if any, would be applieddirectly to reduce the respective subsidiary’s debt obligations to thelender.  During fiscal 2003, Partnerscontributed $250 under the above agreement and was issued Series D PreferredStock which was converted to 49,998 shares of common stock in March 2004. Theproceeds were contributed to U.S. Rubber to keep the Company in compliance withits fixed charge coverage ratio for its revolving line of credit agreement.

 

### **ChampionTransactions**

 

To facilitatethe sale of substantially all assets of Champion, on January 27, 2003, theCompany agreed to a settlement with Markpoint of its outstanding subordinateddebt with Champion. In return for cancellation of the indebtedness and releaseof a pending legal action against us and Champion, we made a cash payment toMarkpoint of $675 and issued to Markpoint 32,143 shares of the Company’s SeriesD preferred stock. In addition, we agreed to repurchase these shares at a priceof $21 per share.  Our repurchaseobligation was guaranteed by Mr. Durham. Fair Holdings assumed the repurchaseobligation. See Item 13 “Certain Relationships and Related Transactions.” Incalendar 2003 Markpoint exercised its option to require the repurchase of theshares and the shares were purchased by Fair Holdings.  Subsequent to the settlement, the Company’sBoard of Directors authorized the sale of Champion, which was completed January30, 2003.

 

**Off-BalanceSheet Arrangements and Contractual Obligations**

 

It is not ourusual business practice to enter into off-balance sheet arrangements, exceptfor off-balance sheet arrangements related to operating lease commitmentsdescribed below in the table of contractual obligations.

 

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

 
| **Contractual Obligations**                                | ** ** | **Total** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010 and  Thereafter** | ** ** |
|------------------------------------------------------------|------------|-----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|--------------------------|------------|
|                                                       |       |      |       |     |       |     |       |     |       |     |       |                     |       |
| Long-term debt, and all debt service  interest payments(1) |       | $         | 65,972     |     | $          | 23,821   |       | $        | 22,675     |     | $          | 5,711                    |       | $ | 1,960 |   | $ | 11,805 |   |
| Operating leases(2)                                        |       | 1,850     |       | 513      |       | 436      |       | 235      |       | 201      |       | 465                      |       |
| Purchase Commitments(3)                                    |       | 1,036     |       | 1,036    |       |     |       |     |       |     |       |                     |       |
| Redeemable Stock(4)                                        |       | 252       |       | —   |       | 252      |       | —   |       | —   |       | —                   |       |
|                                                       |       |      |       |     |       |     |       |     |       |     |       |                     |       |
| Total contractual cash obligations                         |       | $         | 69,110     |     | $          | 25,370   |       | $        | 23,363     |     | $          | 5,946                    |       | $ | 2,161 |   | $ | 12,270 |   |

 

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(1)          The Company has debt outstanding whichmatures through 2014.

 

(2)          The Company has various operating lease commitments, principallyrelated to machinery and equipment, office equipment, and facilities which gothrough 2012.

 

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

 

(4)          In conjunction with the United acquisition in 2001, the Company issued 154,482shares of Common Stock to Huntington Capital Investment Corporation (“Huntington”),the senior subordinated lender of United. The note purchase agreement includeda provision giving Huntington the option to require the Company to repurchasethese shares at 90% of market value at the date of redemption upon the earlierof: a) fifth anniversary of issuance of such shares, b) default under thesubordinated debt agreement, c) other factors related to a sale ofsubstantially all assets of the Company as defined in the agreement. As the

 

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redemption value isvariable, the Company recognizes changes in the estimated fair value eachquarter. Changes in fair value are adjusted through additional paid in capitalor retained earnings when additional paid in capital related to the fair valuechange has been reduced to zero. At October 31, 2005, the estimated redemptionrequirement is $252.

 

Cash flow andliquidity are discussed further below, and in the footnotes to our consolidatedfinancial statements.

 

The followingdetails our commercial commitments included in contractual obligations;

 
| **Other Commercial  Commitment** | ** ** | **Total Amount  Committed** | ** ** | **Outstanding at October  31, 2005** | ** ** | **Date of Expiration** | ** ** |
|----------------------------------|------------|-----------------------------|------------|--------------------------------------|------------|------------------------|------------|
|                             |       |                        |       |                                 |       |                   |       |
| Line of credit, bank             |       | $                           | 1,000      |                                 | $          | 787                    |       | May 1, 2006 |   |
| Line of credit, bank             |       | 5,000                       |       | 3,472                                |       | July 19,  2008         |       |
| Line of credit, bank             |       | 4,000                       |       | 2,672                                |       | October 1,  2005(1)    |       |
| Line of credit, related party    |       | 15,000                      |       | 12,904                               |       | January 1,  2007       |       |
| Line of credit, related party    |       | 5,000                       |       | 3,280                                |       | April 1,  2006         |       |
| Line of credit, related party    |       | 3,000                       |       | 2,304                                |       | April 15,  2012        |       |
| Line of credit, related party    |       | 5,500                       |       | 4,562                                |       | April 15,  2012        |       |
| Line of credit, related party    |       | 750                         |       | 580                                  |       | April 15,  2012        |       |
|                                  |            |                             |            |                                      |            |                        |            |  |  |

 

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(1)TheCompany is working with the bank on a temporary extension until the debt can berefinanced.

 

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

 

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

 

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

 

27

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The totalincrease (decrease) in cash is summarized as follows:

 
| ** **                                                   | ** ** | **Year Ended October 31,** | ** ** |
|--------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                   | ** ** | **2005**                   | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                         |       |                       |       |   |   |   |   |
| Net cash used in continuing operations                       |       | $                          | (7,115     | ) | $ | (4,600 | ) | $ | (2,604 | ) |
| Net cash used in investing activities                        |       | (2,256                     | )          | (2,509 | ) | (3,623 | ) |
| Net cash provided by financing activities                    |       | 9,334                      |       | 6,649 |   | 6,496 |   |
| Net cash flow provided by (used in)  discontinued operations |       | —                     |       | — |   | (41 | ) |
|                                                         |       |                       |       |   |   |   |   |
| Increase (decrease) in cash and cash  equivalents            |       | $                          | (37        | ) | $ | (460 | ) | $ | 228 |   |

 

### **Critical Accounting Policies**

 

Oursignificant accounting policies are summarized in the footnotes to ourfinancial statements.  Some of the mostcritical policies are also discussed below.

 

As a matter of policy, we review our majorassets for impairment.  Our majoroperating assets are accounts receivable, inventory, intangible assets andproperty and equipment.  We have nothistorically experienced significant bad debts expense, and we believe ourreserve for doubtful accounts of $760 should be adequate for any exposure toloss in our October 31, 2005 accounts receivable.  We have also established reserves forslow-moving and obsolete inventories and believe the reserve of $2,195 isadequate.  We depreciate our property andequipment and amortize intangible assets (except for goodwill) over theirestimated useful lives.  Propertyand equipment are reviewed for impairment when events and circumstancesindicate impairment factors may be present. During fiscal 2005 and 2004,certain equipment became idle due to the realignment of the plant at U.S.Rubber.  The equipment will be used inthe future for replacement of existing equipment as needed.  Due to the uniqueness of the equipment andthe high cost to buy new similar pieces, the net book value of $1,544 and $353for the years ended October 31, 2005 and 2004, respectively, was transferred toother assets under idle equipment and is subject to impairment valuation.Accordingly, we continue to analyze the Danzer and US Rubber assets forimpairment in conjunction with our analysis of the continuing operations ofthese facilities. In assessing the recoverability of our property andequipment, we must make various assumptions regarding estimated future cashflows and other factors in determining the fair values of the respectiveassets. If these estimates or related assumptions change in the future, we maybe required to record impairment charges for these assets in future periods.Any such resulting impairment charges could be material to our results ofoperations. As of October 31, 2005 we determined there is no impairment of ourproperty and equipment.

 

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

 

The initial cost of coaches acquired is depreciated over astraight-line basis to a salvage value of 38% of original cost. Subsequent enhancementsand refurbishments of coaches are depreciated over five years using thestraight-line method. The age of coaches in our fleet range from less than oneyear to eleven years, with an average age of approximately six years. Actualvalue of coaches after 15 years is dependent on several factors including thelevel of maintenance and the market conditions at the time of disposal. Werecently

 

28

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disposed of two coaches which did not result in a material gain orloss.  We continue to evaluate ourestimates with respect to the actual depreciation of such vehicles based onmarket conditions and our experience in disposals when they occur. Depreciationexpense related to the coaches for the year ended October 31, 2005 wasapproximately $797. If future factors indicate that our salvage value on thecoaches should be reduced to 20%, depreciation expense would have to beincreased approximately $177 to $974. If it is determined that the coaches haveno salvage value, estimated depreciation expense for the coaches for the yearended October 31, 2005 would have approximated $1,170.

 

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

 

With the acquisition of Classic effective May 1, 2004, we issued170,451 shares of our common stock to the former owners of Classic. Thepurchase agreement for Classic included a provision that gives the sellers theright to have us redeem these shares at a price of $6.5970 per share withinfive years of the date of issuance of the shares. The sellers have the right topartially redeem these shares in increments of 10,000 or more shares pertransaction. The agreement also has an automatic termination provision if theCompany’s shares have traded at a closing price of greater than $7.33 per sharefor any consecutive period of 60 trading days during the period of timecommencing on the date there are no restrictions on the seller’s sale of sharesand ending on the fifth anniversary of the agreement. Subsequent to October 31,2005 these shares were contributed under a subscription agreement to Black RockAcquisition Corp. in exchange for the same number of Black Rock shares. Thistransaction was also part of the “going private” transaction as fully disclosedin the schedule 13-E3 filing as of January 30, 2006.

 

### **Contingencies**

 

The Company isparty to ordinary litigation incidental to its business.  No current pending litigation is expected tohave a material adverse effect on results of operations, financial condition orcash flows.

 

## **Item 7A.**               Quantitativeand Qualitative Disclosures about market Risk

 

Due to thenature of our operations and the highly leveraged acquisitions incurred withvariable debt we are subject to exposures that arise from fluctuations ininterest rates. To manage the volatility relating to this exposure, we evaluateour exposures and attempt to minimize any negative effects by refinancing.

 

29

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OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

(in thousands except per share and share data)

 

## **ITEM 8.   FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA.**

 

#### **REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

Board of Directors andStockholders

Obsidian Enterprises, Inc. andSubsidiaries

Indianapolis, Indiana

 

We have audited theaccompanying consolidated balance sheet of Obsidian Enterprises, Inc. andSubsidiaries as of October 31, 2005 and the related consolidated statements of operations,stockholders’ equity (deficit) and comprehensive loss, and cash flows for theyear then ended.  These financialstatements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements based on our audit.  The financial statements of ObsidianEnterprises, Inc. and Subsidiaries, as of October 31, 2004, were audited byother auditors whose report dated February 4, 2005, included an explanatory paragraphthat described the assumption the Company would continue even though it hadgoing concern even though it had suffered recurring losses from operations,total liabilities exceeded total assets, and had not complied with the terms ofits debt financing agreements as discussed in the Summary of SignificantAccounting Policies in the financial statements.

 

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States).  Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement.  The Company is not required to have, nor werewe engaged to perform, an audit of its internal control over financialreporting.  Our audits included considerationof internal control over financial reporting as a basis for designing auditprocedures that are appropriate in the circumstances, but not for the purposeof expressing an opinion on the effectiveness of the Company’s internal controlover financial reporting. Accordingly, we express no such opinion.  An audit also includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that our auditprovides a reasonable basis for our opinion.

 

In our opinion, the 2005consolidated financial statements referred to above present fairly, in all materialrespects, the financial position of Obsidian Enterprises, Inc. and Subsidiariesat October 31, 2005, and the results of its operations and its cash flows forthe year then ended, in conformity with accounting principles generallyaccepted in the United States of America.

 

The accompanying 2005 consolidated financial statements have beenprepared assuming that the Company will continue as a going concern.  As discussed in the Summary of SignificantAccounting Policies, the consolidated financial statements of the Companyreflects recurring losses from operations, current liabilities in excess ofcurrent assets, violation of certain loan covenants,  and shareholders equity deficit.  This raises substantial doubt about theCompany’s ability to continue as a going concern.  Realization of assets and satisfaction ofliabilities in the ordinary course of business is dependent upon the Company’sability to generate sufficient cash flow to meet its obligations on a timelybasis, successfully refinancing certain obligations and ability to obtainadditional borrowings.  Management’splans in regard to these matters are also described in the Summary ofSignificant Accounting Policies.  Thefinancial statements do not include any adjustments that might result from theoutcome of these uncertainties.

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

30

----

 

Somerset CPAs, P.C.

 

Indianapolis, Indiana

February 10, 2006

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

31

----

 
| ** **                                                                                           | ** ** | **October 31,  2005** | ** ** | **October 31,  2004** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
|                                                                                                 |       |                       |       |                       |       |
| **Assets**                                                                                           |       |                       |       |                       |       |
|                                                                                                 |       |                       |       |                       |       |
| **Current assets:**                                                                                  |       |                       |       |                       |       |
| Cash and cash equivalents                                                                            |       | $                          | 651        |                       | $          | 688 |   |
| Marketable securities                                                                                |       | 75                         |       | 74                         |       |
| Accounts receivable, net of  allowance for doubtful accounts of $760 for 2005 and $743 for 2004      |       | 3,961                      |       | 5,190                      |       |
| Accounts receivable, related  parties (Note 15)                                                      |       | 157                        |       | 71                         |       |
| Inventories, net (Note 6)                                                                            |       | 8,096                      |       | 8,101                      |       |
| Prepaid expenses and other  assets                                                                   |       | 973                        |       | 980                        |       |
| Deferred income tax assets  (Note 14)                                                                |       | 1,390                      |       | 1,209                      |       |
|                                                                                                 |       |                       |       |                       |       |
| **Total  current assets**                                                                            | ** ** | 15,303                     |       | 16,313                     | ** ** |
|                                                                                                 |       |                       |       |                       |       |
| **Property, plant and  equipment, net**(Note  7)                                                     |       | 20,941                     |       | 23,350                     |       |
|                                                                                                 |       |                       |       |                       |       |
| **Other assets:**                                                                                    |       |                       |       |                       |       |
| Goodwill not subject to  amortization                                                                |       | 7,055                      |       | 7,055                      |       |
| Intangible assets (Notes 3 and  5):                                                                  |       |                       |       |                       |       |
| Noncompete agreements, less  accumulated amortization of $1,029 for 2005 and $783 for 2004           |       | 625                        |       | 871                        |       |
| Trade name and customer  relations, less accumulated amortization of $508 for 2005 and $390 for 2004 |       | 773                        |       | 891                        |       |
| Deferred debt costs, less  accumulated amortization of $603 for 2005 and $293 for 2004               |       | 97                         |       | 277                        |       |
| Idle Equipment                                                                                       |       | 1,897                      |       | 353                        |       |
| Other                                                                                                |       | 43                         |       | 13                         |       |
|                                                                                                 |       |                       |       |                       |       |
|                                                                                                 |       | $                          | 46,734     |                       | $          | 49,123 |   |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

32

----

 
| ** **                                                                                                                  | ** ** | **October 31,  2005** | ** ** | **October 31,  2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| **Liabilities and Stockholders’  Deficit**                                                                             |       |                       |       |                       |       |
|                                                                                                                        |       |                       |       |                       |       |
| **Current liabilities:**                                                                                                    |       |                       |       |                       |       |
| Current portion of long-term  debt (Note 8)                                                                                 |       | $                          | 20,914     |                       | $          | 18,376 |   |
| Current portion of long-term  debt, related parties (Note 8 and 15)                                                         |       | 4,115                      |       | 7                          |       |
| Accounts payable, trade                                                                                                     |       | 3,521                      |       | 5,242                      |       |
| Accounts payable, related  parties (Note 15)                                                                                |       | 2,592                      |       | 1,268                      |       |
| Accrued compensation                                                                                                        |       | 786                        |       | 830                        |       |
| Accrued expenses                                                                                                            |       | 1,505                      |       | 1,287                      |       |
| Customer deposits                                                                                                           |       | 159                        |       | 87                         |       |
|                                                                                                                        |       |                       |       |                       |       |
| **Total current liabilities**                                                                                               |       | 33,592                     |       | 27,097                     |       |
|                                                                                                                        |       |                       |       |                       |       |
| **Accounts payable,** related parties (Note 15)                                                                             |       | 556                        |       | 556                        |       |
|                                                                                                                        |       |                       |       |                       |       |
| **Long-term debt,** net of current portion (Note 8)                                                                         |       | 3,637                      |       | 8,547                      |       |
|                                                                                                                        |       |                       |       |                       |       |
| **Long-term debt,**net of current portion, related parties (Note 8  and 15)                                                 |       | 27,058                     |       | 20,299                     |       |
|                                                                                                                        |       |                       |       |                       |       |
| **Deferred income tax  liabilities**(Note  14)                                                                              |       | 4,530                      |       | 4,582                      |       |
|                                                                                                                        |       |                       |       |                       |       |
| **Minority interest**                                                                                                       |       | 214                        |       | 244                        |       |
|                                                                                                                        |       |                       |       |                       |       |
| **Redeemable stock**(Note 11):                                                                                              |       |                       |       |                       |       |
| Common stock, 324,933 shares outstanding  for 2005 and 2004                                                                 |       | 1,377                      |       | 1,567                      |       |
|                                                                                                                        |       |                       |       |                       |       |
| **Stockholders’ deficit (Note  12):**                                                                                  |       |                       |       |                       |       |
| Common stock, par value $.0001  per share; 10,000,000 shares authorized; 3,109,333 issued and outstanding in  2005 and 2004 |       | 1                          |       | 1                          |       |
| Additional paid-in capital                                                                                                  |       | 13,505                     |       | 13,315                     |       |
| Accumulated other comprehensive  loss                                                                                       |       | (39                        | )          | (40                        | )          |
| Accumulated deficit                                                                                                         |       | (37,697                    | )          | (27,045                    | )          |
|                                                                                                                        |       |                       |       |                       |       |
| **Total stockholders’ deficit**                                                                                        |       | (24,230                    | )          | (13,769                    | )          |
|                                                                                                                        |       |                       |       |                       |       |
|                                                                                                                        |       | $                          | 46,734     |                       | $          | 49,123 |   |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

33

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OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands except per share and share data)

 
| ** **                                                                            | ** ** | **Year Ended October 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                            | ** ** | **2005**                        | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                  |       |                            |       |   |   |   |   |
| Net sales                                                                             |       | $                               | 65,774     |   | $ | 64,360 |   | $ | 59,295 |   |
|                                                                                  |       |                            |       |   |   |   |   |
| Cost of sales                                                                         |       | 61,306                          |       | 57,084 |   | 51,736 |   |
|                                                                                  |       |                            |       |   |   |   |   |
| **GROSS PROFIT**                                                                      |       | 4,468                           |       | 6,556 |   | 7,559 |   |
|                                                                                  |       |                            |       |   |   |   |   |
| Selling, general and  administrative expenses                                         |       | (10,265                         | )          | (10,827 | ) | (8,537 | ) |
| Insurance settlement                                                                  |       | 2                               |       | 404 |   | — |   |
|                                                                                  |       |                            |       |   |   |   |   |
| **Loss from operations**                                                              |       | (5,795                          | )          | (3,867 | ) | (978 | ) |
|                                                                                  |       |                            |       |   |   |   |   |
| *Other income (expense):*                                                             |       |                            |       |   |   |   |   |
| Interest expense (Note 8)                                                             |       | (5,160                          | )          | (4,165 | ) | (3,547 | ) |
| Other income                                                                          |       | 142                             |       | 61 |   | 17 |   |
| Other expense                                                                         |       | (96                             | )          | (13 | ) | (81 | ) |
|                                                                                  |       |                            |       |   |   |   |   |
| **Loss before income taxes and  discontinued operations**                             |       | (10,909                         | )          | (7,984 | ) | (4,589 | ) |
|                                                                                  |       |                            |       |   |   |   |   |
| Income tax benefit (Note 14)                                                          |       | 226                             |       | 23 |   | 937 |   |
|                                                                                  |       |                            |       |   |   |   |   |
| **Loss from continuing  operations before discontinued operations**                   |       | (10,683                         | )          | (7,961 | ) | (3,652 | ) |
|                                                                                  |       |                            |       |   |   |   |   |
| Loss from discontinued  operations, net of tax (Note 4)                               |       | —                          |       | — |   | (49 | ) |
|                                                                                  |       |                            |       |   |   |   |   |
| Loss before minority interest                                                         |       | (10,683                         | )          | (7,961 | ) | (3,701 | ) |
|                                                                                  |       |                            |       |   |   |   |   |
| Minority interest                                                                     |       | 31                              |       | (72 | ) | (172 | ) |
|                                                                                  |       |                            |       |   |   |   |   |
| **Net loss**                                                                          |       | $                               | (10,652    | ) | $ | (8,033 | ) | $ | (3,873 | ) |
|                                                                                  |       |                            |       |   |   |   |   |
| Basic and diluted loss per  share attributable to common shareholders (Note 2):       |       |                            |       |   |   |   |   |
| From continuing operations                                                            |       | $                               | (3.37      | ) | $ | (2.47 | ) | $ | (5.87 | ) |
| Discontinued operations, net of  tax                                                  |       | —                          |       | — |   | (.07 | ) |
|                                                                                  |       |                            |       |   |   |   |   |
| Net loss per share                                                                    |       | $                               | (3.37      | ) | $ | (2.47 | ) | $ | (5.94 | ) |
|                                                                                  |       |                            |       |   |   |   |   |
| Weighted average common and  common equivalent shares outstanding, basic and diluted: |       | 3,109,333                       |       | 2,699,252 |   | 720,157 |   |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

34

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OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) ANDCOMPREHENSIVE LOSS

