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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 1996.
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM _______________ TO _________________
Commission file number 0-20267
OMEGA ENVIRONMENTAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 91-1499751
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
19805 NORTH CREEK PARKWAY, PO BOX 3005
BOTHELL, WASHINGTON 98041-3005
(Address of Principal Executive Offices) (Zip Code)
206-486-4800
(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of each exchange on which registered
NONE NONE
Securities registered pursuant to section 12(g) of the Act: COMMON STOCK
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. X Yes No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
State the aggregate market value of the voting stock held by non-affiliates
of the registrant. The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing.
AS OF JUNE 14, 1996, $112,497,893.
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date. AS OF JUNE 14, 1996,
41,408,691 SHARES OF COMMON STOCK, $.0025 PAR VALUE PER SHARE.
DOCUMENTS INCORPORATED BY REFERENCE
PART III PROXY STATEMENT
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PART I
ITEM 1. BUSINESS.
Omega Environmental, Inc. ("Omega" or the "Company") was organized in
September 1990 to become the first national turnkey provider of products and
services to owners of underground storage tank (USTs) systems which are subject
to increasing regulations from the U.S. Environmental Protection Agency
("EPA"), as well as state and local regulatory agencies. Over the last year,
the Company has been placing increasing emphasis on developing market driven
businesses such as new station and convenience store construction, station
upgrades and re-imaging, and installation of state-of-the-art electronic
equipment and customer-interface devices such as pay-at-the-pump and information
management systems. As an essential part of its market-driven strategy, the
Company is also placing greater emphasis on its ability to provide after-sale
service of the increasingly complex equipment being installed in service
stations and convenience stores. The Company now offers the largest range of
services for the operators and owners of fueling facilities in the United
States. Currently, the Company has units operating in 31 states. The Company
also established a subsidiary in Mexico, and has joint ventures with limited
operations in Argentina and Spain.
The Company derives its revenues from a range of products and services
including the removal of leaking and outdated USTs, construction, including
service stations and convenience stores, soil and groundwater remediation
services, the sale and installation of new UST systems, and the distribution,
installation and servicing of petroleum storage and dispensing equipment. The
Company is expanding its maintenance service capabilities, particularly for
large clients as an outsourcing alternative so that customers can focus on their
core business.
REGULATORY CONTEXT
In the early 1980's, the EPA began to address the problem of soil and
groundwater contamination. It was concluded that leaking USTs were a major
source of such contamination. Most of such USTs are used to store petroleum
based products which generally contain a number of carcinogenic compounds such
as benzene, toluene and xylene. When tank systems leak, the surrounding earth
and groundwater supplies become contaminated. One gallon of gasoline can render
1 million gallons of water unpotable. Wildlife water habitats, such as rivers,
lakes and streams are also often polluted by such leaks.
Federal government regulation of USTs began in 1985 with the enactment of
"Interim Prohibition" which made it illegal for anyone to install a UST
constructed of bare steel. In 1988 the federal government adopted permanent
regulations to govern the construction, installation and operation of UST
systems. The EPA regulations were promulgated under the Resource Conservation
and Recovery Act of 1976 ("RCRA") as amended and applied to petroleum products
and hazardous substances defined in the Comprehensive Environmental Response
Compensation and Liability Act of 1980 ("CERCLA" or "SuperFund"). The basic
technological requirements can be broken down into three areas: (i) requirements
for leak detection; (ii) requirements for corrosion protection; and (iii)
requirements for spill and overfill protection. For existing UST systems, tanks
must be equipped with devices to detect leaks, or operators must follow
prescribed methods for the purpose of detecting leaks according to a schedule
based on relative UST age. As of December 1993, EPA regulations have required
that a leak detection program be in place for existing tank systems. In
addition, existing tank systems must meet requirements for corrosion protection
and overfill protection no later than December 1998. Any new system installed
before the December 1998 deadline must comply with all requirements upon
installation.
In addition to regulations pertaining to the safety of UST systems, the EPA
has set forth requirements for financial responsibility to cover the remediation
costs which would be incurred in the event that a stored liquid is released into
the environment. Facility owners and operators who handle more than 12,000
gallons of product per month are required to have financial assurance in the
amount of $1 million. Any facility or group of facilities which operates more
than 100 tanks is required to carry a minimum of $2 million in financial
assurance. Financial assurance requirements can be satisfied by insurance or
other means such as surety bonds or letters of credit.
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In addition to the EPA regulations, states are encouraged to create their
own UST programs and regulations. Some states have merely adopted the EPA
regulations while others have enacted regulations more stringent than those set
forth by the EPA.
According to May 1996 EPA data, there are 1.09 million active USTs
registered with the EPA. There is no way of knowing for sure the total number
of USTs, but recent estimates have placed the number of unknown or unregistered
USTs at 220,000.
Based on a survey of UST program managers from 8 states, the Petroleum
Equipment Institute (PEI) estimates that only 15% of active USTs completely meet
1998 technical standards. This leaves approximately 970,000 tanks which will
need to be either closed in place, upgraded or replaced in order to be in
compliance with the 1998 standards.
Also as of May 1996, the EPA has confirmed 314,720 UST product releases.
Other sources estimate a total of 463,000 USTs will eventually be reported as
leaking. The Company believes that the leaking USTs will require engineering
services, remediation, closure or upgrades in the form of leak detection, new
tanks, or all of these in order to be in compliance with EPA regulations. The
Company also believes that this remediation work will continue well into the
next century. Estimates for the cost of compliance range anywhere from $48
billion to $69 billion.
