BEHIND THE NEWS: Setbacks smudge image of Obsidian CEO Durham Stock is down Snapping up firms

February 21, 2005

Tim Durham tells reporters he wants to be the richest man alive. His office sits atop the Bank One Tower, the state's tallest building. For fun, he adds to his collection of four dozen collector cars.

But behind the glitz, Durham is trying to untangle what's become a real mess at Obsidian Enterprises Inc., the publicly traded manufacturing and transportation firm he controls and leads.

In a regulatory filing last week, Obsidian's independent accounting firm, Minnesota-based McGladrey & Pullen, expressed "substantial doubt about the company's ability to continue as a going concern."

In the same filing, the 420-employee firm said it lost $8 million on sales of $64.4 million in the fiscal year ended Oct. 31. That follows losses of $3.9 million in fiscal 2003 and $6.3 million in fiscal 2002.

"Last year was almost like the perfect storm," Durham said in an interview with IBJ. "You couldn't catch a break anywhere you looked." But he said 2005 is "looking a lot brighter."

"I am not concerned about it," said Durham, 42, who serves as chairman and CEO. "I am concerned about our economic times, but I am not concerned about the longterm viability of our companies."

He needs his bankers to share that optimism. The regulatory filing shows Obsidian companies have fallen out of compliance with the financial terms required by their lenders, and some of the lenders have declined to waive the violations.

Obsidian is working on refinancings. But in the meantime, it has had to classify more than $18 million in long-term debt as a current obligation, which has made its debt-drenched balance sheet appear more sickly.

The company's assets of $49.4 million fall well short of liabilities, the balance sheet shows, leaving the company with a negative net worth of $9.5 million.

The difficulties have deflated Obsidian's shares, which now trade for around $3 apiece, down from $17.50 in late 2003. The decline has reduced Obsidian's market value to $9.3 million.

But Durham has a lot more on the line financially than his stash of stock. As Obsidian has stumbled, the regulatory filing shows, a Durham-controlled entity, Fair Holdings, has provided a steady stream of additional financing to reduce the exposure of other lenders or cover losses. As of Oct. 31, Obsidian owed Fair Holdings $20.3 million.

"Obviously, I have a pretty strong belief" in Obsidian, Durham said of making the loans.

But the regulatory filing notes Fair Holdings now also is out of compliance with its lender.

The lender hasn't granted a waiver, the filing says. "Nor has the lender agreed not to take action against Fair Holdings as a result of the violations," such as requiring repayment of debt, the filing says.

Not to worry, says Durham. He says he has other financial resources he could tap for Obsidian. And he claims he's now received indications from the lender that it will grant a waiver.

These aren't the sorts of questions Durham figured he'd be fielding when he transformed his Indianapolis leveraged-buyout fund into a publicly traded company four years ago.

Central Indiana at the time was reeling from a string of sales of highprofile public firms to out-of-state suitors. Obsidian began snapping up small and midsize firms. It looked to be just the kind of aggressive, fast-growing company Indianapolis needed.

Durham had fared well as a private investor and as a turnaround expert. He'd also served as a top executive of Carpenter Industries, the Indianabased maker of school buses then owned by his mentor, Indianapolis businessman Beurt Ser-Vaas. Durham used to be married to SerVaas' daughter Joan.

But all three of Obsidian's business lines-specialty-trailer manufacturing, butyl-rubber reclamation and motorcoach leasing-lost money last year, for different reasons.

The trailer arm suffered from a sharp rise in raw material costs, including steel. The coach business-which leases posh buses to Kid Rock, Sheryl Crow and other celebrities-suffered from a decline in the number of touring acts.

Setbacks are part of any business, of course. But because Obsidian bought its companies through leveraged buyouts, it has less margin for error. It's a style of investing that can create eyepopping returns or lead to carnage, as Durham himself acknowledges.

"This model works extraordinarily well in great times and extraordinarily badly in bad times," he said.
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