BEHIND THE NEWS Auditor jabs Obsidian as it prepares to go private:

March 13, 2006

If all goes as planned, a Tim Durham-led investment group will take publicly traded Obsidian Enterprises Inc. private by the end of the month.

The Indianapolis company's five-year run on Wall Street has been inglorious by any measure. Stock in the transportation and manufacturing firm has tumbled, from a split-adjusted $12 in 2001 to $1.80 today. Over the last three years, Obsidian has posted a combined $22 million in losses.

As if that weren't enough, now the company's former outside auditor, the accounting firm McGladrey & Pullen, is telling investors Obsidian's financial statements for the fiscal years ending in October 2003 and October 2004 "should not be relied upon."

Why the fuss? Obsidian recently made adjustments to the financials for those two years without discussing them with McGladrey, according to a letter from the CPA firm filed with the Securities and Exchange Commission March 2.

Officials with the Elkhart office of Minnesota-based McGladrey could not be reached for comment. SEC filings show McGladrey had resigned as auditor in October, after citing a long list of shortcomings with the company's internal accounting.

Obsidian's new auditor, Indianapolis-based Somerset CPAs, completed the audit for the company's latest fiscal year. That audit, along with the earlieryear revisions, were contained in a filing Obsidian submitted to the SEC last month.

Obsidian CEO Timothy Durham downplayed McGladrey's concerns about the adjustments. He said the changes worsened, rather than improved, the 2004 results and had no impact on the value of the company.

In any case, Durham said, "I was told by our new auditors that they did try to contact our old auditors," to no avail. Somerset officials did not respond by IBJ deadline.

All this might not amount to much. Obsidian says it now will enlist McGladrey to review the changes, a process Durham says may delay closing on the going-private transaction by a couple of weeks. It had been expected to close March 6.

Obsidian, which has $65 million in annual revenue and a stock-market value of $5.7 million, announced the plan last summer.

Since then, the Durham group has boosted its stake from 77.3 percent to more than 90 percent. Crossing the 90-percent threshold allows the group-which includes about two dozen businesspeople, most of them local-to buy out remaining investors for $1.85 a share without getting their consent.

Durham said he's taking the 450-employee company private because regulatory-compliance costs for small public firms have skyrocketed, not because of its rough run. Remaining public would cost Obsidian some $2 million a year, much of it devoted to complying with the Sarbanes-Oxley corporateaccountability law.

Still, the way Obsidian has sputtered, he surely won't miss the spotlight. Running a public company is a thrill when times are good. There's something to be said for privacy when times turn tough.

A new king of the hill?

WellPoint Inc. now has a stock market value of $50 billion, just $14 billion shy of Eli Lilly and Co.'s $64 billion.

Is the nation's biggest health insurer poised to overtake the pharmaceutical giant as the state's biggest company, as measured by market value?

For sure, the gap has narrowed, as WellPoint gobbles up acquisitions, and its stock soars. In contrast, Lilly shares have languished in recent years and now trade 45 percent below their 2000 high.

WellPoint's forerunner, Anthem Inc., had a market value of just $3.9 billion when it debuted as a public company in October 2001. Since the initial public offering, the company's shares have advanced more than 250 percent.

By one measure, WellPoint already has surpassed Lilly. The insurer in 2005 posted a profit of $2.4 billion, outearning Lilly for the first time. For the year, Lilly earned $2 billion, down from $3.1 billion in 2000.

Marsh bond rating cut

Stock investors lately have become more optimistic about the outlook for Marsh Supermarkets Inc.-pushing the company's Class A shares to $9.25 last week, up from $5.56 in late January.

But the New York-based bond rating agency Moody's Investors Service isn't sharing their enthusiasm.

Moody's on March 3 lowered Marsh's debt rating another notch deeper into the junk category, citing the "deterioration in [its] operating performance" and "weak returns from significant expenditures in recent years to expand its store base."

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