ACQUISITIONS
DOMESTIC ACQUISITIONS. The Company intends to continue to increase its
revenues and market penetration through the expansion of current operations and
the opportunistic acquisition of companies operating in regional markets in the
United States. Omega has established a specific program designed to improve the
marketing and operational capabilities of its acquisitions. The Company
believes that it can improve the operating results of acquired companies over
time by (i) upgrading acquired companies from low-bid contractors to direct
marketers of turn-key service solutions for service stations, commercial fueling
facilities and convenience stores, including comprehensive outsourcing programs;
(ii) realizing improved financial and operating control systems; (iii) realizing
substantially reduced material costs of sales through economies of scale; (iv)
providing exclusive products and services that will substantially differentiate
them while making them more competitive, such as facilitating project financing
for the owners of such facilities, and (v) maintaining excellent economic
incentives for management and providing a routine forum for benchmarking results
and sharing operational knowledge among managers.
Currently Omega products and services are available in the United States
through the entities listed below. By the end of Fiscal 1997, all individual
names will be eliminated and they will be known simply as Omega branches:
- Omega Services (formerly O'Sullivan Omega), headquartered in Seattle, and
with offices in Portland and Anchorage; acquired in May 1991.
- Parks Omega, headquartered in metropolitan Detroit; acquired in March 1993.
- Watkins Omega, headquartered in metropolitan Atlanta, with an office in
Macon, GA; acquired in June 1993.
- Kelley Omega, headquartered near Scranton, PA; acquired in June 1993.
- Goode Omega, headquartered in Richmond, VA, with offices in Roanoke,
Winchester, Chesapeake and Lorton, all in Virginia; acquired in
September 1993.
- PEC Omega, headquartered in Orlando, FL; acquired in October 1993.
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- Tecniflo Omega, headquartered in St. Petersburg, FL; acquired in
December 1993.
- ATS Omega, headquartered in Houston, with offices in San Antonio,
Philadelphia and the Dallas-Fort Worth area; acquired in March 1994.
- Fedco Omega, headquartered in Somersworth, NH with offices in New York and
Connecticut; acquired in May 1994.
- STC Remediation, headquartered in Scottsdale, AZ; acquired in
September 1994.
- Braswell/Arnold Omega, headquartered in Wilson, NC with offices in
Fayetteville, Wilmington, and Greensboro, NC; acquired in November 1994.
- Gurr Omega Environmental Services (consolidated with Omega Environmental
Services, formerly ESSI Omega, which was acquired in September 1993),
headquartered in Lakeland, FL with offices in Houston and Dallas, TX,
Richmond, VA, Atlanta, GA, and Charleston, WV; acquired in November 1994.
- SSC Omega, headquartered in Boerne, TX with offices in Irving and Stafford,
TX; acquired in November 1994.
- SST Omega, headquartered in San Antonio, TX with an office in Corpus
Christi, TX; acquired in November 1994.
- Life-Cycle Services, headquartered in Cleveland, Ohio, acquired in
April, 1996.
The Company is engaged in discussions with other regional companies that
have been identified as candidates for acquisition. As of this date, none of
these discussions had yet reached agreement in principle as to structure or
basic economic or other terms. There can be no assurance that any of these
discussions will result in an acquisition.
MEXICO. In March, 1992, Pemex, Mexico's national oil company, launched a
retail service station modernization program. The modernization program was an
expression of a heightened environmental consciousness throughout Mexico, and of
a growing awareness that the country's economic growth required a dramatic
increase in the quantity and quality of fueling stations. Pemex now offers
Mexican station owners a ten year guarantee of increased gasoline sales
commissions in return for upgrading both fuel systems and image. And, in August
1994, Pemex deregulated the process of granting concessions for new stations,
thereby opening the way for an increase in the number of Mexican stations.
There are only 3,500 stations in Mexico, a country with a population of 85
million. Mexico has few domestic manufacturers of the equipment required for
fuel systems and for remediation at contaminated sites. Nor does the country
have sufficient capacity in the construction of modern stations or in
environmental operations.
In order to offer all of the above mentioned products and services, the
Company incorporated a Mexican subsidiary, Omega Ambiental de Mexico S.A. de
C.V. in late September 1993. In order to reduce overhead, in June 1994,
Ambiental was merged with ATS de Mexico S.A. de C.V. acquired March 31, 1994.
The consolidated Mexican subsidiary, ATS Omega de Mexico S.A. de C.V., now
offers turnkey service station construction and equipment supply throughout
Mexico with offices and warehouses established in Mexico City and Monterrey.
ATS Omega de Mexico has expanded its design and turnkey construction
capability and is currently providing these services to a joint venture owned by
Amoco and Oxxo, Mexico's largest convenience store chain.
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PRODUCTS AND SERVICES
The Company is an experienced construction and environmental services
contractor for fuel storage and related projects, and distributes and services
fuel storage and handling equipment. Its capabilities include:
UST INSTALLATION AND REMOVAL. The Company removes and installs UST systems
and, in the process, may replace the entire pump and delivery system, including
Stage II Vapor Recovery systems. Installation of a UST system involves
excavation, tank siting, burial depth calculations, UST system assembly, back-
filling of the UST system and grading. USTs, piping and other products are
available from various sources. The Company maintains a fleet of service
vehicles and light and heavy duty equipment to perform its work. Tank testing is
provided at certain locations.