(dollars in thousands)

 
| ** **                                                                                            | ** ** | ** **        | ** ** | ** **       | ** ** | ** **          | ** ** | ** **                    | ** ** | ** **                    | ** ** | ** **        | ** ** | ** **      | ** ** | ** **  | ** ** | **Accumulated**   | ** ** | ** **  | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|-------------------|------------|------------------|------------|---------------------|------------|-------------------------------|------------|-------------------------------|------------|-------------------|------------|-----------------|------------|-------------|------------|-------------------|------------|-------------|------------|------------|------------|
| ** **                                                                                            | ** ** | ** **        | ** ** | ** **       | ** ** | ** **          | ** ** | **Series C Convertible** | ** ** | **Series D Convertible** | ** ** | **Additional**    | ** ** | **Other**       | ** ** | ** **  | ** ** | ** **        | ** ** |
| ** **                                                                                            | ** ** | **Comprehensive** | ** ** | **Common Stock** | ** ** | **Preferred Stock** | ** ** | **Preferred Stock**           | ** ** | **Paid-in**                   | ** ** | **Comprehensive** | ** ** | **Accumulated** | ** ** | ** **  | ** ** |
| ** **                                                                                            | ** ** | **Loss**          | ** ** | **Shares**       | ** ** | **Amount**          | ** ** | **Shares**                    | ** ** | **Amount**                    | ** ** | **Shares**        | ** ** | **Amount**      | ** ** | **Capital** | ** ** | **Income (Loss)** | ** ** | **Deficit** | ** ** | **Total**  | ** ** |
|                                                                                                  |       |              |       |             |       |                |       |                          |       |                          |       |              |       |            |       |        |       |              |       |        |       |       |       |
| **Balance** at October 31, 2002, as previously reported                                          |       | ** **        |       | 720,157          |       | 1                   |       | 3,982,193                     |       | 5                             |       | 88,330            |       | —          |       | 10,186      |       | (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                                               |       | —            |       | —           |       | —              |       | —                        |       | —                        |       | —            |       | —          |       | (96         | )          | —            |       | —      |       | (96        | )          |
| Extension of stock options                                                                            |       | —            |       | —           |       | —              |       | —                        |       | —                        |       | —            |       | —          |       | 30          |       | —            |       | —      |       | 30         |       |
| Assignment of 16,072 shares of Series D mandatory redeemable  Preferred Stock                    |       | —            |       | —           |       | —              |       | —                        |       | —                        |       | 16,072            |       | —          |       | 337         |       | —            |       | —      |       | 337        |       |
| Issuance of 14,285 shares of Series D Preferred Stock associated  with Obsidian Capital Partners |       | —            |       | —           |       | —              |       | —                        |       | —                        |       | 14,285            |       | —          |       | 250         |       | —            |       | —      |       | 250        |       |
| Loss on available-for-sale marketable securities                                                      |       | 49                |       | —           |       | —              |       | —                        |       | —                        |       | —            |       | —          |       | —      |       | 49                |       | —      |       | 49         |       |
| Fair value adjustment on redeemable Preferred Stock                                                   |       | —            |       | —           |       | —              |       | —                        |       | —                        |       | —            |       | —          |       | (104        | )          | —            |       | (299        | )          | (403       | )          |
| Prior period adjustment                                                                               |       | —            |       | —           |       | —              |       | —                        |       | —                        |       | —            |       | —          |       | —      |       | —            |       |        |       |       |       |
| 2003 net loss                                                                                         |       | (3,873            | )          | —           |       | —              |       | —                        |       | —                        |       | —            |       | —          |       | —      |       | —            |       | (3,873      | )          | (3,873     | )          |
|                                                                                                  |       |              |       |             |       |                |       |                          |       |                          |       |              |       |            |       |        |       |              |       |        |       |       |       |
| Total comprehensive loss                                                                              |       | $                 | (3,824     | )                |       |                |       |                          |       |                          |       |              |       |            |       |        |       |              |       |        |       |       |       |   |
|                                                                                                  |       |              |       |             |       |                |       |                          |       |                          |       |              |       |            |       |        |       |              |       |        |       |       |       |
| **Balance**at  October 31, 2003, as restated                                                     |       | ** **        |       | 720,157          |       | 1                   |       | 3,982,193                     |       | 5                             |       | 118,687           |       | —          |       | 11,745      |       | —            |       |        |       |       |       |
|                                                                                                  |       |              |       |             |       |                |       |                          |       |                          |       |              |       |            |       |        |       |              |       |        |       |       |       |
| Assignment of 16,071 shares of Series D mandatory redeemable  Preferred Stock                    |       | $                 | —     |             | —     |                | —     |                          | —     |                          | —     |              | 16,071     |            | —     |        | 337        |              | —     |        | —     |       | 337        |   |
| Issue Common Stock shares for the purchase of Classic                                                 |       | —            |       | 170,451          |       | —              |       | —                        |       | —                        |       | —            |       | —          |       | 1,250       |       | —            |       | —      |       | 1,250      |       |
| Reclassification to redeemable Preferred Stock                                                        |       | —            |       | —           |       | —              |       | —                        |       | —                        |       | —            |       | —          |       | (1,125      | )          | —            |       | —      |       | (1,125     | )          |
| Extension of stock options                                                                            |       | —            |       | —           |       | —              |       | —                        |       | —                        |       | —            |       | —          |       | 40          |       | —            |       | —      |       | 40         |       |
| Conversion of Series C and Series D convertible Preferred  Stock to common stock            |       | —            |       | 2,218,725        |       | —              |       | (3,982,193                    | )          | (5                            | )          | (134,758          | )          | —          |       | 5           |       | —            |       | —      |       | —     |       |
| Loss on available-for-sale marketable securities                                                      |       | (40               | )          | —           |       | —              |       | —                        |       | —                        |       | —            |       | —          |       | —      |       | (40               | )          | —      |       | (40        | )          |
| Fair value adjustment on redeemable Preferred Stock                                                   |       | —            |       | —           |       | —              |       | —                        |       | —                        |       | —            |       | —          |       | 1,063       |       | —            |       | 298         |       | 1,361      |       |
| 2004 net loss                                                                                         |       | (8,033            | )          | —           |       | —              |       | —                        |       | —                        |       | —            |       | —          |       | —      |       | —            |       |        |       |       |       |
|                                                                                                  |       |              |       |             |       |                |       |                          |       |                          |       |              |       |            |       |        |       |              |       |        |       |       |       |
| Total comprehensive loss                                                                              |       | $                 | (8,073     | )                |       |                |       |                          |       |                          |       |              |       |            |       |        |       |              |       |        |       |       |       |   |
|                                                                                                  |       |              |       |             |       |                |       |                          |       |                          |       |              |       |            |       |        |       |              |       |        |       |       |       |
| **Balance** at  October 31, 2004                                                                 |       | ** **        |       | 3,109,333        |       | 1                   |       | —                        |       | —                        |       | —            |       | —          |       | 13,315      |       | (40               | )          |        |       |       |       |
|                                                                                                  |       |              |       |             |       |                |       |                          |       |                          |       |              |       |            |       |        |       |              |       |        |       |       |       |
| Gain on available-for-sale marketable securities                                                      |       | $                 | 1          |             | —     |                | —     |                          | —     |                          | —     |              | —     |            | —     |        | —     |              | 1          |        | —     |       | 1          |   |
| Fair value adjustment on redeemable Preferred Stock                                                   |       | —            |       | —           |       | —              |       | —                        |       | —                        |       | —            |       | —          |       | 190         |       | —            |       | —      |       | 190        |       |
| 2005 net loss                                                                                         |       | (10,652           | )          | —           |       | —              |       | —                        |       | —                        |       | —            |       | —          |       | —      |       | —            |       | (10,652     | )          | (10,652    | )          |
|                                                                                                  |       |              |       |             |       |                |       |                          |       |                          |       |              |       |            |       |        |       |              |       |        |       |       |       |
| Total comprehensive loss                                                                              |       | $                 | (10,651    | )                |       |                |       |                          |       |                          |       |              |       |            |       |        |       |              |       |        |       |       |       |   |
| **Balance**at  October 31, 2005                                                                  |       | ** **        |       | 3,109,333        |       | 1                   |       | —                        |       | —                        |       | —            |       | —          |       | $           | 13,505     |              | $          | (39         | )          |       |       |   |   |   |   |
|                                                                                                       |            |                   |            |                  |            |                     |            |                               |            |                               |            |                   |            |                 |            |             |            |                   |            |             |            |            |            |  |  |  |  |  |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

35

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OBSIDIAN ENTERPRISES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 
| ** **                                                                                           | ** ** | **Year Ended October 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                           | ** ** | **2005**                        | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                                 |       |                            |       |   |   |   |   |
| **Cash flow from operating  activities from continuing operations:**                                 | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Loss from continuing operations                                                                      |       | $                               | (10,652    | ) | $ | (8,033 | ) | $ | (3,824 | ) |
| Adjustments to reconcile loss  from continuing operations to net cash used in operating activities:  |       |                            |       |   |   |   |   |
| Depreciation and amortization                                                                        |       | 3,573                           |       | 3,499 |   | 2,850 |   |
| Loss (gain) on sale of  equipment                                                                    |       | 90                              |       | (352 | ) | 10 |   |
| Loss on marketable securities                                                                        |       | —                          |       | — |   | 72 |   |
| Stock-based compensation                                                                             |       | —                          |       | 40 |   | 30 |   |
| Minority interest                                                                                    |       | (31                             | )          | 72 |   | 172 |   |
| Accretion of interest                                                                                |       | 402                             |       | 297 |   | 394 |   |
| Deferred income taxes                                                                                |       | (233                            | )          | (98 | ) | (1,003 | ) |
| Changes in operating assets and  liabilities net of effect of acquisitions: Accounts receivable, net |       | 1,229                           |       | (1,222 | ) | (357 | ) |
| Inventories, net                                                                                     |       | 5                               |       | (595 | ) | (140 | ) |
| Other assets                                                                                         |       | (23                             | )          | (468 | ) | (54 | ) |
| Accounts payable, trade                                                                              |       | (1,721                          | )          | 2,264 |   | (709 | ) |
| Accrued expenses                                                                                     |       | 174                             |       | 195 |   | (96 | ) |
| Customer deposits                                                                                    |       | 72                              |       | (199 | ) | 51 |   |
|                                                                                                 |       |                            |       |   |   |   |   |
| **Net cash used in operating  activities from continuing operations**                                |       | (7,115                          | )          | (4,600 | ) | (2,604 | ) |
|                                                                                                 |       |                            |       |   |   |   |   |
| **Cash flows from investing  activities from continuing operations:**                                |       |                            |       |   |   |   |   |
| Capital expenditures                                                                                 |       | (2,700                          | )          | (1,451 | ) | (3,654 | ) |
| Proceeds from sale of equipment                                                                      |       | 444                             |       | 664 |   | 31 |   |
| Cash payments in connection  with the purchase of Classic, net of cash acquired                      |       | —                          |       | (1,722 | ) | — |   |
|                                                                                                 |       |                            |       |   |   |   |   |
| **Net cash used in investing  activities from continuing operations**                                |       | (2,256                          | )          | (2,509 | ) | (3,623 | ) |
|                                                                                                      |            |                                 |            |  |  |  |  |  |  |  |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

36

----

 
| ** **                                                                          | ** ** | **Year Ended October 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                          | ** ** | **2005**                        | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                |       |                            |       |   |   |   |   |
| **Cash flows from financing  activities from continuing operations:**               | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Advances from (repayments to)  related parties                                      |       | 1,410                           |       | 777 |   | (885 | ) |
| Net borrowings (repayments) on  lines of credit                                     |       | (52                             | )          | 673 |   | 1,352 |   |
| Borrowings on long-term debt                                                        |       | 500                             |       | 1,292 |   | 2,928 |   |
| Borrowings on long-term debt,  related parties                                      |       | 11,414                          |       | 7,042 |   | 6,811 |   |
| Principal repayments on  long-term debt                                             |       | (3,198                          | )          | (2,495 | ) | (3,592 | ) |
| Principal repayments on  long-term debt, related parties                            |       | (600                            | )          | (944 | ) | (273 | ) |
| Debt issuance costs                                                                 |       | (140                            | )          | (46 | ) | (95 | ) |
| Proceeds from capital  contributions and sale of common stock                       |       | —                          |       | 350 |   | 250 |   |
|                                                                                |       |                            |       |   |   |   |   |
| **Net cash provided by  financing activities from continuing operations**           |       | 9,334                           |       | 6,649 |   | 6,496 |   |
|                                                                                |       |                            |       |   |   |   |   |
| Net cash flow provided by (used  in) discontinued operations                        |       | —                          |       | — |   | (41 | ) |
|                                                                                |       |                            |       |   |   |   |   |
| Increase (decrease) in cash and  cash equivalents                                   |       | (37                             | )          | (460 | ) | 228 |   |
|                                                                                |       |                            |       |   |   |   |   |
| **Cash and cash equivalents,**beginning of year                                     |       | $                               | 688        |   | $ | 1,148 |   | $ | 920 |   |
| ** **                                                                          | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Cash and cash equivalents,**end of year                                           |       | $                               | 651        |   | $ | 688 |   | $ | 1,148 |   |
|                                                                                |       |                            |       |   |   |   |   |
| **Interest paid**                                                                   |       | $                               | 2,551      |   | $ | 2,085 |   | $ | 2,956 |   |
|                                                                                |       |                            |       |   |   |   |   |
| **Taxes paid**                                                                      |       | $                               | 68         |   | $ | 75 |   | $ | 96 |   |
|                                                                                |       |                            |       |   |   |   |   |
| Noncash investing and financing  activities:                                        |       |                            |       |   |   |   |   |   |   |   |
| Contribution to capital from  sale of Champion to related party                     |       | $                               | —     |   | $ | — |   | $ | 1,142 |   |
| Issuance of redeemable stock in  conjunction with the sale of Champion              |       | $                               | —     |   | $ | — |   | $ | 675 |   |
| Assignment and assumption of  redeemable stock to Fair Holdings                     |       | $                               | —     |   | $ | 337 |   | $ | 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 |   |
| Coaches and equipment purchased  with debt                                          |       | $                               | —     |   | $ | — |   | $ | 221 |   |
| Fair value changes of  redeemable stock                                             |       | $                               | 190        |   | $ | 1,361 |   | $ | 403 |   |
| Stock issued in purchase of  Classic                                                |       | $                               | —     |   | $ | 1,250 |   | $ | — |   |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

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1.          DESCRIPTION OF BUSINESS AND CHANGE OFNAME

 

Obsidian Enterprises, Inc. (“Obsidian Enterprises”), formerlyDanzer Corporation, was reorganized through an acquisition with U.S. RubberReclaiming, Inc. and Related Entities (“U.S. Rubber Companies”), which wasconsummated on June 21, 2001 (the “Effective Date”).  The reorganization of Obsidian Enterprisesand U.S. Rubber Companies was accounted for as a reverse merger as the shareholdersof the U.S. Rubber Companies owned a majority of the outstanding stock ofObsidian Enterprises subsequent to the acquisition.  For accounting purposes, U.S. RubberReclaiming, Inc. (“U.S. Rubber”) is deemed to have acquired ObsidianEnterprises.

 

The resulting entities, considered accounting subsidiaries of U.S.Rubber (the accounting acquirer) and legal subsidiaries of Obsidian Enterprises(formerly Danzer) after the reorganization are as follows:

 

Obsidian Enterprises, Inc. (“Obsidian Enterprises”, formerlyDanzer, the legal acquirer), a holding company.

 

Butyl-Rubber Reclaiming

 

•                  U.S. RubberReclaiming, Inc. (“U.S. Rubber”, the accounting acquirer), which isengaged in reclaiming scrap butyl rubber into butyl reclaim for resale tomanufacturers of rubber products.

 

Coach Leasing

 

•                  Pyramid Coach, Inc.(“Pyramid”), which is engaged in the leasing of coaches, designed and fittedout for use for travel by country, rock bands and other business enterprises,primarily on weekly to monthly leases. The coach leasing segment also includesthe assets, liabilities, equity and results of operations of DW Leasing, LLC (“DWLeasing”), formed December 1, 2002, Obsidian Leasing Company, Inc. (“ObsidianLeasing”), formed November 1, 2001, and DC Investments Leasing, LLC (“DCInvestments Leasing), formed December 13, 2002.  DW Leasing and DC Investments Leasing arecontrolled by individuals who are also controlling shareholders of ObsidianEnterprises and, accordingly, Pyramid. In addition, these entities meet the requirements for consolidationunder FASB Interpretation No. 46 (FIN No. 46), *Consolidationof Variable Interest Entities*, *an interpretation ofAccounting Research Bulletin No. 51*.  DW Leasing, Obsidian Leasing and DCInvestments Leasing also own the majority of the coaches operated byPyramid.  All intercompany transactionsare eliminated in consolidation.

 

Trailer and Related Transportation Equipment Manufacturing

 

•                  UnitedAcquisition, Inc., which we operate as United Expressline, Inc. (“United”),manufactures and sells general use cargo trailers and specialty trailers usedin the racing industry and for other special purposes.

 

•                  DanzerIndustries, Inc. (“Danzer”), which is principally engaged in the design,manufacture and sale of truck bodies and cargo trailers.

 

•                  ClassicManufacturing, Inc. (“Classic”) was acquired in May 2004. Classicmanufactures steel-framed cargo, fifth wheel, gooseneck, motorcycle, race,snowmobile and stacker/lift trailers and open trailers used in the landscapeindustry.

 

•                  Champion Trailer, Inc.(“Champion”) manufactures and sells transport trailers to be used primarily inthe auto racing industry.  The Company’sBoard of Directors agreed to a plan to dispose of Champion as further describedin Note 4.  The sale of Champion was completedJanuary 30, 2003.  Accordingly, theoperations of Champion are classified as discontinued operations in theaccompanying financial statements.

 

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2.          SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES

 

## **PRINCIPLESOF CONSOLIDATION:**

 

The accompanying consolidated financial statements present the accountsof Obsidian Enterprises and its wholly owned subsidiaries described in Note 1for the periods ended October 31, 2005, 2004 and 2003.  The entities are collectively referred toherein as the “Company.”  All significantintercompany transactions and balances have been eliminated inconsolidation.  The fiscal 2005 and 2004results of operations include the operations of Classic from May 1, 2004(date of acquisition).

 

## **BASISOF PRESENTATION:**

 

The Company’s financial statements have been presented on the basisthat it is a going concern which contemplates the realization of assets andsatisfaction of liabilities in the normal course of business.  Realization of assets and satisfaction ofliabilities in the ordinary course of business is dependent upon theconsolidated entity of Obsidian ability to generate sufficient cash flow,successfully refinancing certain obligations and ability to obtain additionalborrowings. The financial statements do not include any adjustments that mightresult from the outcome of these uncertainties. Obsidian Enterprises’ management has taken several actions to ensurethat the Company will continue as a going concern, including expense reductionand operational efficiencies through the closing of a plant facility and theelimination of the Truck body line within its Transportation and equipmentmanufacturing segment, invested in new capital equipment to improve operationalefficiencies within its rubber reclamation segment and increased sales priceson certain products. In addition, Obsidian Enterprises is in the final stagesof going private which will provide a substantial reduction in administrativeexpenses. Management believes these actions will contribute toward achievingprofitability.

 

## **REVENUERECOGNITION:**

 

Sales are recorded when title passes to the customer (FOB shippingpoint) or when services are performed in accordance with agreements withcustomers.  The Company accumulates costsof trailers in work-in-process inventory until completion.  The Company recognizes repair revenue whenservices are provided to the customer. Shipping and handling charges billed to the customers are included innet sales.  Shipping and handling costs incurredby the Company are included in selling, general, and administrativeexpenses.  Shipping and handling costsamounted to $138, $153, and $94 for the years ended October 31, 2005,2004, and 2003, respectively.

 

For operating leases, income is recognized on a straight-line basisover the lease term.  Recognition ofincome is suspended when management determines that collection of future incomeis not probable (generally after 90 days past due).  Recognition is resumed if the receivablebecomes contractually current and the collection of amounts is again consideredprobable.  Operating lease equipment iscarried at cost less accumulated depreciation and is depreciated to estimatedresidual value using the straight-line method over the lease term or projectedeconomic life of the asset.

 

## **FAIRVALUE OF FINANCIAL INSTRUMENTS:**

 

The carrying amounts of cash and cash equivalents, receivables,accounts payable, and accrued liabilities approximate fair value because of theshort maturity of these instruments.  Thecarrying amount of investments approximates fair market value.  The carrying amount of variable rate debt andfixed rate debt to unrelated parties approximates fair value, as a result ofthe current interest rates paid on the Company’s borrowings being at market.The fair value of fixed rate debt to related parties is impractical todetermine based on the nature of the obligations and the relationship to thelender.  The carrying value of redeemablestock approximates market value determined based on the thirty-day averageclosing price of the Company’s common stock.

 

39

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## **MARKETABLE SECURITIES:**

 

The Company classifies its marketable securities as available forsale.  The securities consist of equitysecurities, which are stated at fair value, with net unrealized gains or losseson the securities recorded as accumulated other comprehensive income (loss) instockholders’ equity (deficit).  Realizedgains and losses are included in earnings and are derived using the specificidentification method for determining the cost of the securities.  Decreases in the market value of thesecurities considered to be other than temporary are recorded in earnings.  For the year ended October 31, 2003, theCompany recorded $72 in the statement of operations related to the permanentdecline in the fair value of the marketable securities. This amount includes areclassification of $49 from accumulated other comprehensive income forunrealized losses previously recorded.

 

## **PROPERTY,PLANT AND EQUIPMENT:**

 

Building, equipment, furniture and fixtures are recorded at historicalcost with depreciation taken using primarily the straight-line method overtheir estimated useful lives. Life ranges for property and equipment are asfollows:

 

| Buildings and improvements    |   | 8 – 40 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 luxurycoaches (generally a 45 foot bus shell converted to a luxury coach) that areleased to entertainment personalities, corporate groups and other travelingprograms. The coach fleet is comprised of a mixture of vehicles ranging from new(the most recent acquired in January 2004) to approximately 11 years old.The average age of the coaches is six years. They can be segregated as follows:

 

| **Age**    | ** ** | ** ** |
|------------|------------|------------|
| 1-3 years  |       | 7 coaches  |
| 4-6 years  |       | 14 coaches |
| 7-11 years |       | 15 coaches |

 

The initial cost of coaches acquired is depreciated over astraight-line basis to a salvage value of 38% of original cost. Subsequentenhancements and refurbishments of coaches are depreciated over five yearsusing the straight-line method. Actual value of coaches after 15 years isdependent on several factors including the level of maintenance and the marketconditions at the time of disposal. During fiscal 2005, the Company disposed oftwo coaches which did not result in a material gain or loss. Accordingly,management continues to evaluate our estimates with respect to the actualdepreciation of such vehicles based on market conditions and management’sexperience in disposals when they occur. Should future factors indicate thecurrent depreciation policy is not adequate, the Company will adjust thedepreciation rates, and such adjustments may have an adverse impact on theCompany’s results of operations.

 

## **CONCENTRATIONOF CREDIT RISK:**

 

The Company maintains cash balances at various banks, which at varioustimes throughout the year exceeded the Federal Deposit Insurance Corporation(FDIC) limit.

 

Financial instruments which potentially subject the Company toconcentrations of credit risk consist principally of trade receivables. TheCompany’s customers are not concentrated in any one specific

 

40

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geographic region.  The creditrisk associated with trade receivables within the various industries may beaffected by changes in economic or other conditions and may, accordingly,impact the Company’s overall credit risk. The Company reviews a customer’scredit history before extending credit. Allowances for doubtful accounts are established based on specificcustomer risk, historical trends and other information. Three of the Company’sreclaimed butyl rubber customers accounted for a substantial portion of theCompany’s butyl rubber sales in 2005:

 

•                  Michelin:  42.8 %

 

•                  KelleySpringfield: 26.3%

 

•                  Tyco Adhesives:16.1%

 

The loss of any of the largest customers would materially and adverselyaffect our revenues.

 

## **ORGANIZEDLABOR:**

 

Certain of Danzer’s employees, which represent 17% of total employees,are currently represented by the United Brotherhood of Carpenters and Joinersof America, Local Union No. 340, whose contract is in effect to January 2008.  The contract contains provisions that affectcompensation to be paid to employees included in the union.

 

## **ALLOWANCEFOR DOUBTFUL ACCOUNTS:**

 

The Company records an allowance for doubtful accounts based onspecifically identified amounts that are believed to be uncollectible.  An additional allowance is recorded based oncertain percentages of aged receivables, which are determined based onhistorical experience and assessment of the general financial conditionsaffecting the Company’s customer base. If actual collections experience changes, revisions to the allowance maybe required.  The Company has a limitednumber of customers with individually large amounts due at any given balancesheet date.  Any unanticipated change inone of those customer’s credit worthiness or other matters affecting thecollectibility of amounts due from such customers could have a material affecton results of operations in the period in which such changes or eventsoccur.  After all attempts to collect areceivable have failed, the receivable is written off against the allowance.Customers generally pay accounts on 30- to 60-day terms.  The Company’s policy does not charge intereston past due receivables.