ENVIRONMENTAL CONSULTING AND ENGINEERING. Gurr Omega (consolidated with
Omega Environmental Services) provides environmental consulting and engineering
services specializing in the areas of site assessment, monitoring, regulatory
compliance consulting and soil and groundwater remediation. The Company's
environmental division assesses sites for soil and groundwater contamination and
develops action plans for remediating the contamination. The Company also acts
as general contractor to assemble a project team of engineering firms,
consultants, laboratories and certified contractors to complete a customer
approved action plan.
SOIL AND GROUNDWATER REMEDIATION. The Company generally provides soil and
groundwater remediation services as an adjunct to UST system installations and
removal contracts. Contaminant extraction methods include thermal dispersion,
aeration, bioremediation, pump and treat systems and air sparging.
PROPRIETARY REMEDIATION TECHNOLOGIES. STC Omega is the provider of a
proprietary solidification/stabilization remediation process for use on full
scale organic and inorganic hazardous waste contaminated sites. The process is
effective at solidifying hazardous waste compounds in a more cost effective
manner than conventional treatment methods.
SERVICE STATION CONSTRUCTION. Certain operations provide general
contracting services for the construction of service station facilities,
including full-service stations and convenience store/gas station complexes.
MAINTENANCE. Many operations also offer maintenance services and
collectively form one of the largest network of service technicians and vehicles
in the industry. The service function is being expanded to operate nation-wide
and is now coordinated through centralized Help Desk Diagnostic and Dispatching
services.
DISTRIBUTION. Certain operations distribute parts and equipment for fuel
storage and dispensing equipment. This capability is being consolidated and
will be linked through a single MIS/Inventory Control System.
FACILITATION OF EQUIPMENT AND PROJECT FINANCING. In response to the need
in the marketplace, the Company has established Omega Environmental Financial
Services, Inc. ("Omega Financial"), a wholly-owned subsidiary, to facilitate
third-party financing primarily for customers of Omega. After performing
preliminary project financing reviews, Omega Financial creates unique leasing
and financing packages to support equipment acquisition and project completion.
Omega Financial has established a market leadership position by serving as an
intermediary with key funding sources which provide lease or purchase financing
for qualified customers. On a case-by-case basis, Omega Financial is authorized
to further facilitate customer financing by providing limited guarantees in the
form of recourse commitments to the lending institution. Omega Financial
receives a brokerage fee for its services.
The Company also assists its customers in obtaining reimbursement of clean-
up cost from State petroleum clean-up funds. The States of Florida and Texas
are important markets for the Company and have
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no-fault reimbursement programs for cleaning up of petroleum contaminated sites
which are financed by a wholesale tax on petroleum.
CUSTOMERS
The Company provides its products and services to large and small
companies and federal, state and local governments, including the U.S. military.
The Company typically contracts directly with owners, operators or tenants of
facilities and works closely with architects and engineers. In its UST
installation/removal and soil remediation operations, the Company relies on
referrals from existing and former customers and architects and engineers for a
substantial portion of its contract leads. A large percentage of the contracts
are obtained by its sales force. The Company performs a substantial amount of
repeat business for certain major oil companies, convenience store chains,
manufacturers, fleet operators and government entities.
MARKETING
The Company generates new business opportunities through referrals and
through the continuing efforts of locally-based sales representatives. The
Company supports these efforts with a variety of direct and indirect lead
generation programs. These programs include advertisements in local and
national trade publications, customized sales and product literature, trade
shows, regional product and service seminars, local and national publicity
programs and other public relations activities. The Company has also developed
customized direct mail and telemarketing programs which have been tested and
implemented at certain locations and which are scheduled for implementation at
other locations on an ongoing basis.
The Company's marketing program emphasizes (i) the nature and objectives of
Omega's efforts to establish a national network of service providers dedicated
to delivering value and quality; (ii) the capacity of the Omega network to
execute a broad range of service station, convenience store and commercial
services in more than one region; and (iii) the availability of Omega's service,
distribution, construction and financing as a "one stop" solution for both
regulatory and market-driven client needs.
NATIONAL ACCOUNTS. The Company has launched an aggressive program to
offer its products and services to clients with multiple sites located in
diverse geographical areas which cannot easily be served by the Company's
locally based competitors. The Company's chief advantages in serving such
accounts are its ability to support multi-regional programs with its existing
network and, when necessary, contract with reputable contractors. National
accounts typically benefit from the Company's consistent quality standards, from
single-contract accountability and from efficient equipment delivery from
multiple warehousing facilities operated by the subsidiaries.
BIDDING AND CONTRACTS. The Company receives a large percentage of
contracts through a bidding process, in which it and a number of competitive
contractors are contacted by the owner, operator or tenant of the property or
architects and engineers to bid on the project. Management maintains financial
and operating controls over all phases of a project, from estimating and bidding
through project completion. Prior to submitting a project proposal, the Company
may assign one or more estimators to visit the job site, review the proposed
work area and determine the size and scope of the work to be performed. The
estimators discuss job requirements with customers' representatives to gain an
understanding of local conditions such as safety and operating regulations,
operating schedules, availability of power and water and access to the job site
or waste storage sites which may affect the scope and execution of the project.