 

## **GOODWILL:**

 

Goodwill was $7,055 at October 31, 2005 and 2004.  In accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 142, *Goodwill and OtherIntangible Assets*, goodwill is not being amortized in the financialstatements. The Company adopted SFAS No. 142 and completes impairmenttesting on the first day of the fourth quarter. There was no impairment charges recorded in fiscal 2005 or 2004.  As of October 31, 2005, goodwill in theamount of $5,784 was deductible for tax purposes.

 

## **IMPAIRMENTOF LONG-LIVED ASSETS, INCLUDING INTANGIBLES:**

 

The Company evaluates the carrying value of long-lived assets,primarily property, plant and equipment and related goodwill and otherintangible assets, whenever significant events or changes in circumstancesindicate the carrying value of these assets may be impaired.  Impairment losses are recognized when thefair 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 operatingperformance and future undiscounted cash flows of the underlying business.  The Company evaluates potential impairment oflong-lived assets by comparing the carrying value of the assets to the expectedfuture cash flows resulting from the use of the assets.  The net book value of the underlying assetsis adjusted to fair value if the sum of expected future

 

41

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discounted cash flows is less than book value.  Fair values are based on quoted market pricesand assumptions concerning the amount and timing of estimated future cash flowsand assumed discount rates, reflecting varying degrees of perceived risk.  There was no impairment charges recordedduring fiscal 2005 or 2004.

 

## **DEFERREDDEBT COSTS:**

 

Deferreddebt issuance costs are amortized over the term of the related debt, primarilyfour to five years.

 

**WARRANTIES:**

 

We generally warrant ourtrailer and related transportation equipment to be free from defects inmaterial and workmanship, and we also provide warranties relating toperformance under normal use, including service for three to five years afterretail sale. Our obligation under these warranties generally is limited to therepair or replacement of the defective product. Warranty expense totaled $188,$172, and $162 for the years ended October 31, 2005, 2004 and 2003,respectively.

 

**ADVERTISINGCOSTS:**

 

The Company incurs advertisingcosts in the normal course of business, which are expensed as incurred.Advertising costs totaled $140, $111 and $108 for the years ended October 31,2005, 2004, and 2003, respectively.

 

**RESEARCHAND DEVELOPMENT:**

 

We have not incurred anymaterial research and development expenses during any of our last three fiscalyears.

 

## **STOCK-BASEDCOMPENSATION:**

 

The Company accounts for stock-based compensation under the provisionsof APB No. 25.  The Company hasadopted the disclosure-only provisions of SFAS No. 123, *Accounting for Stock-Based Compensation*.  Accordingly, no compensation expense isrecognized if the exercise price of stock options equals the fair market valueof the underlying stock at the date of grant. Had compensation expense for the Company’s stock option plans beendetermined based on the fair value at the grant date for awards consistent withthe provisions of SFAS No. 123, the Company’s basic and diluted net lossper share would remain the same. The fair value of each option grant isestimated on the date of grant using the Black Scholes option-pricing model.There were no stock options issued for the years ending October 31, 2005,2004 or 2003. During fiscal 2004, certain options were extended and expired June 30,2004.

 

## **INCOMETAXES:**

 

The Company accounts for income taxes in accordance with SFAS No. 109,*Accounting for Income Taxes*, asrequired. Under SFAS No. 109, deferred tax assets and liabilities arerecorded for any temporary differences between the financial statement and taxbases of assets and liabilities, using the enacted tax rates and laws expectedto be in effect when the taxes are actually paid or received. (See Note 14.)

 

## **USE OFESTIMATES:**

 

The preparation of the financial statements in conformity withaccounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect reportedamounts of assets, liabilities, revenues and expenses and the relateddisclosures of contingent assets and liabilities. Significant items subject tosuch estimates and assumptions include valuation allowances for accountsreceivable, inventories and deferred tax assets, the fair values of assets andliabilities when allocating the purchase price of acquisitions, and thecarrying value of property and equipment and goodwill. Goodwill is valued basedupon historical and future cash flows of the Company.  Actual results may differ from thoseestimates.

 

## **CASHEQUIVALENTS:**

 

For purposes of the statement of cash flows presentation, cashequivalents are unrestricted, highly liquid short-term cash investments with anoriginal maturity of three months or less.

 

## **EARNINGSPER SHARE:**

 

Basic per-share amounts are computed, generally, by dividing net incomeor loss attributable to common shareholders by the weighted-average number ofcommon shares outstanding.  Dilutedper-share amounts are computed similar to basic per-share amounts except thatthe weighted-average shares outstanding are increased to include additionalshares for the assumed exercise of stock options and warrants, if dilutive.

 

42

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All references in the financial statements related to share amounts, pershare amounts and average shares outstanding have been adjusted retroactivelyto reflect the 1-to-50 reverse stock split of our common stock effective February 16,2004.

 

We have a note payable agreement which is convertible by the holder tocommon stock totaling 100,000 shares at a conversion rate of $5.00 pershare.  However, because we incurred aloss for all periods presented, the inclusion of those potential common sharesin the calculation of diluted loss per share would have an antidilutive effect.

 

Our Series C Preferred Stock and Series D Preferred Stock,which have all the rights and privileges of our common stock, were convertibleinto common stock at rates of .40-to-1 and 3.50-to-1, respectively. Followingthe effective date of the 50–to-1 reverse split of the common stock, theseshares were converted to common stock, and such shares are included in theweighted average common shares outstanding from the date of conversion.  There were no shares of preferred stockoutstanding as of October 31, 2005.

 

Basic and diluted loss per share have been computed as follows:

 
| ** **                                                                           | ** ** | **Year Ended October 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                           | ** ** | **2005**                        | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                 |       |                            |       |   |   |   |   |
| Loss before discontinued operations                                                  |       | $                               | (10,652    | ) | $ | (8,033 | ) | $ | (3,824 | ) |
| Change in fair value of redeemable stock                                             |       | 190                             |       | 1,361 |   | (403 | ) |
|                                                                                 |       |                            |       |   |   |   |   |
| Loss attributable to common shareholders  before discontinued operations             |       | (10,462                         | )          | (6,672 | ) | (4,227 | ) |
|                                                                                 |       |                            |       |   |   |   |   |
| Loss from discontinued operations, net of  tax                                       |       | —                          |       | — |   | (49 | ) |
|                                                                                 |       |                            |       |   |   |   |   |
| Net loss attributable to common  shareholders                                        |       | $                               | (10,462    | ) | $ | (6,672 | ) | $ | (4,276 | ) |
|                                                                                 |       |                            |       |   |   |   |   |
| Weighted average common and common  equivalent shares outstanding, basic and diluted |       | 3,109,333                       |       | 2,699,252 |   | 720,157 |   |
|                                                                                 |       |                            |       |   |   |   |   |
| Loss per share, basic and diluted,  attributable to common shareholders:             |       |                            |       |   |   |   |   |
| From continuing operations                                                           |       | $                               | (3.37      | ) | $ | (2.47 | ) | $ | (5.87 | ) |
| Discontinued operations                                                              |       | —                          |       | — |   | (.07 | ) |
|                                                                                 |       |                            |       |   |   |   |   |
| Net loss per share                                                                   |       | $                               | (3.37      | ) | $ | (2.47 | ) | $ | (5.94 | ) |

 

## **STOCKOPTIONS**

 

The Company accounts for stock-based compensation under the provisionsof APB No. 25.  The Company hasadopted the disclosure-only provisions of SFAS No. 123, *Accounting for Stock-Based Compensation*.  Accordingly, no compensation expense isrecognized if the exercise price of stock options equals the fair market valueof the underlying stock at the date of grant. Had compensation expense for the Company’s stock option plans beendetermined based on the fair value at the grant date for awards consistent withthe provisions of SFAS No. 123, the Company’s basic and diluted net lossper

 

43

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share would remain the same. The fair value of each option grant isestimated on the date of grant using the Black-Scholes option-pricing model.There were no stock options issued for the years ended October 31, 2005and 2004. During fiscal 2004, certain options were extended and expired June 30,2004. Their effect on pro forma net income was immaterial.

 

## **INSURANCERECOVERY:**

 

On May 21, 2004 Danzer’s facility in Hagerstown, Maryland wasdamaged by a fire. The Company completed processing its claims with itsinsurance carrier for damaged equipment and facilities. A gain on involuntaryconversion as a result of the fire was recognized in fiscal 2004 in the amountof $404 and $2 in fiscal 2005.

 

**COMPREHENSIVEINCOME:**

 

SFAS No. 130, *Reporting ComprehensiveIncome*, establishes standards for reporting and display ofcomprehensive income and its components in financial statements.  It requires that all items that are requiredto be recognized under accounting standards as components of comprehensiveincome be reported in a financial statement that is displayed with the sameprominence as other financial statements. Comprehensive income consists of net earnings, the net unrealized gainsor losses on available-for-sale marketable securities and is presented in theconsolidated statement of stockholders’ equity (deficit) and comprehensiveloss.

 

## **RECENTLYISSUED ACCOUNTING PRONOUNCEMENTS:**

 

In December 2004,the Financial Accounting Standards Board (FASB) issued Statement No. 123R,Share-Based Payment, requiring that the compensation cost relating to stockoptions and other share-based compensation transactions be recognized at fairvalue in financial statements. Statement No. 123R is effective for theCompany for its quarter ending January 31, 2006.  The Company will then be required to record any compensation expenseusing the fair value method in connection with option grants to employees thathave an exercise price at or above fair market value at the grant date and forshares issued under its employee stock purchase plan.  Management is still evaluating but does notbelieve that its adoption will have a material impact on the Company’s resultsof operations or financial position.

 

In March 2005,the Securities Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 107,“Share-Based Payment” (“SAB 107”).  SAB107 provides the SEC’s view on the interaction between SFAS 123R and certainSEC rules and regulations. Specifically, SAB 107 provides guidance on share-based paymenttransactions with non-employees, valuation methods, accounting for certainredeemable financial instruments issued under share-based payment arrangements,the classification of compensation expense, non GAAP financial measures, capitalizationof compensation costs related to share-based payment arrangements, theaccounting for income tax effects of share-based payment arrangements uponadoption of SFAS 123R, the modification of employee share options prior toadoption of SFAS 123R and disclosures in Management’s Discussion and Analysissubsequent to adoption of SFAS 123R.  Theadoption of SAB 107 will not have a material impact on our implementation ofSFAS 123R.

 

In May 2005,FASB issued Statement No. 154, “Accounting Changes and Error Corrections.”  This statement replaces APB Opinion No. 20,“Accounting Changes,” and FASB Statement No. 3, “Reporting AccountingChanges in Interim Financial Statements,” and changes the requirements for theaccounting for and reporting of a change in accounting principle.  SFAS No. 154 applies to all voluntarychanges in accounting principle.  OpinionNo. 20 previously required that most voluntary changes in accountingprinciple be recognized by including in net income for the period of the changethe cumulative effect of changing to the new accounting principle.  Statement No. 154 requires retrospectiveapplication to prior periods’ financial statement of a change in accountingprinciple, unless it is impracticable to determine

 

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either theperiod-specific effects or the cumulative effect of the change.  When it is impracticable to determine thecumulative effect of applying a change in accounting principle to all priorperiods, Statement No. 154 requires that the new accounting principle beapplied as if it were adopted prospectively from the earliest datepracticable.  Statement No. 154 alsorequires that a change in depreciation, amortization, or depletion method forlong-lived, nonfinancial assets be account for as a change in accountingestimate effected by a change in accounting principle.  Statement No. 154 is effective beginningafter December 15, 2005.  Adoptionof this statement is not expected to materially impact the Company’s results ofoperations or financial position.

 

3.          GOODWILL ANDINTANGIBLE ASSETS

 

The Company adopted the new rules onaccounting for goodwill and other intangible assets. Accordingly, with theadoption of SFAS No. 142, goodwill is no longer amortized but is insteadsubject to an annual impairment test.  Therewas no goodwill impairment charges recorded in fiscal 2005, and 2004.

 

Other intangible assets, net were $1,398 and $1,762 at October 31,2005 and 2004, respectively.  Theseamounts include trade names, customer relations, non-competes and backlogs andother items, which are being amortized on a straight-line basis over livesranging from three months to 10 years. At October 31, 2005 and 2004, accumulated amortization amounted to$1,537 and $1,173, respectively.

 

Amortization of other intangible assets described above for the yearsended October 31, 2005, 2004 and 2003 was $364, $484 and $259,respectively. Estimated amortization expense for each of the ensuing yearsthrough October 31, 2010, is, respectively, $398, $246, $226, $226 and$118.

 

The weighted average remaining life of the Company’s intangible assetsis four, five, and six for the years ended October 31, 2005, 2004, and2003, respectively.

 

4.          DISCONTINUED OPERATIONS

 

On October 30, 2002, the Company’s Board of Directors agreed tosell the assets of Champion to an entity controlled by Messrs. Durham andWhitesell (Officers of the Company) for the assumption of all liabilities ofChampion excluding its subordinated debt. The decision to divest Champion wasbased on the entity’s inability to achieve profitable operations in theforeseeable future without substantial cash infusion.  The Company also agreed in principle tosettle 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 Markpointof 32,143 shares of the Company’s Series D Preferred Stock. In addition,the agreement provided Markpoint the option to require the Company torepurchase these shares at a price of $21 per share. During fiscal 2003 theoption agreement was assigned to Fair Holdings, and Markpoint exercised theiroption under the agreement. The sale of Champion was completed on January 30,2003. Champion is accounted for as a discontinued operation and therefore theresults of operations and cash flows have been removed from the Company’scontinuing operations for all periods presented.

 

The sale of Champion resulted in an increase in equity of the Companyof $1,142, net of tax of $97.  No gain orloss was recognized on the sale because of the involvement of related parties.

 

45

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A summary of the Company’s discontinued operations for the years ended October 31,2005, 2004, and 2003 follows.

 
| ** **             | ** ** | **Year Ended October 31,** | ** ** |
|------------------------|------------|---------------------------------|------------|
| ** **             | ** ** | **2005**                        | ** ** | **2004** | ** ** | **2003** | ** ** |
|                   |       |                            |       |   |   |   |   |
| Net sales              |       | $                               | —     |   | $ | — |   | $ | 170 |   |
| Operating expenses     |       | —                          |       | — |   | (286 | ) |
| Other income (expense) |       | —                          |       | — |   | 127 |   |
| Interest expense       |       | —                          |       | — |   | (85 | ) |
| Net loss               |       | —                          |       | — |   | (49 | ) |
|                        |            |                                 |            |  |  |  |  |  |  |  |

 

5.          ACQUISITION OF CLASSIC MANUFACTURING,INC.

 

In May 2004, Obsidian Enterprises acquired all of the outstandingshares of capital stock of Classic, a Michigan-based manufacturer of open andenclosed trailers. The purchase was a strategic acquisition to complement othersubsidiaries that manufacture similar trailers. The purchase price totaled$3,598 of which $2,348 consisted of cash and $1,250 in Obsidian common stock or170,451 shares. The value of the stock was determined by the average shareprice over the latest 30 days prior to closing.

 

The purchase price and purchase accounting was allocated to the assetsand liabilities of Classic based on their fair values. The allocation totangible assets included $2,767 and liabilities assumed of $963. The excess ofthe purchase price over the fair value of the identifiable tangible net assetsof $1,794 was allocated to goodwill and identifiable intangible assets. Theallocation of purchase price to intangibles includes existing brand name andcustomer base, noncompete, and the backlog. Intangibles included $354 for brand name and customer base, $118 fornoncompete, and $51 for the backlog. The remaining $1,271 was allocated togoodwill none of which is expected to be deductible for tax purposes.

 

Intangible assets, other than goodwill are amortized over theirestimated useful lives, ranging from three months for the backlog, five yearsfor non-compete  and ten years for brandname and customer base, using the straight-line method and are reviewed forpotential impairment whenever events or circumstances indicate that carryingamounts may not be recoverable.

 

The period for which Classic the results of operations of Classic areincluded in the consolidated income statement is for the six months ended May 1,2004 (acquisition) through October 31, 2004.

 

46

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The following schedule is a description of acquisition costs ofClassic and the purchase price allocation (in thousands):

 
| Purchase Price:      |   |   |   |
|----------------------|--------|--------|--------|
| Common stock         |   | $      | 1,250  |   |
| Cash to seller       |   | 2,250  |   |
| Acquisition costs    |   | 98     |   |
|                 |   |   |   |
| Total purchase price |   | $      | 3,598  |   |

 
| Purchase Price Allocation:                                   |   |   |   |
|--------------------------------------------------------------|--------|--------|--------|
| Current assets, including accounts  receivable and inventory |   | $      | 1,962  |   |
| Machinery and equipment                                      |   | 805    |   |
| Goodwill                                                     |   | 1,271  |   |
| Intangibles                                                  |   | 523    |   |
| Liabilities assumed                                          |   | (963   | )      |
|                                                         |   |   |   |
| Total                                                        |   | $      | 3,598  |   |

 
| Supplemental cash flow disclosure related  to acquisition: |   |   |   |
|------------------------------------------------------------|--------|--------|--------|
| Net assets acquired                                        |   | $      | 3,598  |   |
| Less: Common stock issued                                  |   | (1,250 | )      |
| Less: Cash acquired                                        |   | (626   | )      |
|                                                       |   |   |   |
| Total purchase price                                       |   | $      | 1,722  |   |

 

## **PROFORMA INFORMATION (UNAUDITED):**

 

The unaudited condensed consolidated results of operations shown beloware presented on a pro forma basis and represent the results of Classic as ifthe business combinations of these entities occurred at the beginning of theperiods presented. 

 
| ** **                                                               | ** ** | **Year Ended  October 31,  2005** | ** ** | **Year Ended  October 31,  2004** | ** ** | **Year Ended  October 31,  2003** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **                                                               | ** ** | ** **                             | ** ** | ** **                             | ** ** | ** **                             | ** ** |
| Net Sales                                                                |       | $                                      | 65,774     |                                   | $          | 68,188                                 |       | $ | 66,689 |   |
|                                                                     |       |                                   |       |                                   |       |                                   |       |
| Net Loss                                                                 |       | $                                      | (10,652    | )                                      | $          | (8,035                                 | )          | $ | (3,745 | ) |
|                                                                     |       |                                   |       |                                   |       |                                   |       |
| Loss per share, basic and diluted,  attributable to common shareholders: |       |                                   |       |                                   |       |                                   |       |
| From continuing operations                                               |       | $                                      | (3.37      | )                                      | $          | (2.47                                  | )          | $ | (5.75 | ) |
| Discontinued operations                                                  |       | —                                 |       | —                                 |       | (.07                                   | )          |
|                                                                     |       |                                   |       |                                   |       |                                   |       |
| Net loss per share                                                       |       | $                                      | (3.37      | )                                      | $          | (2.47                                  | )          | $ | (5.82 | ) |

 

47

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The pro forma financial information is presented for informationalpurposes only and is not indicative of the operating results that would haveoccurred had the acquisition been consummated as of the above dates, nor arethey necessarily indicative of future operating results.

 

6.          INVENTORIES

 

Inventories are stated at the lower-of-cost (first-in, first-outmethod) or market and are comprised of the following components:

 
| ** **        | ** ** | **October 31,  2005** | ** ** | **October 31,  2004** | ** ** |
|-------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **        | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| Raw materials     |       | $                          | 6,386      |                       | $          | 5,346 |   |
| Work-in-process   |       | 420                        |       | 611                        |       |
| Finished goods    |       | 3,485                      |       | 3,236                      |       |
| Valuation reserve |       | (2,195                     | )          | (1,092                     | )          |
|              |       |                       |       |                       |       |
| Total             |       | $                          | 8,096      |                       | $          | 8,101 |   |

 

The Company provides valuation reserves for inventory consideredobsolete or not currently available for use in production.  Inventory reserves at U.S. Rubber are relatedto excess scrap butyl rubber not currently available for use without furtherprocessing; therefore, it has minimal value.

 

7.          PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment is summarized by major classification asfollows:

 
| ** **                        | ** ** | **October 31,  2005** | ** ** | **October 31,  2004** | ** ** |
|-----------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                        | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| Land and improvements             |       | $                          | 488        |                       | $          | 488 |   |
| Buildings and improvements        |       | 4,185                      |       | 3,977                      |       |
| Plant machinery and equipment     |       | 10,980                     |       | 10,477                     |       |
| Furniture and fixtures            |       | 568                        |       | 580                        |       |
| Coach fleet and vehicles          |       | 15,523                     |       | 16,171                     |       |
| Coach refurbishments              |       | 550                        |       | 566                        |       |
|                              |       |                       |       |                       |       |
| Total                             |       | 32,294                     |       | 32,259                     |       |
| Less accumulated depreciation     |       | (11,354                    | )          | (8,909                     | )          |
|                              |       |                       |       |                       |       |
| Net property, plant and equipment |       | $                          | 20,940     |                       | $          | 23,350 |   |

 

Depreciation expense of property, plant and equipment for the yearsended October 31, 2005, 2004, and 2003 included in continuing operationswas $2,858, $2,678, and $2,401, respectively. During fiscal 2004 and 2005, certain equipment became idle due to therealignment of the plant at U.S. Rubber. The equipment will be used in the future for replacement of existingequipment as needed.  Due to theuniqueness of the equipment and the high cost to buy new similar pieces, thenet book value of $1,544 and $353 for the years ended October 31, 2005 and2004, respectively, was transferred to other assets under idle equipment and issubject to impairment valuation.

 

48

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8.  FINANCING ARRANGEMENTS

 

The Company has the following outstanding debt as of October 31,2005 and 2004:

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | ** ** | **Debt Amount**            | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | ** ** | **October 31,  2005** | ** ** | **October 31,  2004** | ** ** |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |       |                       |       |   |   |
| **U.S. Rubber**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       |                       |       |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |       |                       |       |   |   |
| Line of credit issued by a  bank, bearing interest at prime plus 0.5% (7.25% at October 31, 2005),  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. Line of credit has matured and U.S.  Rubber is currently working on a forebearance agreement with the bank as well  as looking to refinance the debt. |       | $                          | 2,672      |   | $ | 2,403 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |       |                       |       |   |   |
| Note payable to a bank,  interest payable monthly at prime plus 1% (7.75% at October 31, 2005),  monthly principal payments of $48, due October 2005, collateralized by  substantially all assets of U.S. Rubber. Note payable has matured and U.S.  Rubber is currently working on a forebearance agreement with the bank as well  as looking to refinance the debt.                                                                                                                                                   |       | 2,333                      |       | 2,905 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |       |                       |       |   |   |
| Note payable to DC Investments,  interest payable monthly at 15%, balloon payment due March 2007,  subordinate to bank debt.                                                                                                                                                                                                                                                                                                                                                                                                 |       | 700                        |       | 700 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |       |                       |       |   |   |
| Revolving line of credit with  Fair Holdings, interest payable monthly at 2% above the Fair Finance V-12  certificate rate (8.25% at October 31, 2005), due April 2012.  Collateralized by all assets of the borrower, subordinate to senior bank  debt.                                                                                                                                                                                                                                                                |       | 4,562                      |       | — |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |       |                       |       |   |   |
| Other                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |       | 68                         |       | 19 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |       |                       |       |   |   |
| Subtotal U.S. Rubber                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |       | 10,335                     |       | 6,027 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |            |                            |            |  |  |  |  |

 

U.S. Rubber’s debt is subject to financial covenants, the mostrestrictive of which is a fixed charge coverage ratio.

 

49

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| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | ** ** | **Debt Amount**            | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | ** ** | **October 31,  2005** | ** ** | **October 31,  2004** | ** ** |
| **Pyramid, DW Leasing, Obsidian Leasing and  DC Investments Leasing**                                                                                                                                                                                                                                                                                                                                                                                                                               |       |                       |       |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |                       |       |   |   |
| Various installment loans, repayable in monthly installments totaling $146  including interest ranging from the three-month LIBOR rate plus .12% (4.2082%  at October 31, 2005) to 11.4% through January 2014 and applicable  balloon payments thereafter through January 2014, first lien on  assets financed (finance acquisition and asset purchases). A portion of the  borrowings are guaranteed by the members of DW Leasing, Fair Holdings, DC  Investments and its partners. |       | $                          | 8,980      |   | $ | 10,342 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |                       |       |   |   |
| Notes payable to Fair Holdings, repayable in monthly installments of interest ranging  from 10% to 14% through October 2012 and applicable balloon payments  through December 2012. Collateralized by all assets of the borrower,  collateral position second to that of senior lender.                                                                                                                                                                                                   |       | 6,562                      |       | 4,669 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |                       |       |   |   |
| Other                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |       | 15                         |       | 23 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |                       |       |   |   |
| Subtotal Pyramid, DW Leasing, Obsidian  Leasing and DC Investments Leasing                                                                                                                                                                                                                                                                                                                                                                                                                          |       | 15,557                     |       | 15,034 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |            |                            |            |  |  |  |  |

 

The Coach Leasing segment’sdebt is subject to financial covenants, the most restrictive of which is cashflow coverage ratio and debt service coverage.

 

50

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| ** **                                                                                                                                                                                                                                                | ** ** | **Debt Amount**            | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                                                                                                                                                                                                | ** ** | **October 31,  2005** | ** ** | **October 31,  2004** | ** ** |
|                                                                                                                                                                                                                                                      |       |                       |       |   |   |
| **Danzer**                                                                                                                                                                                                                                                |       |                       |       |   |   |
|                                                                                                                                                                                                                                                      |       |                       |       |   |   |
| Line of credit to Fair  Holdings, maximum borrowing equal to $5,000, interest payable monthly at the  LIBOR Daily Floating Rate plus 3.2% (7.2882% at October 31, 2005), due  April 2006. Collateralized by substantially all assets of Danzer. |       | $                          | 3,280      |   | $ | 2,253 |   |
|                                                                                                                                                                                                                                                      |       |                       |       |   |   |
| Note payable to Fair Holdings,  requires monthly principal installments of $6, interest accrues at the LIBOR  Daily Floating Rate plus 3.2% (7.2882% at October 31, 2005), due April,  2006. Collateralized by substantially all assets of Danzer.   |       | 828                        |       | 894 |   |
|                                                                                                                                                                                                                                                      |       |                       |       |   |   |
| Equipment loans payable-monthly—payments  currently aggregating $2 including interest of 9.50% to 11.30% through  November 2007. Collateralized by equipment financed.                                                                          |       | 37                         |       | 58 |   |
|                                                                                                                                                                                                                                                      |       |                       |       |   |   |
| Other                                                                                                                                                                                                                                                     |       | 10                         |       | 13 |   |
|                                                                                                                                                                                                                                                      |       |                       |       |   |   |
| Subtotal Danzer                                                                                                                                                                                                                                           |       | 4,155                      |       | 3,218 |   |
|                                                                                                                                                                                                                                                           |            |                            |            |  |  |  |  |

 

Danzer’s debt is subject to financial covenants, the most restrictiveof which is debt service coverage.

 

51

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| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | ** ** | **Debt Amount**            | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | ** ** | **October 31,  2005** | ** ** | **October 31,  2004** | ** ** |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       |                       |       |   |   |
| **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% (5.5% at  October 31, 2004), due November 1, 2004. Collateralized by  substantially all assets of United and guaranteed by Obsidian Enterprises*.  Line of credit was refinanced with a new lender in July 2005.                                 |       | $                          | —     |   | $ | 4,000 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       |                       |       |   |   |
| Line of credit to a bank,  maximum borrowing equal to $5,000 with a base of up to 85% of the value of  its eligible accounts, plus up to 60% of its eligible raw materials and  finished goods up to $3,000, plus up to 25% of its eligible work in process  up to $150, less reserves of up to $75. Interest payable monthly at prime  plus 0.5% (7.25% at October 31, 2005), due July 2008.  Collateralized by substantially all assets of United and guaranteed by  Obsidian Enterprises. |       | 3,472                      |       | — |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       |                       |       |   |   |
| Notes payable to a bank,  requires monthly principal installments of $11 plus interest of prime plus 1%  (5.75% at October 31, 2004), due through July 2006, collateralized  by substantially all assets of United and guaranteed by Obsidian  Enterprises*. Loan was refinanced with a new lender in July 2005.                                                                                                                                                                        |       | —                     |       | 987 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       |                       |       |   |   |
| Note payable to a bank, monthly  principal installments of $5 plus interest at prime plus 1% (7.75% at  October 31, 2005), due July 2013.                                                                                                                                                                                                                                                                                                                                                    |       | 484                        |       | — |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       |                       |       |   |   |
| 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 ($392 and $794 at October 31, 2005 and  2004, respectively). Unsecured and subordinate to line of credit and notes  payable above.*                                                                                                                                        |       | 3,108                      |       | 2,706 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       |                       |       |   |   |
| 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 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |            |                            |            |  |  |  |  |

 

52

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| ** **                                                                                                                                                                                                                                                                         | ** ** | **Debt Amount**            | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                                                                                                                                                                                                                         | ** ** | **October 31,  2005** | ** ** | **October 31,  2004** | ** ** |
| **United, **continued                                                                                                                                                                                                                                                         |       |                       |       |   |   |
|                                                                                                                                                                                                                                                                               |       |                       |       |   |   |
| Revolving line of credit with  Fair Holdings, interest payable monthly at 2% above the Fair Finance V-12  certificate rate (8.25% at October 31, 2005), due April 2012.  Collateralized by all assets of the borrower, subordinate to line of credit  and notes payable. |       | 2,304                      |       | — |   |
|                                                                                                                                                                                                                                                                               |       |                       |       |   |   |
| Other                                                                                                                                                                                                                                                                              |       | 76                         |       | 79 |   |
|                                                                                                                                                                                                                                                                               |       |                       |       |   |   |
| Subtotal United                                                                                                                                                                                                                                                                    |       | 11,444                     |       | 9,772 |   |

 

----

*United was in technical defaultof certain loan covenants with its senior and subordinated lender atOctober 2005.

 
| **Obsidian Enterprises**                                                                                                                                                                                                                                                                                                                                                                                                        |   |   |   |   |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   |   |   |   |
| Line of credit to Fair  Holdings, maximum borrowing equal to $15,000, interest payable monthly at  10%, due January 2007, collateralized by all assets of Obsidian  Enterprises and personally guaranteed by certain officers.                                                                                                                                                                                             |   | 12,904 |   | 10,815 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   |   |   |   |
| Note payable to Fair Holdings,  interest payable monthly at 15%, balloon payment due March 2007,  personally guaranteed by certain officers.                                                                                                                                                                                                                                                                               |   | — |   | 934    |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   |   |   |   |
| Convertible Notes Payable                                                                                                                                                                                                                                                                                                                                                                                                       |   |   |   |   |   |
| Note payable to Renaissance  (formerly parent of Danzer Corporation), interest payable monthly at 8% per  annum, with monthly principal payments of $5 beginning July 2004, due  July 2008. Convertible at the option of the holder to common stock of  Obsidian Enterprises at a conversion price of $5.00 per share. The loan  agreement also restricts dividend payments without the prior consent of the  lender. |   | 500    |   | 500    |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   |   |   |   |
| Subtotal Obsidian Enterprises.                                                                                                                                                                                                                                                                                                                                                                                                  |   | 12,904 |   | 11,749 |   |

 

United’s debt is subject to financial covenants, the most restrictiveof which is a fixed charge ratio and tangible net worth.

 

53

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| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | ** ** | **Debt Amount**            | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | ** ** | **October 31,  2005** | ** ** | **October 31,  2004** | ** ** |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |       |                       |       |   |   |
| **Classic**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                       |       |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |       |                       |       |   |   |
| Line of credit to a bank,  maximum borrowing equal to the lesser of $1,000 or 85% of eligible accounts  receivable plus the lesser of 60% of all outstanding line of credit advances,  $500, or the sum of 60% of finished goods and raw material eligible inventory  plus the lesser of 60% of work-in-process eligible inventory or $90 minus  inventory reserves. Interest payable monthly at prime plus 0.5% (7.25% at  October 31, 2005), due May 1, 2006. Collateralized by substantially  all assets of Classic and guaranteed by Obsidian Enterprises and the Chairman  of Obsidian Enterprises. |       | 787                        |       | 580 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |       |                       |       |   |   |
| Notes payable to a Bank,  monthly principal installments of $2 plus interest at prime plus 0.5% (7.25%  at October 31, 2005), due through May 1, 2009. Collateralized by  substantially all assets of Classic and guaranteed by Obsidian Enterprises  and certain officers.                                                                                                                                                                                                                                                                                                                              |       | 75                         |       | 96 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |       |                       |       |   |   |
| Notes payable to a Bank,  monthly principal installments of $23 plus interest at prime plus 1% (7.75%  at October 31, 2005), due through May 1, 2007. Collateralized by  substantially all assets of Classic and guaranteed by Obsidian Enterprises  and certain officers.                                                                                                                                                                                                                                                                                                                               |       | 437                        |       | 714 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |       |                       |       |   |   |
| Other                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |       | 30                         |       | 39 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |       |                       |       |   |   |
| Subtotal Classic                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       | 1,329                      |       | 1,429 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |       |                       |       |   |   |
| Total all companies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       | 55,724                     |       | 47,229 |   |
| Less related-party amounts  presented separately, net of current portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       | (31,173                    | )          | (20,299 | ) |
| Less current portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |       | (20,914                    | )          | (18,383 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |       | $                          | 3,637      |   | $ | 8,547 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |            |                            |            |  |  |  |  |

 

Classic’s debt is subject to financial covenants, the most restrictiveof which is a leverage ratio and a fixed charge coverage ratio.

 

Following are the maturities of long-term debt for each of the nextfive years and thereafter:

 

| 2006       |   | $      | 25,029 |   |
|------------|--------|--------|--------|--------|
| 2007       |   | 17,593 |   |
| 2009       |   | 2,557  |   |
| 2009       |   | 1,044  |   |
| 2010       |   | 96     |   |
| Thereafter |   | 9,405  |   |
|       |   |   |   |
|       |   | $      | 55,724 |   |

 

54

----

 

The Company has an agreement with Obsidian Capital Partners (“Partners”)that gives the Company the right to mandate a capital contribution fromPartners 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 contributionagreement with Partners and to receive a capital contribution in amounts up to$1,370 for U.S. Rubber and $1,000 for United to fund the respective subsidiary’sshortfall.  Those payments, if any, wouldbe applied directly to reduce the respective subsidiary’s debt obligations tothe lender. During fiscal 2003, a capital call was made for $250 for U.S.Rubber to bring the Company in compliance with certain bank covenants. Partnersreceived 14,285 shares of Series D Preferred Stock in exchange for thecapital call.

 

The following details significant changes in debt during the year endedOctober 31, 2005, or subsequent thereto:

 

## **FINANCIALCOVENANTS**

 

Significant financial covenants in our credit agreements are themaintenance of minimum ratios, levels of earnings to funded debt and fixedcharge coverage ratios.  The Company didnot meet requirements and covenants in certain debt agreements.

 

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

 

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

 

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

 

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

 

Obsidian Enterprises did not meet its financial covenant related to aminimum working capital requirement and delivery of audited statements within90 days with RENN Capital. No waiver was received and the total balance of $500is classified as current.

 

## **PYRAMID,DW LEASING, OBSIDIAN LEASING AND DC INVESTMENTS LEASING:**

 

On January 3, 2003, Obsidian Leasing paid off debt in the amountof $928 to former shareholders of Pyramid and related companies with proceedsfrom a note with Fair Holdings which includes monthly interest payments of 13%of the outstanding principal amount and a balloon principal payment in January 2009.

 

55

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Pyramid traditionally had a borrowing agreement with ObsidianEnterprises which was funded using Obsidian Enterprises’ agreement with FairHoldings. In April 2005, the agreement was reassigned between FairHoldings and Pyramid which allowed for borrowings up to $750 and expires in April 2012.

 

In November 2005, DW Leasing received an extension on its debtwith a Bank for three years.  As of October 31,2005, the total related debt of $234 was classified as current.  Following this extension, $70 is classifiedas current, and $164 is classified as long-term.

 

In December 2005, DW Leasing’s note with Fair Holdings wasamended. Maximum borrowings were increased from $1,300 to $1,700.

 

In December 2005, DC Investment Leasing’s note with Fair Holdingswas amended. Maximum borrowings were increased from $1,000 to $2,100.

 

In December 2005, Obsidian Leasing’s note with Fair Holdings wasamended. Maximum borrowings were increased from $1,000 to $2,000.

 

In December 2005, Obsidian’s Leasings note with Fair Holdings wasamended to extend the maturity date to January 2009.

 

## **DANZER:**

 

As of January 31, 2003, Danzer was in violation of certaincovenants included in its credit agreement and First Forbearance Agreementdated October 14, 2002 with its senior lender. On February 28, 2003,the Company and the lender entered into a Second Forbearance Agreement waivingthese violations. On March 28, 2003, the credit agreement was assumed byFair Holdings under an assumption and continuation agreement. An amendment wasmade as of the effective date of the agreement to extend the maturity date ofthe line of credit agreement to April 1, 2006 and the debt covenantsrequired by the senior lender were waived through the end of the term.  In September 2003, the line of creditwas amended to increase the total availability from $1,000 to $1,500. All otherterms of the agreement will continue as stated in the original agreement dated August 15,2001.

 

In July 2004 and October 2005, the Fair Holdings line ofcredit was amended to increase the total availability from $1,500 to $3,000 and$5,000, respectively.  All other terms ofthe agreement will continue as stated in the original and amended agreementdated August 15, 2001.

 

## **UNITED:**

 

On January 28, 2004, United amended its line of credit agreementto extend the maturity date of the original $4,000 line to November 2004,to waive United’s current debt violations, and to modify the covenants forfuture reporting periods. The bank debt was refinanced with a new lender in July 2005.

 

Unitedtraditionally had a borrowing agreement with Obsidian Enterprises which wasfunded using Obsidian Enterprises’ agreement with Fair Holdings. In April 2005,the agreement was redocumented between Fair Holdings and United which allowedfor borrowings up to $3,000 and expires in April 2012.

 

56

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## **CLASSIC:**

 

OnDecember 28, 2004, the credit agreement was temporarily amended toincrease the borrowing base through April 1, 2005 to the following:  The borrowing base is equal to 85% of eligible accounts receivable plus thelesser of 75% of all outstanding line of credit advances, $750, or the sum of60% of finished goods and raw material eligible inventory plus the lesser of60% of work-in-process eligible inventory or $90 minus inventory reserves.  On April 1, 2005, the borrowing basereverted back to the original agreement. The Company is currently working with the bank on another temporaryamendment to increae the borrowing base and expects to complete the amendmentin February 2006.

 

## **U.S.RUBBER:**

 

In October 2005, U.S. Rubber’s bank debt matured and U.S. Rubberis currently working with the bank on a short term extension until it isrefinanced.  U.S. Rubber expects tocomplete this financing in the first half of fiscal 2006.

 

U.S. Rubber traditionally had a borrowing agreement with ObsidianEnterprises which was funded using Obsidian Enterprises’ agreement with FairHoldings. In April 2005, the agreement was redocumented between FairHoldings and U.S. Rubber which allowed for borrowings up to $3,700 and expiresin April 2012.  In October 2005,this agreement was amended to increase the maximum borrowings to $5,500.

 

## **OBSIDIANENTERPRISES:**

 

In fiscal 2004, Obsidian Enterprises’ line of credit with Fair Holdingswas amended. Maximum borrowings were increased from $8,000 to $15,000, and thematurity date was extended from January 2005 to January 2007.

 

9.  LEASING ARRANGEMENTS

 

The Company has various operating lease commitments, principallyrelated to machinery and equipment, office equipment, and facilities. Theapproximate future minimum annual rentals under the terms of these leases,which expire on various dates through the year ending October 31, 2012,are as follows:

 
| **Year Ending October 31,** | ** ** | **Third Party** | ** ** | **Related Party** | ** ** | **Total** | ** ** |
|----------------------------------|------------|-----------------|------------|-------------------|------------|-----------|------------|
| 2006                             |       | $               | 407        |              | $          | 144       |       | $ | 551 |   |
| 2007                             |       | 308             |       | 144               |       | 452       |       |
| 2008                             |       | 106             |       | 144               |       | 250       |       |
| 2009                             |       | 72              |       | 144               |       | 216       |       |
| 2010 and thereafter              |       | 121             |       | 360               |       | 481       |       |
| Total                            |       | $               | 1,014      |              | $          | 936       |       | $ | 1,950 |   |

 

Rental expense under operating leases for the years ended October 31,2005, 2004, and 2003 was $681, $658, and $594, respectively.  Rental expense under a monthly commitmentwith Fair Holdings for the years ended October 31, 2005, 2004, and 2003was $64, $64, and $31, respectively.

 

57

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10.  EMPLOYEE BENEFIT PLANS

 

The Company, through certain of its subsidiaries, has definedcontribution 401(k) plans which permit voluntary contributions up to 20% ofcompensation and which provide Company-matching contributions of up to 33% ofemployee contributions not to exceed 6% of employee compensation. 401(k) planexpense for the years ended October 31, 2005, 2004, and 2003 wasapproximately $117, $102, and $128, respectively.  The Company’s health insurance is through apartially self funded plan which has a maximum claim limit of $80 peremployee.   Claims in excess of theselimits are reimbursed by a separate re-insurance plan which carries a lifetimemaximum payment of $2,000.

 

11.  REDEEMABLE STOCK

 

In conjunction with the United acquisition in 2001, the Company issued154,482 shares of Common Stock to Huntington Capital Investment Corporation (“Huntington”),the senior subordinated lender of United. The note purchase agreement includeda provision giving Huntington the option to require the Company to repurchasethese shares at 90% of market value at the date of redemption upon the earlierof: a) fifth anniversary of issuance of such shares, b) default under thesubordinated debt agreement, c) other factors related to a sale ofsubstantially all assets of the Company as defined in the agreement. As theredemption value is variable, the Company recognizes changes in the estimatedfair value each quarter. Changes in fair value are adjusted through additionalpaid in capital or retained earnings when additional paid in capital related tothe fair value change has been reduced to zero. At October 31, 2005, theestimated redemption requirement is $252. Subsequent to October 31, 2005Huntington sold its shares to Black Rock Acquisition Corp for $1.85 per share.This transaction was a result of the “going private” transaction as fullydisclosed in the schedule 13-E3 filing as of January 30, 2006.

 

In conjunction with the sale of Champion discussed in Note 4, theCompany agreed to settle the outstanding subordinated debt due to Markpointfrom Champion in exchange for a cash payment of $675 and issuance to the debt holderof 32,143 shares of the Company’s Series D Preferred Stock.  The agreement provided Markpoint the optionto require the Company to repurchase these shares at a price of $21 pershare.  The repurchase option wasavailable 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 AssignmentAgreement, the Company transferred all rights, title and interest in therepurchase option to Fair Holdings. Markpoint exercised the repurchaseoption  and was paid $338 by FairHoldings.  The exercise of the optionresulted in the reduction of the liability and an increase in additional paidin capital of $337 as of October 31, 2003. On November 10, 2003,Markpoint exercised the option for the remaining shares and those shares alsowere acquired by Fair Holdings.  Theexercise of the option resulted in a reduction in redeemable stock and anincrease in additional paid-in capital of $337.

 

With the acquisition of Classic effective May 1, 2004, the Companyissued 170,451 shares of our common stock to the former owners of Classic.  These shares are classified as redeemablestock.  The purchase agreement for Classicincluded a provision that gives the sellers the right to have us redeem theseshares at a price of $6.5970 per share within five years of the date ofissuance of the shares. The sellers have the right to partially redeem theseshares in increments of 10,000 or more shares per transaction. The agreementalso has an automatic termination provision if the Company’s shares have tradedat a closing price of greater than $7.33 per share for any consecutive periodof 60 trading days during the period of time commencing on the date there areno restrictions on the sellers sale of shares and ending on the fifthanniversary of the agreement. Subsequent to October 31, 2005 these shareswere contributed under a subscription agreement to Black Rock Acquisition Corp.in exchange for the same number of Black Rock shares. This transaction was alsopart of the “going private” transaction as fully disclosed in the schedule 13-E3filing as of January 30, 2006.

 

58

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12.  STOCKHOLDERS’ EQUITY

 

### **PREFERREDSTOCK:**

 

On May 12, 2003, 16,072 shares of Series D Preferred Stock,previously classified as redeemable stock (see Note 11) were acquired by FairHoldings from Markpoint.

 

On October 13, 2003, the Company issued 14,285 shares of Series DPreferred Stock for $250. The issuance was as a result of a capital call fromPartners who were obligated to fund additional capital required to maintaincompliance with the debt covenants of U.S. Rubber.

 

On December 3, 2003, the Company’s stockholders and Board ofDirectors approved a 50-to-1 reverse stock split. The reverse stock split waseffective for trading purposes as of February 16, 2004. As a result of thereverse stock split and the amendment to the Certificate of Incorporation,approximately 720,157 shares of common stock remained outstanding and thenumber of authorized shares of common stock was reduced to 10,000,000.

 

On March 12, 2004, all outstanding Series C and D preferredshares were converted to common stock, which increased common stock outstandingby 2,218,725 shares including 154,482 shares classified as redeemable stock.

 

As of October 31, 2005, there were five million shares authorizedwith no preferred shares issued or outstanding.

 

## **STOCKOPTIONS:**

 

The stockholders approved a stock option plan to issue both “qualified”and “nonqualified” stock options.  Underthe plan, 16,000 options to purchase shares of the Company’s common stock maybe issued at the discretion of the Company’s Board of Directors.  The option price per share is determined bythe Company’s Board of Directors, but in no case will the price be less than85% of the fair value of the common stock on the date of grant.  Options under the plan will have a term ofnot more than ten years with accelerated termination upon the occurrence ofcertain events.

 

The Board adopted, and the Company’s stockholders approved a 2001 LongTerm Incentive Plan. The 2001 Plan authorizes the granting to the Company’sdirectors, key employees, advisors and consultants of options intended toqualify as Incentive Options within the meaning of Section 422 of theInternal Revenue Code of 1986, as amended (the “Code”), options that do not soqualify (“Non-Statutory Options”), restricted stock and Other Stock-BasedAwards that are not Incentive Options or Non-Statutory Options.  The awards are payable in Common Stock andare based on the formula which measures performance of the Company.  There was no performance award expense in2005, 2004 or 2003.  No options underthis plan were granted to any employees. Options are exercisable for up to 10 years from the date of grant.

 

On December 13, 2003, the Company’s Board of Directors approvedthe extension of the expiration date of 4,000 fixed stock options, exercisableat $2.50.  The original expiration dateof December 31, 2002 was originally extended to December 31, 2003 andsubsequently to June 30, 2004.  TheCompany recognized $30 and $40 respectively of compensation expense related tothe extension of the options during the years ended October 31, 2003 and2004. The fixed stock options expired and were not exercised as of June 30,2004.