Estimators study specifications, plans and drawings, which are prepared by an
independent architect or engineer hired by the customer, and prepare an estimate
and project schedule. The Company's bid is prepared by the estimator who must
consult with local management on projects which exceed a predetermined size
depending on the estimator's experience. If the Company's bid is preliminarily
accepted, the estimator commences the contracting process, which involves
meetings with the customer to review and clarify specifications of the job,
performance and payment schedules, liquidated damage provisions for delays or
problems with performance, warranty provisions, payment and performance bonds
and insurance coverages.
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Commercial construction projects, as well as federal, state and municipal
projects, often require contractors to post both performance and payment bonds
at the time of execution of a contract. Performance bonds guarantee that the
project will be completed, and payment bonds guarantee that subcontractors and
vendors will be paid for labor, equipment and other purchases. Bonds typically
cost between 1 1/2% and 2 1/2% of the cost of the project. Contractors without
adequate bonding capabilities may be ineligible to bid or negotiate on many
projects. The Company obtains bonds as needed on a case-by-case basis.
Most of the Company's installation and service projects are contracted for
on a fixed price basis, which can offer the Company the opportunity to realize
margins which are higher than those on other types of contracts; however, the
contracts also involve a risk that actual costs may be higher than those
estimated at the time of the bid due to subsequent price increases,
unanticipated problems, inefficient project management, inaccurate estimation of
the labor or material costs or disputes over the terms and specifications of the
contracted performance. Some of the Company's projects are performed on a time
and materials basis.
GOVERNMENT REGULATIONS
DOMESTIC. In recent decades, federal, state and local governments have
enacted and amended numerous environmental protection laws in response to public
concerns about the environment. The Company's business is subject to these
evolving laws and the related regulations. The federal environmental laws that
the Company believes are applicable to the Company and its potential customers
include CERCLA, RCRA and Oil Pollution Act of 1990 ("OPA"). Most states and
certain localities have counterparts to these laws which are at least as
stringent as the federal laws.
Many of the same federal, state and local laws and regulations that create
demand for the Company's business also may directly regulate the Company's own
operations or create potential liabilities for the Company. If the installed
UST systems do not function as expected, petroleum or hazardous materials may
enter the ground and possibly groundwater, and the Company may potentially be
liable for investigation and cleanup costs under federal, state and local
environmental laws. The Company carries contractor's pollution liability
insurance, product liability insurance, and certain other coverage to protect
against for such potential liabilities. See "Business - Insurance."
RCRA provides a comprehensive framework for the regulation of the
generation and transportation of hazardous waste, as well as for the treatment,
storage and disposal of such waste. RCRA is intended to provide a "cradle to
grave" system for the control of hazardous wastes; that is, regulation of wastes
from the time they are generated until they are properly disposed. Both civil
and criminal liability may be imposed on parties that fail to comply with RCRA's
requirements. RCRA requires that, among other parties, transporters of
hazardous waste must obtain and comply with RCRA permits. The Company may be
required to obtain RCRA permits for the transportation of contaminated materials
in connection with providing its removal and remediation services. The Company
believes that it complies with applicable regulations under RCRA.
The UST regulations were promulgated under RCRA and apply to petroleum
products and hazardous substances as defined in CERCLA. These regulations
impose technical standards and financial assurance requirements upon owners and
operators of USTs. Many states and certain localities have enacted regulations
governing USTs which include requirements pertaining to permitting, cleanup
standards, license and certification programs and release reporting
requirements. These state and local regulations may be more stringent than the
federal UST regulations.
CERCLA and the SuperFund Amendments and Reauthorization Act ("SARA")
provide for the investigation and remediation of hazardous waste sites. Under
SuperFund, parties who own or operate sites or facilities contaminated by
hazardous substances, or parties which have generated hazardous materials or
which have arranged for the transportation or disposal of hazardous substances
may be subject to strict, joint and several liability for the investigation and
remediation of contamination. The Company offers installation, removal and
remediation services as elements of its turnkey solution program. The Company
may be subject to liability for investigation and cleanup costs under CERCLA and
RCRA and parallel state and local laws.
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OPA regulates discharge or substantial threat of discharge of oil and
petroleum products from offshore and on-shore facilities. Facilities are
defined to include USTs. Responsible parties under OPA include UST owners and
operators and they may be liable for removal costs, as well as damages to
natural resources, personal property and real property. Civil, criminal and
administrative penalties may apply to violations of OPA. Liability is imposed
on third parties who, either by act or omission, cause a discharge or threatened
discharge of oil or petroleum products. The Company may be subject to liability
under OPA if in the installation or removal of an UST, the Company causes the
discharge or threatened discharge of oil or petroleum products.
MEXICO. Mexico's General Law of Ecological Equilibrium and Environmental
Protection (the "General Environmental Law") imposes certain obligations on
generators of hazardous waste, but the extent of these obligations is not as
comprehensive as the U.S. system of "cradle to grave" regulation under RCRA.
Nor is Mexico's definition of "hazardous waste" as expansive as the definition
under U.S. law. Thus, some materials which are regulated in the U.S. under RCRA
are not currently regulated in Mexico.
Mexico is encouraging the development of increased capacity for hazardous
waste storage and disposal in Mexico. Although Mexican law imposes requirements
on business similar to those in U.S. law, the Mexican environmental protection
agency, Secretariat of Social Development ("SEDESOL"), has not had sufficient
funding to provide adequate enforcement of existing environmental laws.