 

59

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Following is a summary of transactions of granted shares under optionand adjusted for the 50:1 reverse stock split in February 2004 for theyears ended October 31, 2005, 2004 and 2003:

 
| ** **                          | ** ** | **2005**   | ** ** | **2004**                                   | ** ** | **2003**   | ** ** |
|-------------------------------------|------------|------------|------------|--------------------------------------------|------------|------------|------------|
| ** **                          | ** ** | **Shares** | ** ** | **Weighted****Average  Exercise****Price** | ** ** | **Shares** | ** ** | **Weighted****Average  Exercise****Price** | ** ** | **Shares** | ** ** | **Weighted****Average  Exercise****Price** | ** ** |
| ** **                          | ** ** | ** ** | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Outstanding, beginning of year      |       | —     |       | —                                     |       | 16,000     |       | 4.50 |   | 16,000 |   | 4.50 |   |
| Issued during the year              |       | —     |       | —                                     |       | —     |       | — |   | — |   | — |   |
| Canceled or expired during the year |       | —     |       | —                                     |       | (16,000    | )          | 4.50 |   | — |   | — |   |
| Exercised during the year           |       | —     |       | —                                     |       | —     |       | — |   | — |   | — |   |
|                                |       |       |       |                                       |       |       |       |   |   |   |   |   |   |
| Outstanding, end of year            |       | —     |       | —                                     |       | —     |       | — |   | 16,000 |   | 4.50 |   |
|                                |       |       |       |                                       |       |       |       |   |   |   |   |   |   |
| Eligible, end of year for exercise  |       | —     |       | —                                     |       | —     |       | — |   | 16,000 |   | 4.50 |   |

##  

## **STOCKWARRANTS:**

##  

The Company has issued warrants to purchase common stock to severalparties. In January 2003, the Company agreed to a modification of termswith the debenture holders to provide for less stringent covenants.  In exchange for this modification, theCompany issued warrants to the debenture holders to purchase up to 320 sharesof the Company’s common stock at an exercise price of $10.00 per share.  These warrants expire January 24,2006.  In February 2004, the Companyreceived an extension of the requirement to provide audited financialstatements to debenture holders.  Thesewarrants expire February 9, 2007. The issuance of the warrants had no material impact on earnings.

 

The following table summarizes the outstanding warrants for the yearsended October 31, 2005 and 2004:

 
| ** **                                         | ** ** | **Outstanding  Warrants  October 31,  2003 and  2004** | ** ** | **Issued  During  the Year** | ** ** | **Exercise  Price** | ** ** | **Warrants  Exercised  in Period** | ** ** | **Outstanding  Warrants  October 31,  2005 and  2004** | ** ** |
|----------------------------------------------------|------------|-------------------------------------------------------------|------------|------------------------------|------------|---------------------|------------|------------------------------------|------------|-------------------------------------------------------------|------------|
|                                               |       |                                                        |       |                         |       |                |       |                               |       |                                                        |       |
| Common Stock:                                      |       |                                                        |       |                         |       |                |       |                               |       |                                                        |       |
| Renaissance US Growth & Income  Trust PLC |       | 320                                                         |       | —                       |       | 10.00               |       | —                             |       | 320                                                         |       |
| BFSUS Special Opportunities Trust PLC              |       | 320                                                         |       | —                       |       | 10.00               |       | —                             |       | 320                                                         |       |

##  

## **CONVERTIBLE DEBT:**

##  

As described in Note 8, the Company has a note payable agreement whichis convertible by the holder to common stock totaling 100,000 shares at aconversion rate of $5.00 per share. The note payable is due in July 2008 withan interest rate of 8%. The balance outstanding as of October 31, 2005 is $500.

 

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13.  BUSINESS SEGMENT DATA AND GEOGRAPHIC DATA

 

The Company operates in three industry segments comprised of trailerand related transportation equipment manufacturing; coach leasing; and butylrubber reclaiming.  All sales are inNorth and South America primarily in the United States, Canada and Brazil.  All segment information is presented fromcontinuing operations and loss from discontinued operations. Selectedinformation by segment follows:

 
| ** **                              | ** ** | **Year Ended October 31, 2005** | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|
| ** **                              | ** ** | **Trailer  Manufacturing**           | ** ** | **Coach  Leasing** | ** ** | **Butyl Rubber  Reclaiming** | ** ** | **Total  Segments** | ** ** | **Corporate** | ** ** | **Consolidated** | ** ** |
|                                    |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Sales:                                  |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Domestic                                |       | $                                    | 45,788     |   | $ | 3,343 |   | $ | 9,562 |   | $ | 58,693 |   | $ | — |   | $ | 58,693 |   |
| Foreign                                 |       | 5,681                                |       | — |   | 1,400 |   | 7,081 |   | — |   | 7,081 |   |
|                                    |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Total                                   |       | $                                    | 51,469     |   | $ | 3,343 |   | $ | 10,962 |   | $ | 65,774 |   | $ | — |   | $ | 65,774 |   |
|                                    |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Cost of goods sold                      |       | $                                    | 47,473     |   | $ | 1,936 |   | $ | 11,897 |   | $ | 61,306 |   | $ | — |   | $ | 61,306 |   |
|                                    |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Loss before taxes and minority interest |       | $                                    | (2,736     | ) | $ | (2,211 | ) | $ | (2,488 | ) | $ | (7,435 | ) | $ | (3,474 | ) | $ | (10,909 | ) |
|                                    |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Identifiable assets                     |       | $                                    | 23,017     |   | $ | 12,367 |   | $ | 10,377 |   | $ | 45,761 |   | $ | 973 |   | $ | 734 |   |
|                                    |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Goodwill                                |       | $                                    | 7,055      |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 7,055 |   |
|                                    |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Depreciation and amortization expense   |       | $                                    | 1,063      |   | $ | 843 |   | $ | 1,517 |   | $ | 3,423 |   | $ | 150 |   | $ | 3,573 |   |
|                                    |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Interest expense                        |       | $                                    | 1,737      |   | $ | 1,409 |   | $ | 654 |   | $ | 3,800 |   | $ | 1,360 |   | $ | 5,160 |   |

 

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| ** **                              | ** ** | **Year Ended October 31, 2004** | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|
| ** **                              | ** ** | **Trailer  Manufacturing**           | ** ** | **Coach  Leasing** | ** ** | **Butyl Rubber  Reclaiming** | ** ** | **Total  Segments** | ** ** | **Corporate** | ** ** | **Consolidated** | ** ** |
|                                    |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Sales:                                  |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Domestic                                |       | $                                    | 43,037     |   | $ | 5,464 |   | $ | 9,499 |   | $ | 58,000 |   | $ | — |   | $ | 58,000 |   |
| Foreign                                 |       | 5,147                                |       | — |   | 1,213 |   | 6,360 |   | — |   | 6,360 |   |
|                                    |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Total                                   |       | $                                    | 48,184     |   | $ | 5,464 |   | $ | 10,712 |   | $ | 64,360 |   | $ | — |   | $ | 64,360 |   |
|                                    |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Cost of goods sold                      |       | $                                    | 44,116     |   | $ | 3,216 |   | $ | 10,472 |   | $ | 57,804 |   | $ | — |   | $ | 57,804 |   |
|                                    |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Loss before taxes and minority interest |       | $                                    | (4,110     | ) | $ | (1,574 | ) | $ | (1,773 | ) | $ | (7,457 | ) | $ | (694 | ) | $ | (8,151 | ) |
|                                    |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Identifiable assets                     |       | $                                    | 25,311     |   | $ | 13,407 |   | $ | 9,692 |   | $ | 48,410 |   | $ | 713 |   | $ | 49,123 |   |
|                                    |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Goodwill                                |       | $                                    | 7,055      |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 7,055 |   |
|                                    |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Depreciation and amortization expense   |       | $                                    | 903        |   | $ | 1,004 |   | $ | 1,450 |   | $ | 3,357 |   | $ | 142 |   | $ | 3,499 |   |
|                                    |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Interest expense                        |       | $                                    | 1,606      |   | $ | 1,362 |   | $ | 494 |   | $ | 3,462 |   | $ | 703 |   | $ | 4,165 |   |

 

62

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| ** **                              | ** ** | **Year Ended October 31, 2003** | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|
| ** **                              | ** ** | **Trailer  Manufacturing**           | ** ** | **Coach  Leasing** | ** ** | **Butyl Rubber  Reclaiming** | ** ** | **Total  Segments** | ** ** | **Corporate** | ** ** | **Consolidated** | ** ** |
|                                    |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Sales:                                  |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Domestic                                |       | $                                    | 37,590     |   | $ | 7,281 |   | $ | 9,893 |   | $ | 54,764 |   | $ | — |   | $ | 54,764 |   |
| Foreign                                 |       | 3,419                                |       | — |   | 1,112 |   | 4,531 |   | — |   | 4,531 |   |
|                                    |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Total                                   |       | $                                    | 41,009     |   | $ | 7,281 |   | $ | 11,005 |   | $ | 59,295 |   | $ | — |   | $ | 59,295 |   |
|                                    |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Cost of goods sold                      |       | $                                    | 37,704     |   | $ | 4,060 |   | $ | 9,972 |   | $ | 51,736 |   | $ | — |   | $ | 51,736 |   |
|                                    |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Loss before taxes and minority interest |       | $                                    | (3,480     | ) | $ | (122 | ) | $ | (752 | ) | $ | (4,354 | ) | $ | (235 | ) | $ | (4,589 | ) |
|                                    |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Identifiable assets                     |       | $                                    | 19,722     |   | $ | 14,147 |   | $ | 11,028 |   | $ | 44,897 |   | $ | 985 |   | $ | 45,882 |   |
|                                    |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Goodwill                                |       | $                                    | 5,784      |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 5,784 |   |
|                                    |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Depreciation and amortization expense   |       | $                                    | 751        |   | $ | 767 |   | $ | 1,332 |   | $ | 2,850 |   | $ | — |   | $ | 2,850 |   |
|                                    |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Interest expense                        |       | $                                    | 1,395      |   | $ | 1,189 |   | $ | 556 |   | $ | 3,140 |   | $ | 407 |   | $ | 3,547 |   |

 

Obsidian Enterprises (legal parent) allocates selling, general andadministrative expenses to the respective companies primarily based on apercentage of sales.  For the years endedOctober 31, 2005, 2004, and 2003, respectively, allocated corporateexpenses by segment were as follows:

 

| ** **              | ** ** | **Year Ended October 31,** | ** ** |
|-------------------------|------------|---------------------------------|------------|
| ** **              | ** ** | **2005**                        | ** ** | **2004** | ** ** | **2003** | ** ** |
|                    |       |                            |       |   |   |   |   |
| Trailer manufacturing   |       | $                               | 1,798      |   | $ | 2,280 |   | $ | 1,174 |   |
| Coach leasing           |       | 181                             |       | 259 |   | 200 |   |
| Butyl rubber reclaiming |       | 383                             |       | 507 |   | 317 |   |
|                    |       |                            |       |   |   |   |   |
|                    |       | $                               | 2,362      |   | $ | 3,046 |   | $ | 1,691 |   |

 

14.  INCOME TAXES

 

The Company files a consolidated federal tax return.  The parent and each subsidiary record theirshare of the consolidated federal tax expense on a separate-return basis.  Any additional income tax expense or recoveryrealized as a result of filing a consolidated tax return is recorded inconsolidation.  The Company and eachsubsidiary file separate state income tax returns.  The Company accounts for income taxes incompliance with SFAS No. 109, *Accounting for IncomeTaxes*.  Under SFAS No. 109,deferred tax assets and liabilities are recorded for any temporary differencesbetween the financial statement and tax bases of assets and liabilities, usingthe enacted tax rates and laws expected to be in effect when the taxes areactually paid or recovered.

 

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The provision for (expense) benefit for income taxes consists of thefollowing:

 

| ** **                                     | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Current:                                       |       |     |       |     |       |     |       |
| Federal                                        |       | $        | —     |     | $          | —   |       | $ | — |   |
| State                                          |       | 4        |       | (48      | )          | (66      | )          |
|                                           |       |     |       |     |       |     |       |
|                                           |       | 4        |       | (48      | )          | (66      | )          |
|                                           |       |     |       |     |       |     |       |
| Deferred:                                      |       |     |       |     |       |     |       |
| Federal                                        |       | 208      |       | 61       |       | 733      |       |
| State                                          |       | 14       |       | 10       |       | 270      |       |
| Discontinued operations                        |       | —   |       | —   |       | 25       |       |
|                                           |       |     |       |     |       |     |       |
|                                           |       | 222      |       | 71       |       | 1,028    |       |
|                                           |       |     |       |     |       |     |       |
| Total tax benefit                              |       | 226      |       | 23       |       | 962      |       |
|                                           |       |     |       |     |       |     |       |
| Less tax benefit from  discontinued operations |       | —   |       | —   |       | (25      | )          |
|                                           |       |     |       |     |       |     |       |
| Tax benefit from continuing  operations        |       | $        | 226        |     | $          | 23       |       | $ | 937 |   |

 

A reconciliation of income tax benefit (expense) from continuingoperations at U.S. statutory rates to actual income tax benefit (expense) is asfollows:

 

| ** **                                | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                      |       |     |       |     |       |     |       |
| Benefit (tax) at statutory rate  (34%)    |       | $        | 3,698      |     | $          | 2,714    |       | $ | 1,536 |   |
| Effect of nontaxable combined  entity     |       | (27      | )          | (10      | )          | 138      |       |
| State income tax                          |       | 359      |       | 273      |       | 180      |       |
| Non-deductible goodwill                   |       | —   |       | —   |       | —   |       |
| Valuation reserve applied to  equity      |       | —   |       | —   |       | —   |       |
| (Increase) decrease in  valuation reserve |       | (3,804   | )          | (2,901   | )          | (1,028   | )          |
| Other                                     |       | —   |       | (53      | )          | 111      |       |
|                                      |       |     |       |     |       |     |       |
|                                      |       | $        | 226        |     | $          | 23       |       | $ | 937 |   |

 

Deferred income taxes represent the net tax effects of temporarydifferences between the carrying amount of assets and liabilities for financialreporting purposes and for income tax purposes. Deferred tax assets are reduced by a valuation allowance when, in the opinionof management, it is more likely than not that some or all of a portion of thedeferred tax assets will not be realized. Significant components of the Company’s deferred tax assets andliabilities are as follows:

 

64

----

 

 

| ** **                              | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|
|                                    |       |     |       |     |       |
| Deferred tax assets  (liabilities):     |       |     |       |     |       |
| Accounts receivable                     |       | $        | 290        |     | $          | 295 |   |
| Inventories                             |       | 775      |       | 527      |       |
| Accrued expenses                        |       | 286      |       | 351      |       |
| Intangibles                             |       | (76      | )          | (61      | )          |
| Operating loss carryforwards            |       | 10,579   |       | 6,830    |       |
| Property and equipment                  |       | (4,461   | )          | (4,521   | )          |
| Other                                   |       | 46       |       | 36       |       |
|                                    |       |     |       |     |       |
|                                    |       | 7,439    |       | 3,457    |       |
| Less valuation reserves                 |       | (10,579  | )          | (6,830   | )          |
|                                    |       |     |       |     |       |
| Deferred tax assets  (liabilities), net |       | $        | (3,140     | )        | $          | (3,373 | ) |

 

Included in the accompanying balance sheet under the following:

 

| ** **               | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|
|                     |       |     |       |     |       |
| Deferred tax assets      |       | $        | 1,390      |     | $          | 1,209 |   |
| Deferred tax liabilities |       | (4,530   | )          | (4,582   | )          |
|                     |       |     |       |     |       |
|                     |       | $        | (3,140     | )        | $          | (3,373 | ) |

 

The amount of federal tax net operating loss carryforwards available atOctober 31, 2005 was approximately $29,700.  Certain of these loss carryforwards weregenerated by certain subsidiaries prior to the reverse merger transaction in June 2001and have expiration dates through the year 2021.  The use of preacquisition operating losses issubject to limitations imposed by the Internal Revenue Code.  Utilization of these loss carryforwards isimpacted by such limitations. Accordingly, the deferred tax assets related to premerger operatinglosses have been reserved with a valuation allowance to the extent they are notoffset by deferred liabilities.

 

Federal tax net operating loss carryforwards and expiration dates as ofOctober 31, 2005 are as follows:

 

| **Premerger** | ** ** | **Expiration Dates** | ** **        | **Postmerger** | ** ** | **Expiration Dates** | ** ** |
|---------------|------------|----------------------|-------------------|----------------|------------|----------------------|------------|
|          |       |                 |              |           |       |                 |       |
| $             | 2,996      |                 | 2008 through 2021 |           | $          | 26,704               |       | 2021 through 2025 |   |
|               |            |                      |                   |                |            |                      |            |  |  |

 

Cash payments of income taxes for the years ended October 31,2005, 2004, and 2003 were $68, $75, and $96, respectively.

 

65

----

 

15.  RELATED PARTIES

 

The Company makes advances, receives loans and conducts other businesstransactions with affiliates resulting in the following amounts for the periodsended:

 
| ** **                                                | ** ** | **October 31,  2005** | ** ** | **October 31,  2004** | ** ** |
|-----------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Balance sheets:                                           |       |                       |       |                       |       |
| Current assets:                                           |       |                       |       |                       |       |
| Accounts receivable, Obsidian Capital  Company(2)         |       | $                          | 8          |                       | $          | 8 |   |
| Accounts receivable, Champion(2)                          |       | 14                         |       | 7                          |       |
| Accounts receivable, CCG Parma(2)                         |       | 8                          |       | 12                         |       |
| Accounts receivable, DC Investments and  Fair Holdings(2) |       | 29                         |       | 2                          |       |
| Accounts receivable, stockholders                         |       | 27                         |       | 11                         |       |
| Accounts receivable, other affiliated  entities           |       | 71                         |       | 31                         |       |
|                                                      |       |                       |       |                       |       |
| Total assets                                              |       | $                          | 157        |                       | $          | 71 |   |
|                                                      |       |                       |       |                       |       |
| Current liabilities:                                      |       |                       |       |                       |       |
| Accounts payable, Obsidian Capital Company(2)             |       | $                          | 35         |                       | $          | 35 |   |
| Accounts payable, Champion(2)                             |       | 56                         |       | 12                         |       |
| Accounts payable, CCG Parma(2)                            |       | 59                         |       | 9                          |       |
| Accounts payable, DC Investments and Fair  Holdings(2)    |       | 2,388                      |       | 1,181                      |       |
| Accounts payable, stockholders                            |       | 3                          |       | 3                          |       |
| Accounts payable, other affiliated entities               |       | 51                         |       | 28                         |       |
| Long-term portion:                                        |       |                       |       |                       |       |
| Accounts payable, Obsidian Capital Company(2)             |       | 240                        |       | 240                        |       |
| Accounts payable, stockholders                            |       | 316                        |       | 316                        |       |
| Notes payable, DC Investments(2)                          |       | 700                        |       | 700                        |       |
| Notes payable, Fair Holdings(2)                           |       | 7,417                      |       | 8,784                      |       |
| Line of credit, Fair Holdings(2)                          |       | 23,056                     |       | 10,815                     |       |
| Total liabilities                                         |       | $                          | 34,321     |                       | $          | 22,123 |   |

 
| ** **                                              | ** ** | **October 31,  2005** | ** ** | **October 31,  2004** | ** ** | **October 31,  2003** | ** ** |
|---------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|
|                                                    |       |                       |       |                       |       |                       |       |
| Statements of Operations:                               |       |                       |       |                       |       |                       |       |
| Interest expense, DC Investments and Fair  Holdings(2)  |       | $                          | 2,674      |                       | $          | 1,751                      |       | $ | 1,274 |   |
| Rent expense, Fair Holdings(2)                          |       | 54                         |       | 54                         |       | 45                         |       |
| Sales to Champion (2)                                   |       | 71                         |       | 60                         |       | —                     |       |
| Purchases from Champion (2)                             |       | 1,107                      |       | 137                        |       | —                     |       |
| Rent expense, Roost Leasing(1)                          |       | 144                        |       | 72                         |       | —                     |       |
| Purchases, CCG Parma(2)                                 |       | 127                        |       | 11                         |       | —                     |       |
| Other:                                                  |       |                       |       |                       |       |                       |       |
| Coach rebuild, Champion                                 |       | —                     |       | 185                        |       | —                     |       |
| Classic acquisition costs, Diamond  Investments, LLC(2) |       | —                     |       | 51                         |       | —                     |       |
|                                                         |            |                            |            |                            |            |                            |            |  |  |  |

 

----

(1)A leasing company owned by the former owners of Classic

(2)An entity controlled by Tim Durham, the Chairman of ObsidianEnterprises

 

66

----

 

Related-party amounts classified as current reflect those portions ofthe total receivable or payable that were currently due in accordance with theterms, or were collected or paid subsequent to year end.  Amounts classified as long term representamounts not currently due.

 

In February and March 2004, Obsidian secured an additionalfinancial commitment from Fair Holdings to provide, as needed, additionalborrowings under a line of credit agreement from $8,000 to $15,000. The linebears interest at 10% and the line of credit arrangement expires on January 1,2007 at which time the total principal and interest is due and payable.  No late fees were charged on this loan.

 

In July 2004 and October 2005 the Fair Holdings line ofcredit with Danzer was amended to increase the total availability from $1,500to $3,000 and $5,000, respectively. All other terms of the agreement willcontinue as stated in the original and amended agreement dated August 15,2001 which includes interest at LIBOR plus 3.2%. No late fees have beenassessed by Fair Holdings for this loan.

 

United, U.S. Rubber, and Pyramid traditionally had borrowing agreementswith Obsidian Enterprises which was funded using Obsidian Enterprises’agreement with Fair Holdings discussed above. In April 2005, these agreements were redocumented between FairHoldings and United, U.S. Rubber, and Pyramid which allowed for borrowings upto $3,000, $3,700, and $750, respectively, and expire in April 2012. In October 2005,U.S. Rubber’s agreement with Fair Holdings was amended to increase the maximumborrowings to $5,500.

 

16.  COMMITMENTS AND CONTINGENCIES

 

In connection with their dealers’ wholesale floor-plan financing ofcargo trailers, the Company has entered into repurchase agreements with variouslending institutions.  Each repurchasecommitment is on an individual unit basis with a term from the date it isfinanced by the lending institution through payment date by the dealer,generally not exceeding one year. Outstanding obligations are approximately $2,461 at October 31,2005. Repurchase agreements with third party financing sources are ordinary andcustomary in the cargo trailer industry. The repurchase obligations are limited to the repurchase of theinventory, in like new condition, and only in the event a dealer is in defaultunder its agreement with the finance company. The Company is not responsible for interest or any other carrying costincurred by the dealer, and is not responsible for any required curtailmentpayments to be made by the dealer to the finance company based on the aging ofthe finance company receivable. The dealer cannot initiate the repurchaseobligation and has no right to return the product to the Company.  The Company receives credit approval from thethird party finance company prior to shipping the product and generally receivespayment with in a few days.  The Company’srepurchase activity under these agreements has historically been infrequent andthe losses incurred have been minimal. The loss is limited to the difference between the repurchase amount andthe subsequent resale of the inventory.  Losses incurred under such arrangements have not been significant andthe estimated liability for losses on contracts outstanding at October 31,2005 is not material.

 

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

 

In fiscal 2005, U.S. Rubber entered into a number of agreementsrelating to the installation of new equipment. These commitments total approximately $1,036 which requires full paymentin fiscal 2006.