However, as a part of the country's new National Development Plan announced on
May 31, 1995, Mexico's President Ernesto Zedillo Ponce de Leon called for
stricter environmental enforcement, stating that his government "will push for
compliance with environmental protection standards and we will reinforce the
'polluter pays' principle while at the same time giving incentives to those who
comply with the standards and operate cleanly."
Under the terms of NAFTA and accords on environmental cooperation between
the U.S. and Mexico, Mexico has agreed to enact environmental laws and
regulations that would establish parity between the U.S. and Mexico, as well as
increase enforcement efforts to encourage compliance with new and existing
environmental laws. While there are no existing laws that specifically regulate
USTs in Mexico, regulations pertaining to the storage of hazardous substances,
including USTs are currently being drafted.
SOURCE OF SUPPLY
The Company generally has several sources of the parts and supplies it
uses.
In 1994 a major manufacturer of fuel dispensing equipment notified the
Company of its intent to cancel its local distributorship arrangement with one
of the Company's operations and canceled a similar arrangement with another
operation while retaining them as Authorized Service Contractors. While the
Company can obtain equipment from other sources, the Company has filed a lawsuit
against the manufacturer and others alleging violation of the antitrust and
other laws and has obtained a substantial judgment against said manufacturer
(see Item 3, Legal Proceedings).
COMPETITION
The petroleum equipment and services field is highly competitive. In
regions where the Company currently offers its products and services, it
competes with numerous other contractors in the industry. The Company believes
that none of these competitors has revenues exceeding those of the Company. The
Company, to its knowledge, is the only comprehensive service company operating
in more than one major regional market and the only company actively engaged in
establishing a national network to provide such services. The Company also
differentiates itself from competitors by facilitation of financing. The
Company believes that the ultimate execution of this strategy will lead to
economies of scale in a number of its operations, including material cost
reduction through increased purchasing power, thus allowing it to be the low
cost provider of such products and services.
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As a result of EPA, state and local UST regulations and the growth of
convenience store and fast food outlets, the Company believes that, along with
the removal of older USTs, other upgrading of facilities will take place. New
competitors are also likely to enter this market, although in order to be
successful they would need to obtain distributor licenses, state and local
licenses, insurance coverage, bonding capacity, experienced personnel capable of
meeting requirements of applicable regulatory agencies and clients, and
sufficient financing for investment in start-up equipment and working capital.
BACKLOG AND GOVERNMENT REIMBURSEMENT PROGRAMS
In general, fixed price contracts are completed within a few months and
thus firm backlog does not meaningfully reflect future sales. The Company also
has time and material contracts, most of which involve site assessment and
remediation, including contracts in which state government petroleum clean-up
reimbursement programs will pay for most or all of the cost of such clean-up.
Under the government reimbursement programs, the Company performs environmental
clean-up services for a client with the understanding that the government
reimbursement program will pay for most or all of the clean-up costs and not the
client. The Company has a substantial number of contracts for over 1,300 sites
under these programs (over 80% in Florida and Texas) to be completed in the next
several years.
During the 1996 legislative session, the Florida government completed the
transition of the reimbursement program from a voluntary "first come, first
paid" basis to a government assigned priority ranking system requiring pre-
approval and payment within 45 days of invoicing for completed tasks. In
addition, the legislation created a new non-profit Inland Protection Financing
Corporation (IPFC) to manage the backlog of unpaid claims. The IPFC will issue
certificates of participation to be used to pay the claims already awaiting
payment. The Company believes this change will provide for quicker payment of
claims and will further extend the number of years over which these contracts
will be completed. Like Florida, the Texas program requires that all work be
pre-approved before the work begins. Further, certain of such contracts may be
terminated by the customer. The Company is completing such contracts in the
ordinary course of business.
These contracts do not specify price or the timing of completion since the
government reimbursement programs are to pay the reasonable costs of the clean-
up and the costs of completing the work are not determined until after the
contract is entered into and site assessment work is substantially complete.
While no assurances can be given as to the amount of work involved in any
contract or whether or when work under a contract will be performed, average
historical site costs for remediation under government reimbursement programs,
as estimated by the Florida Department of Environmental Protection, range
between $220,000 and $250,000. These estimates may change due to recent changes
in the Florida reimbursement program. In other states with similar programs,
the average site costs are running between $50,000 and $125,000. Florida fuel
taxes currently provide approximately $160 million per year for clean-up
efforts, and of such amount up to $140 million in expenditures per year are used
to reimburse contractors for clean-up services with the remainder used for
administrative expenses.
There may be a substantial lag time under these state programs before
payment is received. In Florida, reimbursement historically averaged about
fifteen to eighteen months. However, since the 1996 legislative changes will
result in paying off the backlog, the payment period will be reduced.
According to the legislative intent, payment from the state is to be made on
pre-approved claims in 45 days after completing the task. In Texas, the
present lag time for payment for completed work is 120 days. The Company's
ability to carry such contracts will depend on its cash position or ability
to finance such receivables. The Company has costs and estimated earnings in
excess of billings on uncompleted contracts of approximately $14,637,000 as
of March 31, 1996 related to government reimbursement programs. Subsequent to
March 31, 1996, the Company has entered into financing agreements with
unrelated parties and assigns the right of reimbursement to the entity for
specific reimbursement applications. This arrangement provides for funding
upon completion of an application up to a total of $9,000,000. The Company
is also seeking similar additional agreements but no assurances can be given
that such additional agreements will be obtained.
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INSURANCE
The Company currently maintains property, inland marine, and builders risk
insurance, a comprehensive crime and fidelity bond, general and products
pollution liability insurance, commercial auto liability insurance, worker's
compensation insurance, and contractor's pollution/professional liability
insurance, although no assurance can be given that such insurance will continue
to be available. The Company believes that its current level of insurance
coverage is adequate to protect it from the type and level of liability exposure
the Company can reasonably expect to encounter during its ordinary course of
business. However, the coverage would most likely be inadequate if a
catastrophic event occurred for which the Company was determined to be liable.
As a result, there is no assurance that such insurance coverage will adequately
protect the Company under all circumstances. All of the above described
insurance programs are subject to the coverage exemptions and exclusions of the
type commonly found in such policies.
WARRANTIES
In its installation and remediation business, the Company generally
includes with submitted bids or proposals a one-year warranty on its services.
In addition, any UST system component installed would generally carry a warranty
from the third-party manufacturer of that tank and equipment.
EMPLOYEES
As of May 31, 1996, the Company employed, on a full-time basis,
approximately 1,000 people in management, administration, marketing, research
and development, manufacturing, distribution, construction and field service
personnel. Certain of the Company's employees are union members. The Company
believes that its employee relations are satisfactory.
ITEM 2. PROPERTIES.
At May 31, 1996, the Company has the following principal properties under
lease:
- Corporate office space in Bothell, Washington at an annual rent of
$104,000 through November 1997.
- Office, yard, and/or warehouse facilities in Seattle Washington;
Milford, Michigan; Montrose, Pennsylvania; East Point, Georgia;
Atlanta, Georgia; Richmond, Virginia; Lakeland, Florida; St.
Petersburg, Florida; Houston, Texas; Boerne, Texas; San Antonio,
Texas; Dallas, Texas; Somersworth, New Hampshire; Scottsdale, Arizona;
Wilson, North Carolina; and Mexico City, Mexico and office and yard
facilities at several unit locations with annual rents of
approximately $1,370,000 that expire through November 2004, including
leases with related parties with annual rents of approximately
$636,000 that expire through November 2004. The properties are
suitable and adequate for the Company's operations.
ITEM 3. LEGAL PROCEEDINGS.
In January 1995 the Company entered into an agreement in principle to
settle the May 17, 1994 class action lawsuits. On December 5, 1995, the United
States District Court in Seattle, Washington, approved the class action
settlement agreement. Pursuant to such agreement in principle, the settlement
consisted of (i) $250,000 in cash, (ii) $125,000 in cash or common stock, and
(iii) 550,000 shares of the Company's common stock. However, the Company
guaranteed that the common stock to be issued in settlement, as of February 1,
1996 (the "guarantee date"), would have a minimum value of $9.50 per share. The
stock value based upon the 20 trading-day average of the closing market prices
of the Company's common stock (as reported in the Wall Street Journal the
following day) through February 1, 1996 was $3.00795. Since the average was
less than $9.50 per share, the Company was required to issue 1,187,063
9
<PAGE>
additional shares of common stock. In April 1996, the Company issued 1,737,063
shares as final settlement.
In 1994 the Company filed a lawsuit against Gilbarco Inc., a unit of
General Electric PLC in the United Kingdom and a major manufacturer of fuel
dispensing equipment, alleging violation of antitrust and other laws. This
action was filed by the Company in response to Gilbarco's canceling its
distributorship arrangement with two of the Company's operations. On December 4,
1995, in the U.S. Federal Court for the Western District of Washington, in
Seattle, a jury awarded the Company and two of its operations, $27 million in
damages and related interest and attorneys' fees and costs. While that federal
court judge has since entered a judgment in favor of the Company and denied a
motion to set aside the previously announced judgment, Gilbarco has filed an
appeal. The Company will not recognize the award in its consolidated financial
statements until it is received or assured.
The Company is subject to other legal proceedings and claims which have
arisen in the ordinary course of its business. These actions when ultimately
concluded and determined will not, in the opinion of management, have a material
adverse effect on results of operations or the financial condition of the
Company. The Company is not currently a party to any litigation or regulatory
investigation or inquiry with respect to environmental matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
10
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock has been included for quotation on the NASDAQ National
Market under the symbol "OMEG" since July 26, 1993 and in the over-the-counter
market since July 11, 1991. The following table sets forth the high and low bid
prices as reported on NASDAQ National Market for the periods indicated. The bid
prices represent inter-dealer quotations, without adjustments for retail mark-
ups, mark-downs or commissions and may not necessarily represent actual
transactions.
HIGH LOW
--------- ---------
FISCAL YEAR ENDED MARCH 31, 1995 . . . . . . .
First Quarter . . . . . . . . . . . . . . $ 10 7/8 $ 5 7/8
Second Quarter. . . . . . . . . . . . . . 6 7/8 4 1/4
Third Quarter . . . . . . . . . . . . . . 6 3/16 5
Fourth Quarter . . . . . . . . . . . . . 5 5/8 3
FISCAL YEAR ENDED MARCH 31, 1996 . . . . . . .
First Quarter . . . . . . . . . . . . . . 4 3/8 3 1/8
Second Quarter. . . . . . . . . . . . . . 5 1/2 3 7/16
Third Quarter . . . . . . . . . . . . . . 4 11/16 3 1/8
Fourth Quarter. . . . . . . . . . . . . . 3 3/8 2 1/8
FISCAL YEAR ENDED MARCH 31, 1997 . . . . . . .