 

67

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17.  RESTATEMENT OF PREVIOUSLY ISSUED FINANCIALSTATEMENTS:

 

The Companybecame aware of errors related to the accounting for accrued warranty,inventory, and income taxes.  The changerelates to periods prior to October 31, 2004 and prior.  The Company is restating its previouslyissued financial statements for October 31, 2004 for this error.  Below is a comparison of previously reportedand restated balances included in the Consolidated Balance Sheet and Statementof Operations as of and for October 31, 2004:

 

 
| **October 31, 2004**                       | ** ** | **Previously  Reported** | ** ** | **Change** | ** ** | **As Restated** | ** ** |
|-------------------------------------------------|------------|--------------------------|------------|------------|------------|-----------------|------------|
|                                            |       |                     |       |       |       |            |       |
| Consolidated Balance Sheet:                     |       |                     |       |       |       |            |       |
| Inventories, net                                |       | $                        | 8,971      |       | $          | (870            | )          | $ | 8,101 |   |
| Deferred income tax assets                      |       | 5,507                    |       | 786        |       | 6,293           |       |
| Deferred income tax valuation reserve           |       | (4,872                   | )          | (31        | )          | (4,903          | )          |
| Net deferred income tax assets                  |       | 635                      |       | 755        |       | 1,390           |       |
| Accrued expenses                                |       | 923                      |       | 364        |       | 1,287           |       |
| Accumulated deficit                             |       | (22,739                  | )          | (4,306     | )          | (27,045         | )          |
|                                            |       |                     |       |       |       |            |       |
| Stockholders’ deficit, beginning of period |       | (9,463                   | )          | (4,306     | )          | (13,769         | )          |
|                                            |       |                     |       |       |       |            |       |
| Cost of sales                                   |       | 57,804                   |       | 167        |       | 57,971          |       |
| Loss before income taxes                        |       | (7,984                   | )          | (167       | )          | (8,151          | )          |
| Net loss                                        |       | (8,033                   | )          | (167       | )          | (8,200          | )          |
| Net loss per share                              |       | $                        | (2.47      | )          | $          | (0.06           | )          | $ | (2.53 | ) |

 

18.  SUBSEQUENT EVENTS

 

A group of Obsidian Stockholders filed a transaction statement on Schedule 13E-3and announced their intention to take Obsidian private. The purpose of thetransaction is to eliminate the public stockholders of Obsidian and causeObsidian to become a private company whose stock will no longer be traded onthe OTC Bulletin Board and which will no longer be subject to the periodicreporting requirements of the Securities Exchange Act of 1934. Subsequent tofiscal 2005, the group filed amendment 4 to schedule 13-E3 notifying allshareholders that the group obtained 90% ownership.  The expected date to complete the goingprivate transaction is March 6, 2006.

 

68

----

 

19.  SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

 

(dollars in thousands, except per shareamounts)

 

# **YEAR ENDED OCTOBER 31, 2005**

 
| ** **                                                                    | ** ** | **First Qtr.  Ended 1/31/05** | ** ** | **Second Qtr.  Ended 4/30/05** | ** ** | **Third Qtr.  Ended 7/31/05** | ** ** | **Fourth Qtr.  Ended  10/31/05** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------------------|------------|--------------------------------|------------|-------------------------------|------------|----------------------------------|------------|
|                                                                          |       |                          |       |                           |       |                          |       |                             |       |
| Net sales                                                                     |       | $                             | 13,645     |                           | $          | 18,944                        |       | $                                | 17,591     |   | $ | 15,594 |   |
|                                                                          |       |                          |       |                           |       |                          |       |                             |       |
| Gross profit                                                                  |       | 826                           |       | 1,765                          |       | 1,487                         |       | 390                              |       |
|                                                                          |       |                          |       |                           |       |                          |       |                             |       |
| Loss from continuing operations                                               |       | (3,116                        | )          | (2,083                         | )          | (2,157                        | )          | (3,553                           | )          |
|                                                                          |       |                          |       |                           |       |                          |       |                             |       |
| Loss from continuing operations per basic  common and common equivalent share |       | (1.01                         | )          | (0.67                          | )          | (0.69                         | )          | (1.15                            | )          |
|                                                                               |            |                               |            |                                |            |                               |            |                                  |            |  |  |  |  |

 

# **YEAR ENDED OCTOBER 31, 2004**

 
| ** **                                                                    | ** ** | **First Qtr.  Ended 1/31/04** | ** ** | **Second Qtr.  Ended 4/30/04** | ** ** | **Third Qtr.  Ended 7/31/04** | ** ** | **Fourth Qtr.  Ended  10/31/04** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------------------|------------|--------------------------------|------------|-------------------------------|------------|----------------------------------|------------|
|                                                                          |       |                          |       |                           |       |                          |       |                             |       |
| Net sales                                                                     |       | $                             | 12,046     |                           | $          | 16,292                        |       | $                                | 18,227     |   | $ | 17,795 |   |
|                                                                          |       |                          |       |                           |       |                          |       |                             |       |
| Gross profit                                                                  |       | 1,067                         |       | 1,103                          |       | 2,809                         |       | 1,577                            |       |
|                                                                          |       |                          |       |                           |       |                          |       |                             |       |
| Loss from continuing operations                                               |       | (2,218                        | )          | (2,890                         | )          | (686                          | )          | (2,167                           | )          |
|                                                                          |       |                          |       |                           |       |                          |       |                             |       |
| Loss from continuing operations per basic  common and common equivalent share |       | (3.32                         | )          | (1.00                          | )          | (0.13                         | )          | (0.66                            | )          |
|                                                                               |            |                               |            |                                |            |                               |            |                                  |            |  |  |  |  |

#  

# **YEAR ENDED OCTOBER 31, 2003**

 
| ** **                                                                    | ** ** | **First Qtr.  Ended 1/31/03** | ** ** | **Second Qtr.  Ended 4/30/03** | ** ** | **Third Qtr.  Ended 7/31/03** | ** ** | **Fourth Qtr.  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 |       | (2.25                         | )          | (1.26                          | )          | (0.14                         | )          | (1.52                            | )          |
|                                                                               |            |                               |            |                                |            |                               |            |                                  |            |  |  |  |  |

 

----

***The fourth quarter includesa charge related to inventory at United of $500**

** **

69

----

 

**SCHEDULE II—VALUATIONAND QUALIFYING OF ACCOUNTS**

** **

Year Ended October 31,2005

(in thousands)

 
| ** **                      | ** ** | ** **                                           | ** ** | **Column C—Additions**                  | ** ** | ** **                                               | ** ** | ** **                                     | ** ** |
|---------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------------------|------------|------------------------------------------------|------------|
| **Column A—  Description** | ** ** | **Column B—  Balance at  Beginning of  Period** | ** ** | **(1)—Charged  to Costs and  Expenses** | ** ** | **(2)—Charged  to Other  Accounts—  Describe** | ** ** | **Column D—  Deductions—  Describe** | ** ** | **Column E—  Balance at  End of  Period** | ** ** |
|                            |       |                                                 |       |                                         |       |                                                     |       |                                           |       |   |   |
| Allowance for doubtful accounts |       | $                                                    | 743        |                                         | $          | 102                                                      |       | $                                              | —     |   | $ | 85 | (1) | $ | 760 |   |
|                            |       |                                                 |       |                                         |       |                                                     |       |                                           |       |   |   |
| Inventory valuation allowances  |       | $                                                    | 1,092      |                                         | $          | 1,103                                                    |       | $                                              | —     |   | $ | — |   | $ | 2,195 |   |
|                            |       |                                                 |       |                                         |       |                                                     |       |                                           |       |   |   |
| Deferred tax valuation reserve  |       | $                                                    | 6,830      |                                         | $          | 3,749                                                    |       | $                                              | —     |   | $ | — |   | $ | 10,579 |   |

 

Year Ended October 31,2004

(in thousands)

 
| ** **                      | ** ** | ** **                                           | ** ** | **Column C—Additions**                  | ** ** | ** **                                               | ** ** | ** **                                     | ** ** |
|---------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------------------|------------|------------------------------------------------|------------|
| **Column A—  Description** | ** ** | **Column B—  Balance at  Beginning of  Period** | ** ** | **(1)—Charged  to Costs and  Expenses** | ** ** | **(2)—Charged  to Other  Accounts—  Describe** | ** ** | **Column D—  Deductions—  Describe** | ** ** | **Column E—  Balance at  End of  Period** | ** ** |
|                            |       |                                                 |       |                                         |       |                                                     |       |                                           |       |   |   |
| Allowance for doubtful accounts |       | $                                                    | 496        |                                         | $          | 287                                                      |       | $                                              | —     |   | $ | 40 | (1) | $ | 743 |   |
|                            |       |                                                 |       |                                         |       |                                                     |       |                                           |       |   |   |
| Inventory valuation allowances  |       | $                                                    | 321        |                                         | $          | 870                                                      | (3)        | $                                              | —     |   | $ | 99 | (2) | $ | 1,092 |   |
|                            |       |                                                 |       |                                         |       |                                                     |       |                                           |       |   |   |
| Deferred tax valuation reserve  |       | $                                                    | 1,971      |                                         | $          | 4,859                                                    | (3)        | $                                              | —     |   | $ | — |   | $ | 6,830 |   |

 

----

(1)Recovery of amounts previously reserved.

(2)Use of inventory previously reserved.

(3)Additional reserve due to change of error in periods of October 31,2004 and prior.

 

70

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## **ITEM 9.**                        CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.

##  

As previously reported in a Current Report Form 8-Kfiled on October 14, 2005 the independent public accountant of theCompany, McGladrey & Pullen, LLC, resigned effective October 14,2005.  The Audit Committee of the Boardof Directors subsequently approved the engagement of Somerset CPAs. P.C. as theCompany’s registered independent public accounting firm.

 

## **ITEM9A.**               CONTROLS AND PROCEDURES.

 

The Company maintains disclosure controls andprocedures that are designed to ensure that information required to bedisclosed in the reports we file pursuant to the Securities Exchange Act of1934 is recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms. The Company’s management recognizes that, because the design of anysystem of controls is based in part upon certain assumptions about thelikelihood of future events and also is subject to other inherent limitations,disclosure controls and procedures, no matter how well designed and operated,can provide only reasonable, and not absolute, assurance of achieving thedesired objectives.

 

Under the supervision and with theparticipation of the Company’s management, including the Company’s ChiefExecutive Officer and Chief Financial Officer, the Company has evaluated theeffectiveness of the Company’s disclosure controls and procedures as of October 31,2005.  Based on this evaluation, theChief Executive Officer and Chief Financial Officer have concluded that, forthe reasons more fully set forth below, the Company’s disclosure controls andprocedures were not effective on October 31, 2005 in providing reasonableassurance that information required to be disclosed in the reports we filepursuant to the Securities Exchange Act of 1934 was recorded, processed,summarized and reported within the time periods specified in the SEC’s rules andforms.

 

More specifically, the Company’s management hasconcluded that (i) additional accounting personnel were needed both at theparent company level and at certain subsidiaries at October 31, 2005 toensure that certain disclosure controls and procedures were operatingeffectively; (ii) greater segregation of duties was needed in theaccounting functions; and (iii) certain procedures should be documented toensure that personnel turnover does not result in a failure of those procedures.  The Company is evaluating how best to utilizethe time of these new employees.  TheCompany will continue to evaluate the need for additional staff at the parentand subsidiary levels, but given the size and location of the Company’ssubsidiaries the Company believes it will continue to face challenges inattracting and retaining qualified personnel. Additionally, the Company is also in the process of evaluating ways inwhich the impact of personnel turnover on the implementation of disclosure controlsand procedures can be reduced. Management continues to evaluate the effectiveness of this segregationand the need for additional enhancements, including, but not limited to, theaddition of accounting personnel.

 

There have been no other significant changes in theCompany’s internal controls or in other factors that could significantly affectinternal controls subsequent to the date of the October 31, 2005evaluation.

 

## **ITEM9B.**               OTHER INFORMATION.

##  

None.

 

71

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# **PART III**

 

## **ITEM10.**                 DIRECTORS AND EXECUTIVE OFFICERS OF THEREGISTRANT.

##  

The following table sets forth information with respect to alldirectors and executive officers of the Company, including their ages, present principal occupations, other businessexperience during the last five years.  

 
| **Name**             | ** ** | **Age**    | ** ** | **Position**                                                 | ** ** | **Director Since** |
|----------------------|------------|------------|------------|--------------------------------------------------------------|------------|--------------------|
| ** **           | ** ** | ** ** | ** ** | ** **                                                   | ** ** | ** **         |
| Timothy S. Durham    |       | 43         |       | Chief Executive Officer and Chairman of the  Board           |       | 2001               |
| Terry G. Whitesell   |       | 66         |       | President, Chief Operating Officer and  Director             |       | 2001               |
| Jeffrey W. Osler     |       | 37         |       | Executive Vice President, Secretary,  Treasurer and Director |       | 2001               |
| D. Bruce Johnston+   |       | 55         |       | Director                                                     |       | 2004               |
| D. Scott McKain*     |       | 51         |       | Vice Chairman and Director                                   |       | 2001               |
| Daniel S.  Laikin+   |       | 43         |       | Director                                                     |       | 2001               |
| Rick D. Snow         |       | 42         |       | Executive Vice President and Chief  Financial Officer        |       | N/A                |
| Anthony P. Schlichte |       | 50         |       | Executive Vice President of Corporate  Finance               |       | N/A                |

 

----

*Members of the Compensation Committee

+Membersof the Audit Committee

 

Mr. Durham has served as the Chief Executive Officer and Chairmanof the Board and as a director of the Company since June 2001.  He has served as a Managing Member and ChiefExecutive Officer of Obsidian Capital Company LLC, which is the general partnerof Obsidian Capital Partners, a major shareholder of the Company since April 2000.  Beginning in 1998, Mr. Durham foundedand maintained a controlling interest in several investment funds, includingDurham Capital Corporation, Durham Hitchcock Whitesell and Company LLC, andDurham Whitesell & Associates LLC. From 1991 to 1998, Mr. Durham served in various capacities atCarpenter Industries, Inc., a school bus manufacturer, including as ViceChairman, President and Chief Executive Officer.  Mr. Durham also serves as a director ofNational Lampoon, Inc.  Mr. Durhamis Mr. Osler’s brother-in-law.

 

Mr. Whitesell has served as the President and Chief OperatingOfficer and as a director of the Company since June 2001.  Prior to that time he co-founded severalentities with Mr. Durham, including Obsidian Capital Company, LLC, DurhamHitchcock Whitesell and Company LLC and Durham Whitesell & AssociatesLLC.  Mr. Whitesell also is aManaging Member of Obsidian Capital Company LLC.  From April 1992 until September 1998,Mr. Whitesell served as Executive Vice President of Carpenter Industries, Inc.,which manufactured school buses.

 

Mr. Osler has served as the Executive Vice President, Secretaryand Treasurer and as a director of the Company since June 2001.  He also is a Managing Member of ObsidianCapital 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 asthe General Manager of Hilton Head National Golf Club.  Mr. Osler is Mr. Durham’sbrother-in-law.

 

Mr. Johnston has served as a director of the Company since May 2004,when he was appointed by the Board to fill the vacancy created by theresignation of a prior director. Mr. Johnston currently providesconsulting services through executive workshops across the nation. He hadserved as President and Chief Executive Officer of Gartmore Global Investments,the asset management fund subsidiary of Nationwide Mutual Insurance Companyfrom May 2002 to January 2004. From March 1998 to May 2002,he had served as Senior Vice President of Conseco Capital Management.

 

72

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Mr. McKain has been a director of the Company since September 2001.  He has served as the Chairman of McKainPerformance Group since 1981.  Mr. McKainalso has been the Vice Chairman of Durham Capital Corporation since 1999.  From 1983 to 1998, Mr. McKain was abroadcast journalist and television commentator.  Mr. McKain has also authored severalbooks and is a keynote speaker who presents high content workshops across thenation.

 

Mr. Laikin has served as a director of the Company since September 2001.  Mr. Laikin is Chief Operating Officerand a director of National Lampoon, Inc., the owner of the “NationalLampoon” trademark and engaged in the entertainment business.  He has been a Managing Member of FourleafManagement LLC, a management company of an investment fund that invests intechnology related entities, since 1999. Mr. Laikin served as the Chairman of the Board of Biltmore Homesfrom 1993 to 1998.

 

Mr. Snow was named Executive Vice President and Chief FinancialOfficer in April 2003.  He continuesto serve as Chief Financial Officer for Fair Finance, Inc., a company forwhich Mr. Durham, the Company’s Chairman and Chief Executive Officer, alsoserves as Chief Executive Officer.  Priorto joining Fair Finance, Inc., in 2002, Mr. Snow had served as SeniorManager of Brockman, Coats, Gedelian & Co., a regional accounting firmfrom 1991 to 2002. Prior to joining Brockman, Coats, Gedelian & Co. in1991, he was an accountant with Grant Thornton LLP.

 

Mr. Schlichte has served as Executive Vice President of CorporateFinance since April 2003. Previously he held vice president and senior lending officer positionsat First Indiana Bank from 1981 to 2003.

 

### **AUDIT COMMITTEE FINANCIAL EXPERT**

 

The Company’s Board of Directors has determined that the two members ofthe Audit Committee, Daniel S. Laikin and D. Bruce Johnston. Each qualify as an“audit committee financial expert” as defined by Item 401(h) of RegulationS-K adopted pursuant to the Securities Exchange Act of 1934, as amended.    Mr. Laikin and Mr. Johnston alsohave extensive business experience that has involved the review of financialstatements as more fully described in the above biographical information.  Mr. Johnston also qualifies as “independent”as that term is used in Item 7(d)(3)(iv) of Schedule 14A of theSecurities Exchange Act of 1934, as amended.

 

### **CODE OF ETHICS**

 

The Company has adopted a Code of Ethics for Chief Executive Officerand Senior Financial Officers (“Code of Ethics”), which applies to the Company’sprincipal executive officer and to its principal financial and accountingofficers. A copy of the Code of Ethics is attached as Exhibit 14 to thisAnnual Report on Form 10-K.

 

### **SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE**

 

Compliance with Section 16(a) of the Securities Exchange Actof 1934 requires the Company’s directors, executive officers, and persons whoown more than ten percent of the Company’s Common Stock (“10% Shareholders”) tofile reports of ownership and reports of changes in ownership of the Company’sCommon Stock with the Securities Exchange Commission (“SEC”). Officers,Directors and 10% Shareholders are required by SEC regulation to furnish theCompany with copies of all forms they file under Section 16 (a). Basedsolely on its review of the copies of such forms received by it with respect toits fiscal year ended October 31, 2005, and written representations fromcertain reporting persons that no other reports were required to be made bythose persons, the Company believes that its officers, directors and 10%Shareholders have complied with all Section 16(a) requirements forthe fiscal year ended October 31, 2005.

 

73

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## **ITEM11.**                 EXECUTIVE COMPENSATION.

 

### **SUMMARY COMPENSATION TABLE**

 

The following table sets forth certain information concerning thecompensation paid or accrued by the Company for services rendered during theCompany’s past three fiscal years ended October 31 by the Chief ExecutiveOfficer and each of the Company’s other most highly compensated executiveofficers whose total annual compensation for fiscal 2005, based on salary andbonus earned during fiscal 2005, exceeded $100,000 (the “Named ExecutiveOfficers”).   (No other executiveofficers of the Company received a salary and bonus for fiscal 2005 in excessof $100,000 so as to require their inclusion in the table.)  No bonuses were paid to any Named ExecutiveOfficers in fiscal years 2005, 2004 or 2003.

 
| **Name and  Principal Position**                                  | ** ** | **Annual Compensation** | ** ** | **All Other  Compensation** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **Year**                                                          | ** ** | **Salary**              |
| Timothy S. Durham, Chief Executive Officer                        |       | 2005                    |       | $                           | 185,000    |   | $ | 9,600 | (1) |
|                                                              |       | 2004                    |       | $                           | 185,000    |   | $ | 9,600 | (1) |
|                                                              |       | 2003                    |       | $                           | 75,000     |   | $ | 9,600 | (1) |
|                                                              |       |                    |       |                        |       |   |   |
| Terry G. Whitesell, President, Chief  Operating Officer           |       | 2005                    |       | $                           | 185,000    |   | $ | 9,600 | (1) |
|                                                              |       | 2004                    |       | $                           | 185,000    |   | $ | 9,600 | (1) |
|                                                              |       | 2003                    |       | $                           | 65,000     |   | $ | 9,600 | (1) |
|                                                              |       |                    |       |                        |       |   |   |
| Jeffrey W. Osler, Executive Vice President,  Secretary, Treasurer |       | 2005                    |       | $                           | 125,000    |   | $ | 9,600 | (1) |
|                                                              |       | 2004                    |       | $                           | 125,000    |   | $ | 9,600 | (1) |
|                                                              |       | 2003                    |       | $                           | 55,000     |   | $ | 9,600 | (1) |

 

----

(1) Othercompensation is a total annual car allowance.

 

### **OPTION/SAR GRANTS IN LAST FISCAL YEAR**

 

No grants were made to the Company’s Chief Executive Officer or otherNamed Executive Officers during fiscal 2005 pursuant to the Company’s 1999Stock 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 were exercised during fiscal 2005 by the Company’s ChiefExecutive Officer or other Named Executive Officers.

 

### **LONG-TERM INCENTIVE PLANS-AWARDS IN LAST FISCAL YEAR**

 

No awards were made in fiscal 2005 to the Chief Executive Officers ofother Named Executive Officers under any long-term incentive plan.

 

### **COMPENSATION OF DIRECTORS**

 

Directors who are not employees of the Company are entitled to a boardmeeting attendance fee of $750, plus reimbursement of expenses for each meetingattended.

 

74

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### **EMPLOYMENT AND CHANGE OF CONTROL AGREEMENTS**

 

The Company does not have an employment agreement with its ChiefExecutive Officer or other Named Executive Officers.

 

### **COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION**

 

None.

 

## **ITEM12.**                 SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT.

##  

The following table sets forth information with respect to beneficialownership of common stock as of January 30, 2006, by (i) all personsknown to the Company to be the beneficial owner of five percent or more of thecommon stock, (ii) each director of the Company, (iii) the ChiefExecutive Officer and each of the Named Executive Officers; and (iv) allCompany directors and executive officers as a group. This table does notinclude shares of common stock that may be purchased pursuant to options notexercisable within 60 days of the record date. All persons listed have solevoting and investment power with respect to their shares unless otherwiseindicated.

 
| **Name and Address of  Beneficial Owner** | ** **                                 | **Common Stock** | ** **                                     |
|-------------------------------------------|--------------------------------------------|------------------|------------------------------------------------|
| ** **                                | **Number of  Shares  Beneficially  Owned** | ** **       | **Percentage  of Shares  Beneficially  Owned** | ** ** |
| **Executive Officers and Directors:**     |                                       |             |                                           |   |   |
| Timothy S. Durham(1)                      |                                       | 2,800,984        |                                           | 90.08 | % |
| **Other 5% Owners:**                      |                                       |             |                                           |   |   |
| Black Rock Acquisition Corp(1)            |                                       | 2,800,984        |                                           | 90.08 | % |
| Jonathan B. Swain (1)                     |                                       | 2,800,984        |                                           | 90.08 | % |

 

----

(1)          Black RockAcquisition Corporation holds these shares directly. Messrs. Durham andSwain are members of the Board of Directors of Black Rock and may be deemed toshare voting and investment power with respect to these shares

 

## **ITEM13.**                 CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS.

##  

All dollar amounts in this Item 13 are in thousands (except for shareand per share information).

 

The Company subleases its headquarters space from Fair Holdings under asublease with a monthly rental payment of $5.

 

DW Trailer, a company owned by Messrs. Durham and Whitesell, hasleased a forklift to Danzer under a 38 month lease at $1 per month.

 

On March 28, 2003, Fair Holdings, a company controlled by Mr. Durham,acquired the line of credit and term debt due to the senior lender of Danzer inthe amount of $1,488 under an assignment and assumption agreement. The maturitydate of the line of credit included in the assignment and assumption agreementwas extended to April 2006, maximum borrowings under the line of creditwere increased from $1,000 to $1,500, and the debt covenants required by thesenior lender were waived through the end of the term. In July 2004 and October 2005,the Fair Holdings line of credit with Danzer was amended to increase the totalavailability from $1,500 to $3,000 and $5,000, respectively. All other terms ofthe agreement will continue as stated in the original and amended agreementdated August 15, 2001 which includes interest at LIBOR plus 3.2%. No latefees have been assessed by Fair Holdings for this loan.

 

75

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In February and March, 2004, Obsidian Enterprises secured anadditional financial commitment from Fair Holdings to provide, as needed,additional borrowings under a line of credit agreement from $8,000 to$15,000.  The line of credit arrangementexpires on January 1, 2007 at which time the total principal and interestis due and payable.  No late fees wereincurred or charged.  Fair Holdings iscontrolled by Mr. Durham.

 

United, U.S. Rubber, and Pyramid traditionally had borrowing agreementswith Obsidian Enterprises which was funded using Obsidian Enterprises’agreement with Fair Holdings discussed above. In April 2005, these agreements were redocumented between FairHoldings and United, U.S. Rubber, and Pyramid which allowed for borrowings upto $3,000, $3,700, and $750, respectively, and expire in April 2012. In October 2005,U.S. Rubber’s agreement with Fair Holdings was amended to increase the maximumborrowings to $5,500.

 

The following summarizes the current related party loans between theCompany, Fair Holdings and DC Investments:

 
| ** **                                                                                                                                                                                                                                                                                               | ** ** | **Debt  Outstanding at  October 31,  2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
|                                                                                                                                                                                                                                                                                                     |       |                                             |       |
| Obsidian  Enterprises                                                                                                                                                                                                                                                                                    |       |                                             |       |
|                                                                                                                                                                                                                                                                                                     |       |                                             |       |
| Line of credit issued by Fair  Holdings, maximum borrowing equal to $15,000, interest payable monthly at  10%, due January 2007, collateralized by all assets of Obsidian  Enterprises and personally guaranteed by certain officers.                                                               |       | $                                                | 12,904     |   |
|                                                                                                                                                                                                                                                                                                     |       |                                             |       |
| Danzer                                                                                                                                                                                                                                                                                                   |       |                                             |       |
|                                                                                                                                                                                                                                                                                                     |       |                                             |       |
| Line of credit issued by Fair  Holdings, maximum borrowing equal to $5,000, interest payable monthly at the  LIBOR Daily Floating Rate plus 3.2% (7.2882% at October 31, 2005), due  April 2006. Collateralized by substantially all assets of Danzer and  guaranteed by Obsidian Enterprises. |       | $                                                | 3,280      |   |
|                                                                                                                                                                                                                                                                                                     |       |                                             |       |
| Note payable to Fair Holdings,  requires monthly principal installments of $6, interest accrues at the LIBOR  Daily Floating Rate plus 3.2% (7.2882% at October 31, 2005), due April,  2006. Collateralized by substantially all assets of Danzer and guaranteed by  Obsidian Enterprises.          |       | $                                                | 828        |   |
|                                                                                                                                                                                                                                                                                                     |       |                                             |       |
| Pyramid, DW Leasing, DC Investments Leasing  and Obsidian Leasing                                                                                                                                                                                                                                        |       |                                             |       |
|                                                                                                                                                                                                                                                                                                     |       |                                             |       |
| Notes payable to Fair Holdings, repayable in monthly installments of interest ranging  from 10% to 14% through October 2012 and applicable balloon payments  through December 2012.                                                                                                            |       | $                                                | 6,562      |   |
|                                                                                                                                                                                                                                                                                                     |       |                                             |       |
| US Rubber                                                                                                                                                                                                                                                                                                |       |                                             |       |
|                                                                                                                                                                                                                                                                                                     |       |                                             |       |
| Note payable to DC Investments,  interest payable monthly at 15%, balloon payment due March 2007,  subordinate to bank debt.                                                                                                                                                                        |       | $                                                | 700        |   |
| Revolving line of credit with  Fair Holdings, interest payable monthly at 2% above the Fair Finance V-12  certificate rate (8.25% at October 31, 2005), due April 2012.  Collateralized by all assets of the borrower, subordinate to senior bank  debt.                                       |       | $                                                | 4,562      |   |
|                                                                                                                                                                                                                                                                                                     |       |                                             |       |
| United                                                                                                                                                                                                                                                                                                   |       |                                             |       |
|                                                                                                                                                                                                                                                                                                     |       |                                             |       |
| Revolving line of credit with  Fair Holdings, interest payable monthly at 2% above the Fair Finance V-12  certificate rate (8.25% at October 31, 2005), due April 2012.  Collateralized by all assets of the borrower, subordinate to line of credit  and notes payable.                       |       | $                                                | 2,304      |   |

 

76

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The notes to DC Investments and Fair Holdings did not incur anyadditional fees including late fees. In addition to the notes the Company hasan account payable to DC Investments and Fair Holdings totaling $2,388.

 

Management believes that the transactions described in this Item wereon terms no less favorable to the Company and its subsidiaries than would havebeen the case for transactions with unrelated third parties.

 

## **ITEM14.  PRINCIPAL ACCOUNTANT FEES ANDSERVICES.**

##  

Somerset CPAs, P.C. (“Somerset”) served as the Company’s independentauditors for the year ended October 31, 2005.  McGladrey & Pullen, LLP (“McGladrey &Pullen”) served as the Company’s independent auditors for the quarters ended January 31,April 30, and July 31, 2005 and for the years ended October 31,2004 and 2003.  The services performed bySomerset and McGladrey & Pullen in this capacity included conductingan examination in accordance with generally accepted auditing standards of, andexpressing an opinion on, the Company’s consolidated financial statements.

 

*Audit Fees*

 

Somerset’s aggregate fees billed for professional services rendered inconnection with the audit and review of SEC regulatory filings were $300,000for the 2005 fiscal year.  McGladrey &Pullen’s aggregate fees billed for professional services rendered in connectionwith the review of Forms 10-Q and all other SEC regulatory filings were $70,239 for the 2005 fiscal year, and $373,217 for the 2004 fiscal year.  The Company has paid and is current on allbilled fees.

 

*Audit-Related Fees*

 

McGladrey & Pullen’s fees for audit related services renderedin connection with the audit of a subsidiary’s defined contribution plan were$28,078 for the 2005 fiscal year and $16,662 for the 2004 fiscal year.

 

*Tax Fees*

 

Somerset and McGladrey & Pullen did not render any taxcompliance advice or planning services for the 2005 and 2004 fiscal years.

 

The Company has paid and is current on all billed fees.

 

*All Other Fees*

 

Somerset and McGladrey & Pullen did not render any managementadvisory services for the 2005 and 2004 fiscal years.

 

77

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*Audit Committee*

 

The Company’s Audit Committee pre-approves 100% of audit and auditrelated services with the exception of tax, benefit and other managementadvisory services.

 

Part IV

 

## **ITEM15.**                 EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

##  

(a)          The following documentsare filed as part of this Form 10-K:

 

1.                                                     ConsolidatedFinancial Statements of Obsidian Enterprises, Incorporated and Subsidiaries:

 

Report of Independent Registered AccountingFirm

 

Consolidated Balance Sheets – October 31,2005 and 2004

 

Consolidated Statements of Operations – Yearsended October 31, 2005, 2004, and 2003

 

Consolidated Statements of Stockholders’Equity (Deficit) and Comprehensive Loss – Years ended October 31, 2005,2004, and 2003

 

Consolidated Statements of Cash Flows – Yearsended October 31, 2005, 2004, and 2003

 

Notes to Consolidated Financial Statements.

 

2.                                                     ConsolidatedFinancial Statement Schedule of Obsidian Enterprises, Incorporated andSubsidiaries:

 

Schedule II –Valuation and Qualifying ofAccounts – Years ended October 31, 2005, 2004, and 2003

 

All other schedules are omitted because theyare not applicable or because the required information is included in theconsolidated financial statements or the notes thereto.

 

(b)         Exhibits:

 

See Exhibit Index

 

(c)          Additional FinancialStatements:

 

The individual financial statements of theregistrant’s subsidiaries have been omitted since the registrant is primarilyan operating company and all subsidiaries included in the consolidatedfinancials statements are wholly-owned subsidiaries.

 

78

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# **SIGNATURES**

#  

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 
| Dated: February 14, 2006 | OBSIDIAN ENTERPRISES, INC. |
|-------------------------------|----------------------------|
|                          |                       |   |
|                          |                       |   |
|                          | By                         | /s/ Timothy S. Durham |   |
|                          |                       | Timothy S. Durham |
|                          |                       | Chief Executive Officer |

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of theRegistrant and in the capacities and on the dates indicated.

 
| Dated: February 14, 2006 | /s/ Timothy S. Durham                                                                                         |   |
|-------------------------------|---------------------------------------------------------------------------------------------------------------|--------|
|                          | Timothy S. Durham                                                                                             |
|                          | Chief  Executive Officer (Principal Executive Officer)

and Chairman  of the Board and Director               |
|                          |                                                                                                          |
| Dated: February 14, 2006 | /s/ Rick D. Snow                                                                                              |   |
|                          | Rick D.  Snow, Executive Vice President/Chief Financial  Officer (Principal Financial and Accounting Officer) |
|                          |                                                                                                          |
| Dated: February 14, 2006 | /s/ Jeffrey W. Osler                                                                                          |   |
|                          | Jeffrey W.  Osler, Executive Vice President, Secretary  and Treasurer and Director                            |
|                          |                                                                                                          |
| Dated: February 14, 2006 | /s/ Terry G. Whitesell                                                                                        |   |
|                          | Terry G. Whitesell, Director                                                                                  |
|                          |                                                                                                          |
| Dated: February 14, 2006 | /s/ D. Bruce Johnston, III                                                                                    |   |
|                          | D. Bruce Johnston, III, Director                                                                         |
|                          |                                                                                                          |
| Dated: February 14, 2006 | /s/ D. Scott McKain                                                                                           |   |
|                          | D. Scott McKain, Vice Chairman and Director                                                                   |
|                          |                                                                                                          |
| Dated: February 14, 2006 | /s/ Daniel S. Laikin                                                                                          |   |
|                          | Daniel S. Laikin, Director                                                                                    |
|                               |                                                                                                               |        |  |

 

79

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**EXHIBIT INDEX**

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                               | ** ** | **Incorporated by  Reference/Attached**                                                                                                                         |
|------------------|------------|-------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                          |       |                                                                                                                                                            |
| 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 Limitations of Series C  Preferred Stock                           |       | Incorporated  by reference to Exhibit 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 and Limitations of  Series C Preferred Stock                   |       | Incorporated  by reference to Exhibit 3.1 to Amendment No. 1 to the Registration  Statement on Form S-4 filed on December 17, 2003.         |
|             |       |                                                                                                                          |       |                                                                                                                                                            |
| 3.4              |       | Certificate  of Designations, Preferences, Rights and Limitations of Series D  Preferred Stock                           |       | Incorporated  by reference to Exhibit 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 and Limitations of  Series D Preferred Stock                   |       | Incorporated  by reference to Exhibit 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 September 27, 2002)                                                  |       | Incorporated  by reference to Exhibit 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, dated July 27, 2001                                             |       | Incorporated  by reference to Exhibit 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 19, 2001 to HSBC Global Custody Nominee Due July 19, 2008 |       | Incorporated  by reference to Exhibit 2 to Schedule 13D filed September 20,  2001 by Russell Cleveland, Renaissance Capital Group, Inc.     |

 

80

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| 4.4    |   | 8.00%  Convertible Debenture Issued by Registrant on July 19, 2001 to  Renaissance US Growth & Income Trust PLC Due July 19, 2008                                                                    |   | Incorporated  by reference to Exhibit 3 to Schedule 13D filed September 20,  2001 by Russell Cleveland, Renaissance Capital Group, Inc. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                    |   |                                                                                                                                                        |
| 4.5    |   | Convertible  Loan Agreement, dated July 19, 2001, Among Registrant, BFSUS Special  Opportunities Trust PLC, Renaissance US Growth & Income Trust PLC  and Renaissance Capital Group, Inc.            |   | Incorporated  by reference to Exhibit 4.5 to the Registrant’s Annual Report on  Form 10-K for the Year Ended 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   |   | Management  Agreement, dated June 16, 2001, between Pyramid, Inc. and D.W.  Leasing                                                                                                                           |   | Incorporated  by reference to Exhibit 10.10 to the Registrant’s Annual Report on  Form 10-K for the Year Ended October 31, 2001         |
|   |   |                                                                                                                                                                                                                    |   |                                                                                                                                                        |
| 10.3   |   | Promissory  Note, dated June 1, 2001, from Obsidian Capital Company, LLC to U.S.  Rubber Reclaiming, Inc.                                                                                                     |   | Incorporated  by reference to Exhibit 10.11 to the Registrant’s Annual Report on  Form 10-K for the Year Ended October 31, 2001         |
|   |   |                                                                                                                                                                                                                    |   |                                                                                                                                                        |
| 10.4   |   | Purchase  Agreement, dated June 5, 2001, between United Expressline, Inc.,  United Acquisition, Inc., J.J.M. Incorporated and the Shareholders of  United Expressline, Inc. and J.J.M. Incorporated |   | Incorporated  by reference to Exhibit 10.13 to the Registrant’s Annual Report on  Form 10-K for the Year Ended October 31, 2001         |
|   |   |                                                                                                                                                                                                                    |   |                                                                                                                                                        |
| 10.5   |   | Promissory  Note, dated July 27, 2001, from United Acquisition, Inc. to United  Expressline, Inc.                                                                                                        |   | Incorporated  by reference to Exhibit 10.14 to the Registrant’s Annual Report on  Form 10-K for the Year Ended October 31, 2001         |
|   |   |                                                                                                                                                                                                                    |   |                                                                                                                                                        |
| 10.6   |   | Credit  Agreement, dated July 27, 2001, between United Acquisition, Inc. and  First Indiana Bank                                                                                                              |   | Incorporated  by reference to Exhibit 10.15 to the Registrant’s Annual Report on  Form 10-K for the Year Ended October 31, 2001         |
|   |   |                                                                                                                                                                                                                    |   |                                                                                                                                                        |
| 10.7   |   | Loan and  Security Agreement, dated January 21, 2000, between Danzer  Industries, Inc. and Banc of America Commercial Finance Corp.                                                                           |   | Incorporated  by reference to Exhibit 10.16 to the Registrant’s Annual Report on  Form 10-K for the Year Ended October 31, 2001         |
|   |   |                                                                                                                                                                                                                    |   |                                                                                                                                                        |
| 10.8   |   | Subordinated  Secured Promissory Note, dated December 29, 2000, from USRR Acquisition  Corp. to SerVaas, Inc.                                                                                                 |   | Incorporated  by reference to Exhibit 10.19 to the Registrant’s Annual Report on  Form 10-K for the Year Ended October 31, 2001.        |
|   |   |                                                                                                                                                                                                                    |   |                                                                                                                                                        |
| 10.9   |   | Form of  Installment Loan from Edgar County Bank & Trust Co. to DW Leasing  Company, LLC, Related Documents and Schedule Identifying Material  Details                                               |   | Incorporated  by reference to Exhibit 10.21 to the Registrant’s Annual Report on  Form 10-K for the Year Ended October 31, 2001         |

 

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| 10.10  |   | Loan Agreement,  dated December 10, 1999, between Old National Bank and DW Leasing  Company, LLC, and Related Documents                                                              |   | Incorporated  by reference to Exhibit 10.22 to the Registrant’s Annual Report on  Form 10-K for the Year Ended October 31, 2001    |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                      |   |                                                                                                                                                   |
| 10.11  |   | Form of  Promissory Note from DW Leasing Company, LLC to Star Financial Bank, Related  Documents and Schedule Identifying Material Details                                      |   | Incorporated  by reference to Exhibit 10.24 to the Registrant’s Annual Report on  Form 10-K for the Year Ended October 31, 2001    |
|   |   |                                                                                                                                                                                      |   |                                                                                                                                                   |
| 10.12  |   | Master Lease  Agreement, dated May 17, 2000, between Old National Bank and DW Leasing  Company, LLC, and Related Documents                                                           |   | Incorporated  by reference to Exhibit 10.26 to the Registrant’s Annual Report on  Form 10-K for the Year Ended October 31, 2001    |
|   |   |                                                                                                                                                                                      |   |                                                                                                                                                   |
| 10.13  |   | Loan  Agreement, dated June 1, 2000, between DW Leasing Company LLC and  Regions Bank and Security Agreement                                                                         |   | Incorporated  by reference to Exhibit 10.27 to the Registrant’s Annual Report on  Form 10-K for the Year Ended October 31, 2001    |
|   |   |                                                                                                                                                                                      |   |                                                                                                                                                   |
| 10.14  |   | Business  Loan Agreement (Asset Based), dated August 15, 2001, between Danzer  Industries, Inc. and Bank of America, N.A.                                                       |   | Incorporated  by reference to Exhibit 10.28 to the Registrant’s Annual Report on  Form 10-K for the Year Ended October 31, 2001    |
|   |   |                                                                                                                                                                                      |   |                                                                                                                                                   |
| 10.15  |   | 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    |
|   |   |                                                                                                                                                                                      |   |                                                                                                                                                   |
| 10.16  |   | Assignment  and Assumption Agreement, dated February 20, 2002, between DW Leasing,  LLC and Fair Holdings, Inc.                                                                 |   | Incorporated  by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on  Form 10-Q for the Quarter Ended April 30, 2002 |
|   |   |                                                                                                                                                                                      |   |                                                                                                                                                   |
| 10.17  |   | Replacement  Promissory Note, dated February 26, 2002, from Obsidian Enterprises, Inc.  to Fair Holdings, Inc. in the principal amount of $700,000 due  March 1, 2007 |   | Incorporated  by reference to Exhibit 10.35 to the Registrant’s Annual Report on  Form 10-K for the Year Ended October 31, 2002    |
|   |   |                                                                                                                                                                                      |   |                                                                                                                                                   |
| 10.18  |   | Promissory  Note from Obsidian Enterprises, Inc. in favor of Fair  Holdings, Inc. in the principal amount of $570,000 due February 1,  2007                                |   | Incorporated  by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on  Form 10-Q for the Quarter Ended April 30, 2002 |
|   |   |                                                                                                                                                                                      |   |                                                                                                                                                   |
| 10.19  |   | Subscription  Agreement of Fair Holdings, Inc. for 186,324 shares of Series C  Preferred Stock                                                                                  |   | Incorporated  by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on  Form 10-Q for the Quarter Ended April 30, 2002 |
|   |   |                                                                                                                                                                                      |   |                                                                                                                                                   |
| 10.20  |   | Subscription  Agreement of Obsidian Capital Partners, LP for 402,906 shares of  Series C Preferred Stock                                                                             |   | Incorporated  by reference to Exhibit 10.7 to the Registrant’s Quarterly Report on  Form 10-Q for the Quarter Ended April 30, 2002 |

 

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| 10.21  |   | Second  Amendment to Credit Agreement, dated August 28, 2002, between United  Expressline, Inc. and First Indiana Bank, N.A.                                 |   | Incorporated  by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on  Form 10-Q filed for the Quarter Ended July 31, 2002 |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                   |   |                                                                                                                                                        |
| 10.22  |   | Promissory  Note, dated January 17, 2002, from DW Leasing Company, LLC, to Fair  Holdings, Inc.                                                              |   | Incorporated  by reference to Exhibit 10.40 to the Registrant’s Annual Report on  Form 10-K for the Year Ended October 31, 2002         |
|   |   |                                                                                                                                                                   |   |                                                                                                                                                        |
| 10.23  |   | Promissory  Note, dated September 3, 2002, from Obsidian Enterprises, Inc., to  Fair Holdings, Inc.                                                     |   | Incorporated  by reference to Exhibit 10.41 to the Registrant’s Annual Report on  Form 10-K for the Year Ended October 31, 2002         |
|   |   |                                                                                                                                                                   |   |                                                                                                                                                        |
| 10.24  |   | Promissory  Note, dated January 9, 2002, from Obsidian Enterprises, Inc. to  Fair Holdings, Inc.                                                        |   | Incorporated  by reference to Exhibit 10.42 to the Registrant’s Annual Report on  Form 10-K for the Year Ended October 31, 2002         |
|   |   |                                                                                                                                                                   |   |                                                                                                                                                        |
| 10.25  |   | Credit  Agreement, dated October 31, 2002, between Obsidian Leasing  Company, Inc. and Old National Bank, N.A. and Related Documents                         |   | Incorporated  by reference to Exhibit 10.43 to the Registrant’s Annual Report on  Form 10-K for the Year Ended October 31, 2002         |
|   |   |                                                                                                                                                                   |   |                                                                                                                                                        |
| 10.26  |   | Stock Purchase  Agreement, dated July 27, 2001, between Danzer Corporation and The  Huntington Capital Investment Company.                                        |   | Incorporated  by reference to Exhibit A to the Schedule 13G filed by The  Huntington Capital Investment Company on August 6, 2001.           |
|   |   |                                                                                                                                                                   |   |                                                                                                                                                        |
| 10.27  |   | Loan  Agreement, dated September 24, 2002, between Edgar County  Bank & Trust Co. and Obsidian Leasing Company, Inc.                                |   | Incorporated  by reference to Exhibit 10.45 to the Registrant’s Annual Report on  Form 10-K for the Year Ended October 31, 2002         |
|   |   |                                                                                                                                                                   |   |                                                                                                                                                        |
| 10.28  |   | Term  Promissory Note, dated September 26, 2002, from Obsidian Leasing  Company, Inc. to Fair Holdings, Inc.                                            |   | Incorporated  by reference to Exhibit 10.46 to the Registrant’s Annual Report on  Form 10-K for the Year Ended October 31, 2002         |
|   |   |                                                                                                                                                                   |   |                                                                                                                                                        |
| 10.29  |   | Note Purchase  Agreement, dated July 27, 2001, between United Acquisition, Inc.  and The Huntington Capital Investment Company.                              |   | Incorporated  by reference to Exhibit 10.47 to the Registrant’s Annual Report on  Form 10-K for the Year Ended October 31, 2002         |
|   |   |                                                                                                                                                                   |   |                                                                                                                                                        |
| 10.30  |   | Limited  Forbearance Agreement, dated October 14, 2002, among Danzer  Industries, Inc., Obsidian Enterprises, Inc. and Bank of America,  N.A.           |   | Incorporated  by reference to Exhibit 10.48 to the Registrant’s Annual Report on  Form 10-K for the Year Ended October 31, 2002         |
|   |   |                                                                                                                                                                   |   |                                                                                                                                                        |
| 10.31  |   | Revolving  Credit, Term Loan and Security Agreement, dated October 25, 2002,  between PNC Bank, N.A. and U.S. Rubber Reclaiming, Inc. and Related  Documents |   | Incorporated  by reference to Exhibit 10.49 to the Registrant’s Annual Report on  Form 10-K for the Year Ended October 31, 2002         |

 