First Quarter (through June 14, 1996) . . 3 5/8 2 7/16
As of June 14, 1996, there were approximately 505 stockholders of record.
The Company has never declared a dividend on its Common Stock. The Company
intends to retain future earnings for use in its business and therefore does not
anticipate paying dividends in the foreseeable future. There is no assurance
that the Company will ever pay dividends on its Common Stock. The Company's
current bank loan agreement prohibits the paying of dividends.
11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1995 (b) 1994 (d) 1993 (f) 1992 (i)
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $ 151,718 137,044 46,640 7,664 4,878
Cost of sales 127,540 112,382 38,458 6,930 4,684
--------------------------------------------------------------------------
Gross profit 24,178 24,662 8,182 734 194
Operating expenses 42,991 (a) 34,219 17,631 8,918 (g) 3,342
--------------------------------------------------------------------------
Operating loss (18,831) (9,557) (9,449) (8,184) (3,148)
Other income (expense), net (2,629) (7,617) (c) 539 (1) (126)
--------------------------------------------------------------------------
Net loss $ (21,442) (17,174) (8,910) (8,185) (3,274)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Net loss per common share $ (0.61) (0.55) (0.35) (0.89) (0.66)
Weighted average number of
common shares outstanding 34,910 31,320 25,486 9,234 4,993
BALANCE SHEET DATA:
Working capital $ 22,934 22,139 38,792 9,544 453
Goodwill, net 28,554 (a) 35,504 19,908 5,051 872
Total assets 102,013 110,297 85,592 21,998 3,627
Long-term obligations, excluding
current installments 6,554 2,324 2,142 1,919 307
Shareholders' equity $ 50,026 63,306 64,013 (e) 15,221 (h) 1,965
</TABLE>
The above data should be read in conjunction with the consolidated financial
statements.
(a) Includes an adjustment to write down goodwill of $5,699,000.
(b) Includes a full year of Statement of Operations Data of acquisitions made
on or before March 31, 1994 and Statement of Operations Data for the
following entities since their acquisition date: Fedco Omega acquired May
24, 1994; STC Omega acquired September 22, 1994; Gurr Omega acquired
November 18, 1994; Braswell/Arnold Omega acquired November 21, 1994; SSC
Omega acquired November 30, 1994; and SST Omega acquired November 30, 1994.
Balance Sheet Data includes all acquired entities.
(c) Includes class action settlement and related expenses of $6,764,000.
(d) Includes a full year of Statement of Operations Data of Omega Services
(formerly O'Sullivan Omega) and Parks Omega and Statement of Operations
Data for the following entities since their acquisition date: Watkins
Omega acquired June 1, 1993; Kelley Omega acquired June 1, 1993; Omega
Environmental Services (formerly ESSI Omega) acquired September 30, 1993;
PEC Omega acquired October 5, 1993; and Tecniflo Omega acquired December
17, 1993. Balance Sheet Data includes entities acquired on and before
March 31, 1994, including ATS Omega and ATS Omega de Mexico.
(e) Includes sale of common stock for cash and issuance of common stock for
cash upon exercise of warrants, net of issuance costs, of $47,008,000.
(f) Includes a full year of Statement of Operations Data of Omega Services.
Balance Sheet Data includes Omega Services and Parks Omega which were
acquired March 12, 1993.
(g) Includes non-cash stock option compensation expense of $2,725,000.
(h) Includes sale of common stock for cash and issuance of common stock for
cash upon exercise of Class A warrants, net of issuance costs, of
$16,213,000.
(i) Includes Statement of Operations Data of Omega Services from its
acquisition on May 31, 1991 and its Balance Sheet Data as of March 31,
1992.
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
% %
1996 Change 1995 Change 1994
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $ 151,718 11% $ 137,044 194% $ 46,640
Cost of sales 127,540 13% 112,382 192% 38,458
-----------------------------------------------------------------------
Gross profit 24,178 24,662 8,182
Gross profit % 16% 18% 18%
Selling, general and administrative 35,338 9% 32,524 104% 15,906
Goodwill write-down 5,699 - -
Amortization of goodwill 1,954 38% 1,417 184% 499
Research and development - 278 (77%) 1,226
-----------------------------------------------------------------------
Operating loss (18,813) 97% (9,557) 1% (9,449)
Class action lawsuit settlement and
related expenses - (6,764) -
Other income (expense), net (2,629) (853) 539
-----------------------------------------------------------------------
Net loss $ (21,442) 25% $ (17,174) 93% $ (8,910)
-----------------------------------------------------------------------
-----------------------------------------------------------------------
</TABLE>
FISCAL YEAR 1996 COMPARED TO 1995
In fiscal year 1996, the Company continued the execution of its primary
business strategy to be the first national provider of turnkey products and
services to owners of USTs. The early phase of this strategy involved acquiring
companies in major metropolitan areas providing such products and services in
their respective local and regional markets. Although no acquisitions were made
in 1996, the Company still intends to pursue acquisition of companies operating
in regional markets or providing complementary services.
At the present time, the Company is focused on operations, having brought
in new management to consolidate its acquired resources and achieve operating
efficiencies, economies of scale and marketing leverage. Management is
currently in the process of aligning operations along functional lines on a
national basis. This includes (i) centralizing purchasing and bringing
distribution under one national information system, (ii) consolidating
maintenance services in one nationally coordinated and directed unit, and (iii)
consolidating marketing and sales activities. In the fourth quarter of 1996, new
management significantly lowered corporate and division overhead, eliminated
duplicate functions and facilities, disposed of non-core lines of business, and
significantly downsized two units' operations. The cost of these actions was
significant, but were required to improve future operations.