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| 10.32  |   | Term  Promissory Note, dated October 31, 2002, from DW Leasing Company, LLC to  Fair Holdings, Inc.                                                                                                 |   | Incorporated  by reference to Exhibit 10.50 to the Registrant’s Annual Report on  Form 10-K for the Year Ended October 31, 2002      |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                          |   |                                                                                                                                                     |
| 10.33  |   | Rental  Agreement, dated October 1, 2002, between DW Trailer, LLC and Danzer  Industries, Inc.                                                                                                      |   | Incorporated  by reference to Exhibit 10.51 to the Registrant’s Annual Report on  Form 10-K for the Year Ended October 31, 2002      |
|   |   |                                                                                                                                                                                                          |   |                                                                                                                                                     |
| 10.34  |   | Commercial  Equipment Lease Agreement, dated August 1, 2002, between Fair  Holdings, Inc. and Danzer Industries, Inc.                                                                          |   | Incorporated  by reference to Exhibit 10.52 to the Registrant’s Annual Report on  Form 10-K for the Year Ended October 31, 2002      |
|   |   |                                                                                                                                                                                                          |   |                                                                                                                                                     |
| 10.35  |   | Commercial  Equipment Lease Agreement, dated August 1, 2002, between Fair  Holdings, Inc. and Obsidian Enterprises, Inc.                                                                       |   | Incorporated  by reference to Exhibit 10.53 to the Registrant’s Annual Report on  Form 10-K for the Year Ended October 31, 2002      |
|   |   |                                                                                                                                                                                                          |   |                                                                                                                                                     |
| 10.36  |   | Promissory  Term Note, dated November 18, 2002, from Obsidian Leasing  Company, Inc. to Fair Holdings, Inc.                                                                                    |   | Incorporated  by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on  Form 10-Q for the Quarter Ended January 31, 2003 |
|   |   |                                                                                                                                                                                                          |   |                                                                                                                                                     |
| 10.37  |   | Third  Amendment to Credit Agreement, dated December 26, 2002, between United  Expressline, Inc. and First Indiana Bank, N.A.                                                                       |   | Incorporated  by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on  Form 10-Q for the Quarter Ended January 31, 2003 |
|   |   |                                                                                                                                                                                                          |   |                                                                                                                                                     |
| 10.38  |   | Credit  Agreement, dated December 18, 2002, between DC Investments Leasing, LLC  and First Indiana Bank, N.A. and Related Documents.                                                                     |   | Incorporated  by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on  Form 10-Q for the Quarter Ended January 31, 2003 |
|   |   |                                                                                                                                                                                                          |   |                                                                                                                                                     |
| 10.39  |   | Term  Promissory Note, dated January 3, 2003, from Obsidian Leasing, Inc.  to Fair Holdings, Inc.                                                                                              |   | Incorporated  by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on  Form 10-Q for the Quarter Ended January 31, 2003 |
|   |   |                                                                                                                                                                                                          |   |                                                                                                                                                     |
| 10.40  |   | Stock  Purchase Warrant, dated January 24, 2003, issued by Obsidian  Enterprises, Inc. to Frost National Bank, Custodian, FBO Renaissance US  Growth Investment Trust PLC Trust No. WOO740100. |   | Incorporated  by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on  Form 10-Q for the Quarter Ended January 31, 2003 |
|   |   |                                                                                                                                                                                                          |   |                                                                                                                                                     |
| 10.41  |   | Stock  Purchase Warrant, dated January 24, 2003, issued by Obsidian  Enterprises, Inc., to HSBC Global Custody Nominee (UK) Limited, FBO BFS  US Special Opportunities Trust PLC.                   |   | Incorporated  by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on  Form 10-Q for the Quarter Ended January 31, 2003 |

 

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| 10.42  |   | Second  Limited Forbearance Agreement, dated February 28, 2003, between Danzer  Industries, Inc. and Obsidian Enterprises, Inc.                                   |   | Incorporated  by reference to Exhibit 10.7 to the Registrant’s Quarterly Report on  Form 10-Q for the Quarter Ended January 31, 2003  |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                             |   |                                                                                                                                                      |
| 10.43  |   | Form of  Letter Amending Stock Options and Schedule Identifying Material Details*                                                                                      |   | Incorporated  by reference to Exhibit 10.8 to the Registrant’s Quarterly Report on  Form 10-Q for the Quarter Ended January 31, 2003  |
|   |   |                                                                                                                                                                             |   |                                                                                                                                                      |
| 10.44  |   | 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  |
|   |   |                                                                                                                                                                             |   |                                                                                                                                                      |
| 10.45  |   | Sublease,  effective as of January 1, 2003, between Fair Holdings, Inc. and  Obsidian Enterprises, Inc.                                                           |   | Incorporated  by reference to Exhibit 10.10 to the Registrant’s Quarterly Report on  Form 10-Q for the Quarter Ended January 31, 2003 |
|   |   |                                                                                                                                                                             |   |                                                                                                                                                      |
| 10.46  |   | Commercial  Equipment Lease Agreement, commencing November 20, 2002, between Fair  Holdings, Inc. and United Expressline, Inc.                                    |   | Incorporated  by reference to Exhibit 10.11 to the Registrant’s Quarterly Report on  Form 10-Q for the Quarter Ended January 31, 2003 |
|   |   |                                                                                                                                                                             |   |                                                                                                                                                      |
| 10.47  |   | Assignment  Agreement, dated May 12, 2003, between Obsidian Enterprises, Inc.  and Fair Holdings, Inc.                                                            |   | Incorporated  by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on  Form 10-Q for the Quarter Ended April 30, 2003    |
|   |   |                                                                                                                                                                             |   |                                                                                                                                                      |
| 10.48  |   | Assignment  of Note and Other Loan Documents, dated March 28, 2003, between Bank of  America, N.A. and Fair Holdings, Inc.                                             |   | Incorporated  by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on  Form 10-Q for the Quarter Ended April 30, 2003    |
|   |   |                                                                                                                                                                             |   |                                                                                                                                                      |
| 10.49  |   | First  Amendment to Business Loan Agreement and Promissory Note (Line of Credit),  dated March 28, 2003, between Danzer Industries, Inc. and Fair  Holdings, Inc. |   | Incorporated  by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on  Form 10-Q for the Quarter Ended April 30, 2003    |
|   |   |                                                                                                                                                                             |   |                                                                                                                                                      |
| 10.50  |   | Second  Amendment to Promissory Note (Line of Credit), dated April 1, 2003,  between Obsidian Enterprises, Inc. and Fair Holdings, Inc.                                |   | Incorporated  by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on  Form 10-Q for the Quarter Ended April 30, 2003    |
|   |   |                                                                                                                                                                             |   |                                                                                                                                                      |
| 10.51  |   | Employment  Agreement, dated April 30, 2003, between Obsidian Enterprises, Inc.  and Rick D. Snow.*                                                                    |   | Incorporated  by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on  Form 10-Q for the Quarter Ended July 31, 2003     |

 

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| 10.52  |   | Third  Amendment to Promissory Note (Line of Credit), dated February 2, 2004,  between Obsidian Enterprises, Inc. and Fair Holdings, Inc.                                                       |   | Incorporated  by reference to Exhibit 10.70 on the Registrant’s Annual Report on  Form 10K for the Year Ended October 31, 2003    |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                           |   |                                                                                                                                                  |
| 10.53  |   | Term  Promissory Note, dated September 19, 2003, from DC Investments Leasing,  LLC to Fair Holdings, Inc.                                                                                            |   | Incorporated  by reference to Exhibit 10.71 on the Registrant’s Annual Report on  Form 10K for the Year Ended October 31, 2003    |
|   |   |                                                                                                                                                                                                           |   |                                                                                                                                                  |
| 10.54  |   | Promissory  Note, dated August 31, 2003, from DC Investments, Inc. to Fair  Holdings, Inc.                                                                                                      |   | Incorporated  by reference to Exhibit 10.72 on the Registrant’s Annual Report on Form 10K  for the Year Ended October 31, 2003    |
|   |   |                                                                                                                                                                                                           |   |                                                                                                                                                  |
| 10.55  |   | Second  Amendment to Revolver Promissory Note, dated September 31, 2003, between  Danzer Industries, Inc. and Fair Holdings, Inc.                                                               |   | Incorporated  by reference to Exhibit 10.73 on the Registrant’s Annual Report on  Form 10K for the Year Ended October 31, 2003    |
|   |   |                                                                                                                                                                                                           |   |                                                                                                                                                  |
| 10.56  |   | Stock  Purchase Warrant, dated February 9, 2004, issued by Obsidian  Enterprises, Inc. to HSBC Global Custody Nominee (UK) Limited, FBO BFS  US Special Opportunities Trust PLC.                     |   | Incorporated  by reference to Exhibit 10.74 on the Registrant’s Annual Report on  Form 10K for the Year Ended October 31, 2003    |
|   |   |                                                                                                                                                                                                           |   |                                                                                                                                                  |
| 10.57  |   | Stock  Purchase Warrant, dated February 9, 2004, issued by Obsidian  Enterprises, Inc. to Frost National Bank, Custodian, FBO Renaissance US  Growth Investment Trust PLC, Trust No. W00740100. |   | Incorporated  by reference to Exhibit 10.75 on the Registrant’s Annual Report on  Form 10K for the Year Ended October 31, 2003    |
|   |   |                                                                                                                                                                                                           |   |                                                                                                                                                  |
| 10.58  |   | Third  Amendment to Revolver Promissory Note by and among Danzer  Industries, Inc. and Fair Holdings, Inc., dated May 1, 2004                                                                   |   | Incorporated  by reference to Exhibit 10.1 on the Registrant’s Quarterly Report on  Form 10-Q for the Quarter Ended July 31, 2004 |
|   |   |                                                                                                                                                                                                           |   |                                                                                                                                                  |
| 10.59  |   | Credit  Agreement, dated as of April 28, 2004, between Classic Manufacturing  Acquisition Corp. and National City Bank of Indiana                                                                         |   | Incorporated  by reference to Exhibit 10.1 on the Registrant’s Form 8-K dated  May 14, 2004                                       |
|   |   |                                                                                                                                                                                                           |   |                                                                                                                                                  |
| 10.60  |   | Facility  Lease for Pyramid Coach, Inc. with Fergusen Properties, dated  November 16, 2004                                                                                                           |   | Incorporated  by reference to Exhibit 10.60 on the Registrant’s Annual Report on  Form 10K for the Year Ended October 31, 2004    |
|   |   |                                                                                                                                                                                                           |   |                                                                                                                                                  |
| 10.61  |   | Facility  Lease for Classic Manufacturing, Inc. with Roost Leasing, dated  April 27, 2004                                                                                                            |   | Incorporated  by reference to Exhibit 10.61 on the Registrant’s Annual Report on  Form 10K for the Year Ended October 31, 2004    |
|   |   |                                                                                                                                                                                                           |   |                                                                                                                                                  |
| 10.62  |   | Amended  Credit Agreement, dated December 28, 2004, between Classic Manufacturing  Acquisition Corp. and National City Bank of Indiana                                                                    |   | Incorporated  by reference to Exhibit 10.62 on the Registrant’s Annual Report on  Form 10K for the Year Ended October 31, 2004    |
|   |   |                                                                                                                                                                                                           |   |                                                                                                                                                  |
| 10.63  |   | Third  Amendment to Revolver Promissory Note by and among Danzer  Industries, Inc. and Fair Holdings, Inc., dated July 1, 2004                                                                  |   | Incorporated  by reference to Exhibit 10.63 on the Registrant’s Annual Report on  Form 10K for the Year Ended October 31, 2004    |

 

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| 10.64  |   | Second  Amendment to Promissory Note by and among Obsidian Leasing Company, Inc.  and Fair Holdings, Inc., dated August 31, 2004            |   | Incorporated  by reference to Exhibit 10.64 on the Registrant’s Annual Report on  Form 10K for the Year Ended October 31, 2004      |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                       |   |                                                                                                                                                    |
| 10.65  |   | Second  Amendment to Note Purchase Agreement between United Expresslines and The  Huntington Capital Company                                               |   | Incorporated  by reference to Exhibit 10.65 on the Registrant’s Annual Report on  Form 10K for the Year Ended October 31, 2004      |
|   |   |                                                                                                                                                       |   |                                                                                                                                                    |
| 10.66  |   | Third  Amended Promissory Note (Line of Credit) by and between Obsidian Leasing  Company, Inc. and Fair Holdings, Inc. dated March 31, 2005 |   | Incorporated  by reference to Exhibit 10.1 on the Registrant’s Quarterly Report on  Form 10-Q for the Quarter Ended April 30, 2005  |
|   |   |                                                                                                                                                       |   |                                                                                                                                                    |
| 10.67  |   | Credit  Agreement by and between U.S. Rubber Reclaiming, Inc. and Fair  Holdings, Inc. dated April 15, 2005                                 |   | Incorporated  by reference to Exhibit 10.2 on the Registrant’s Quarterly Report on  Form 10-Q for the Quarter Ended April 30, 2005  |
|   |   |                                                                                                                                                       |   |                                                                                                                                                    |
| 10.68  |   | Security  Agreement by and between U.S. Rubber Reclaiming, Inc. and Fair  Holdings, Inc. dated April 15, 2005                               |   | Incorporated  by reference to Exhibit 10.3 on the Registrant’s Quarterly Report on  Form 10-Q for the Quarter Ended April 30, 2005  |
|   |   |                                                                                                                                                       |   |                                                                                                                                                    |
| 10.69  |   | Revolving  Note by and between U.S. Rubber Reclaiming, Inc. and Fair  Holdings, Inc. dated April 15, 2005                                   |   | Incorporated  by reference to Exhibit 10.4 on the Registrant’s Quarterly Report on  Form 10-Q for the Quarter Ended April 30, 2005  |
|   |   |                                                                                                                                                       |   |                                                                                                                                                    |
| 10.70  |   | Credit  Agreement by and between United Expressline, Inc. and Fair Holdings  dated April 15, 2005                                                |   | Incorporated  by reference to Exhibit 10.5 on the Registrant’s Quarterly Report on  Form 10-Q for the Quarter Ended April 30, 2005  |
|   |   |                                                                                                                                                       |   |                                                                                                                                                    |
| 10.71  |   | Security  Agreement by and between United Expressline, Inc. and Fair  Holdings, Inc. dated April 15, 2005                                   |   | Incorporated  by reference to Exhibit 10.6 on the Registrant’s Quarterly Report on  Form 10-Q for the Quarter Ended April 30, 2005  |
|   |   |                                                                                                                                                       |   |                                                                                                                                                    |
| 10.72  |   | Revolving  Note by and between United Expressline, Inc. and Fair  Holdings, Inc. dated April 15, 2005                                       |   | Incorporated  by reference to Exhibit 10.7 on the Registrant’s Quarterly Report on  Form 10-Q for the Quarter Ended April 30, 2005  |
|   |   |                                                                                                                                                       |   |                                                                                                                                                    |
| 10.73  |   | Credit  Agreement by and between Pyramid Coach, Inc. and Fair  Holdings, Inc. dated April 15, 2005                                          |   | Incorporated  by reference to Exhibit 10.8 on the Registrant’s Quarterly Report on  Form 10-Q for the Quarter Ended April 30, 2005  |
|   |   |                                                                                                                                                       |   |                                                                                                                                                    |
| 10.74  |   | Security  Agreement by and between Pyramid Coach, Inc. and Fair  Holdings, Inc. dated April 15, 2005                                        |   | Incorporated  by reference to Exhibit 10.9 on the Registrant’s Quarterly Report on  Form 10-Q for the Quarter Ended April 30, 2005  |
|   |   |                                                                                                                                                       |   |                                                                                                                                                    |
| 10.75  |   | Revolving  Note by and between Pyramid Coach, Inc. and Fair Holdings, Inc.  dated April 15, 2005                                            |   | Incorporated  by reference to Exhibit 10.10 on the Registrant’s Quarterly Report on  Form 10-Q for the Quarter Ended April 30, 2005 |

 

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| 10.76  |   | Forbearance  Agreement by and between Old National Bank, Obsidian Leasing  Company, Inc., Obsidian Enterprises, Inc., Pyramid  Coach, Inc., Timothy S. Durham, Terry Whitesell and Julia Whitesell  effective as of December 1, 2004                  |   | Incorporated  by reference to Exhibit 10.11 on the Registrant’s Quarterly Report on  Form 10-Q for the Quarter Ended April 30, 2005 |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                      |   |                                                                                                                                                    |
| 10.77  |   | Loan and  Security Agreement by and between United Expressline, Inc. and LaSalle  Business Credit, LLC dated July 19, 2005                                                                                                                                      |   | Incorporated  by reference to Exhibit 10.1 on the Registrant’s Quarterly Report on  Form 10-Q for the Quarter Ended July 31, 2005   |
|   |   |                                                                                                                                                                                                                                                                      |   |                                                                                                                                                    |
| 10.78  |   | Revolving  Note by and between United Expressline, Inc. and LaSalle Business  Credit, LLC dated July 19, 2005                                                                                                                                                   |   | Incorporated  by reference to Exhibit 10.2 on the Registrant’s Quarterly Report on  Form 10-Q for the Quarter Ended July 31, 2005   |
|   |   |                                                                                                                                                                                                                                                                      |   |                                                                                                                                                    |
| 10.79  |   | Term Note by  and between United Expressline, Inc. and LaSalle Business Credit, LLC  dated July 19, 2005                                                                                                                                                        |   | Incorporated  by reference to Exhibit 10.3 on the Registrant’s Quarterly Report on  Form 10-Q for the Quarter Ended July 31, 2005   |
|   |   |                                                                                                                                                                                                                                                                      |   |                                                                                                                                                    |
| 10.80  |   | Continuing  Unconditional Guarantee by and between United Expressline, Inc. and  LaSalle Business Credit, LLC dated July 19, 2005                                                                                                                               |   | Incorporated  by reference to Exhibit 10.4 on the Registrant’s Quarterly Report on  Form 10-Q for the Quarter Ended July 31, 2005   |
|   |   |                                                                                                                                                                                                                                                                      |   |                                                                                                                                                    |
| 10.81  |   | Subordination  Agreement by and between The Huntington Capital Investment Company, United  ExpressLine, Inc. and LaSalle Business Credit, LLC dated July 19,  2005                                                                                              |   | Incorporated  by reference to Exhibit 10.5 on the Registrant’s Quarterly Report on  Form 10-Q for the Quarter Ended July 31, 2005   |
|   |   |                                                                                                                                                                                                                                                                      |   |                                                                                                                                                    |
| 10.82  |   | Subordination  Agreement by and between Fair Holdings, Inc., United  ExpressLine, Inc. and LaSalle Business Credit, LLC dated July 19,  2005                                                                                                               |   | Incorporated  by reference to Exhibit 10.6 on the Registrant’s Quarterly Report on  Form 10-Q for the Quarter Ended July 31, 2005   |
|   |   |                                                                                                                                                                                                                                                                      |   |                                                                                                                                                    |
| 10.83  |   | Subordination  Agreement by and between UX, Inc., United ExpressLine, Inc. and  LaSalle Business Credit, LLC dated July 19, 2005                                                                                                                           |   | Incorporated  by reference to Exhibit 10.7 on the Registrant’s Quarterly Report on  Form 10-Q for the Quarter Ended July 31, 2005   |
|   |   |                                                                                                                                                                                                                                                                      |   |                                                                                                                                                    |
| 10.84  |   | Second  Amendment to Forbearance Agreement by and between Old National Bank, Obsidian  Leasing Company, Inc., Obsidian Enterprises, Inc., Pyramid  Coach, Inc., Timothy S. Durham, Terry Whitesell and Julia Whitesell  effective as of July 22, 2005 |   | Incorporated  by reference to Exhibit 10.8 on the Registrant’s Quarterly Report on  Form 10-Q for the Quarter Ended July 31, 2005   |
|   |   |                                                                                                                                                                                                                                                                      |   |                                                                                                                                                    |
| 10.85  |   | Third  Amended Promissory Note (Line of Credit) by and between DW Leasing Company,  LLC and Fair Holdings, Inc. dated June 15, 2005                                                                                                                             |   | Incorporated  by reference to Exhibit 10.9 on the Registrant’s Quarterly Report on  Form 10-Q for the Quarter Ended July 31, 2005   |
|   |   |                                                                                                                                                                                                                                                                      |   |                                                                                                                                                    |
| 10.86  |   | Second  Amended Promissory Note (Line of Credit) by and between DC Investments  Leasing, LLC and Fair Holdings, Inc. dated June 15, 2005                                                                                                                        |   | Incorporated  by reference to Exhibit 10.10 on the Registrant’s Quarterly Report on  Form 10-Q for the Quarter Ended July 31, 2005  |

 

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| 10.87  |   | Amendment  No. 3 to Note Purchase Agreement and Limited Waiver by and between  United Expressline, Inc. and The Huntington Capital Investment Company  dated July 19, 2005 |   | Incorporated  by reference to Exhibit 10.11 on the Registrant’s Quarterly Report on  Form 10-Q for the Quarter Ended July 31, 2005 |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                      |   |                                                                                                                                                   |
| 10.88  |   | Second  Amendment to Promissory Note by and between Obsidian Leasing  Company, Inc. and Fair Holdings, Inc. dated December 15, 2005                                        |   | Attached                                                                                                                                               |
|   |   |                                                                                                                                                                                      |   |                                                                                                                                                   |
| 10.89  |   | Fourth  Amendment to Promissory Note by and between Obsidian Leasing  Company, Inc. and Fair Holdings, Inc. dated December 15, 2005                                        |   | Attached                                                                                                                                               |
|   |   |                                                                                                                                                                                      |   |                                                                                                                                                   |
| 10.90  |   | First  Amendment to Promissory Note (Line of Credit) by and between U.S. Rubber  Reclaiming, Inc. and Fair Holdings, Inc. dated October 15,  2005                          |   | Attached                                                                                                                                               |
|   |   |                                                                                                                                                                                      |   |                                                                                                                                                   |
| 10.91  |   | Fourth  Amendment to Revolver Promissory Note by and between Danzer  Industries, Inc. and Fair Holdings, Inc. dated October 15,  2005                                      |   | Attached                                                                                                                                               |
|   |   |                                                                                                                                                                                      |   |                                                                                                                                                   |
| 10.92  |   | Fourth  Amendment to Promissory Note by and between DW Leasing Company, LLC and Fair  Holdings, Inc. dated December 15, 2005                                                    |   | Attached                                                                                                                                               |
|   |   |                                                                                                                                                                                      |   |                                                                                                                                                   |
| 10.93  |   | Second  Amendment to Promissory Note by and between DC Investments Leasing, LLC and  Fair Holdings, Inc. dated December 15, 2005                                                |   | Attached                                                                                                                                               |
|   |   |                                                                                                                                                                                      |   |                                                                                                                                                   |
| 14.1   |   | Code of  Ethics for Chief Executive Officer and Senior Financial Officers                                                                                                                 |   | Attached                                                                                                                                               |
|   |   |                                                                                                                                                                                      |   |                                                                                                                                                   |
| 21.1   |   | List of  Subsidiaries                                                                                                                                                                     |   | Attached                                                                                                                                               |
|   |   |                                                                                                                                                                                      |   |                                                                                                                                                   |
| 31.1   |   | Sarbanes-Oxley  Act Section 302 Certification                                                                                                                                        |   | Attached                                                                                                                                               |
|   |   |                                                                                                                                                                                      |   |                                                                                                                                                   |
| 31.2   |   | Sarbanes-Oxley  Act Section 302 Certifications                                                                                                                                       |   | Attached                                                                                                                                               |
|   |   |                                                                                                                                                                                      |   |                                                                                                                                                   |
| 32.1   |   | Sarbanes-Oxley  Act Section 906 Certification                                                                                                                                        |   | Attached                                                                                                                                               |

 

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*Indicates Exhibits that describe or evidence management contracts orcompensatory plans or arrangements required to be filed as Exhibits to thisAnnual Report on Form 10-K.

 

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