Omega's net loss was $21,442,000 in 1996, a $11,032,000 increase over 1995,
excluding the class action lawsuit settlement and related expenses. The primary
reasons for this increase include the following fourth quarter charges: (i) the
write-down of goodwill totaling $5,699,000, (ii) expenses incurred to
consolidate operations totaling approximately $4,100,000, (iii) reimbursement
rate and other changes associated with state reimbursement programs totaling
approximately $2,500,000, and (iv) a provision for uncollectible receivables of
$1,700,000. Revenues and margins were also negatively effected in the fourth
quarter due to severe and prolonged winter weather conditions in the eastern
United States.
SALES, COST OF SALES AND GROSS PROFIT
Sales and cost of sales increased 11% and 13%, respectively, due primarily
to acquisitions made in 1995 that are included for a full year in 1996 and only
included in 1995 from their acquisition dates.
13
<PAGE>
The increases caused by entities acquired in 1995 were $25,383,000 and
$18,745,000, respectively. However, sales and cost of sales at other entities
decreased as a result of a manufacturer of fuel dispensing equipment canceling
its distributorship agreements with certain units of the Company and from severe
and prolonged winter weather conditions in the eastern United States. Gross
profit decreased from 18% in 1995 to 16% in 1996 primarily due to reimbursement
rate and other changes associated with state government clean-up reimbursement
programs, principally Florida, totaling approximately $2,500,000, an estimated
loss on disposal of excess inventory of $1,800,000, and lower margins caused by
severe winter weather conditions.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 9% due primarily to
acquisitions made in 1995 that are included for a full year in 1996 and only
included in 1995 since their acquisition date. The increase caused by entities
acquired in 1995 was $4,634,000. This increase was offset by decreases in
personnel and expenses at the corporate office related to reduced acquisition
activity and legal expenses and division personnel and expenses related to
eliminating redundant overhead costs and consolidation of certain operations.
Selling, general and administrative expenses in 1996 included severance and
other expenses related to the Company's management changes and operational
consolidation totaling approximately $1,800,000, legal and related expenses
associated with the Company's lawsuit against a manufacturer of fuel dispensing
equipment totaling approximately $900,000, a provision for estimated
uncollectible receivables of $1,700,000 and lease termination costs related to
the elimination of redundant facilities of $500,000.
In 1994, the Company filed a lawsuit against Gilbarco Inc., a unit of
General Electric PLC in the United Kingdom and a major manufacturer of fuel
dispensing equipment, alleging violation of antitrust and other laws. This
action was filed by the Company in response to Gilbarco's canceling its
distributorship arrangement with two of the Company's operations. On December 4,
1995, in the U.S. Federal Court for the Western District of Washington, in
Seattle, a jury awarded the Company and two of its operations, $27 million in
damages and related interest and attorneys' fees and costs. While that federal
court judge has since entered a judgment in favor of the Company and denied a
motion to set aside the previously announced judgment, Gilbarco has filed an
appeal. The Company will not recognize the award in its consolidated financial
statements until it is received or assured.
GOODWILL WRITE-DOWN
In March 1996, the Company recognized a goodwill write-down of $5,699,000
related to the acquisition of ATS Omega in March 1994. ATS incurred significant
losses in 1996 and 1995 and has not been able to recover from the cancellation
of a distributorship agreement with Gilbarco. In March 1996, management made a
strategic decision to significantly downsize ATS' operations and eliminate non-
core businesses. Reduced future operating levels, past losses and debt incurred
to finance these losses have impaired ATS' ability to recover goodwill over the
expected period of benefit.
The methodology that management used to assess the recoverability of
goodwill was to project results of operations forward 18 years, which represents
the remaining expected period of benefit of ATS' goodwill at March 31, 1996.
Projections were based on the past two years of core business operations and
management's changes to downsize the operations. The forecast through the year
2014 is management's best estimate of future results and includes a 3% annual
increase in sales and slightly increasing margins. Projected future results
were discounted at 10%, the Company's estimated cost of funds. The evaluation
resulted in a $5,699,000 write-down of ATS goodwill to $1,340,000. The
remaining balance will be amortized over 18 years, the expected period of
benefit.
The Company has assessed the recoverability of goodwill, and it is
dependent upon certain entities achieving future profitable operations. In the
opinion of management, based upon current information and projections, the
remaining goodwill balance at March 31, 1996 will be recovered over the expected
period
14
<PAGE>
of benefit. However, if future profitable operations are not achieved at these
entities, goodwill will be impaired.
AMORTIZATION OF GOODWILL
Amortization of goodwill increased $537,000 due to acquisitions made in
1995 being included for a full year in 1996. Amortization will decrease in 1997
due to the write-down of goodwill at ATS. Future amortization associated with
future acquisitions will have an adverse effect on future results of operations.
The current rate of goodwill amortization after the write-down of goodwill at
ATS, is approximately $1,600,000 per year utilizing the straight line method of
amortization over 20 years.
RESEARCH AND DEVELOPMENT EXPENSES
No research and development expenses were incurred in 1996 and management,
at this time, does not plan to incur any significant research and development
expenses in 1997.
OTHER INCOME (EXPENSE)
Interest income decreased $415,000 due to use of cash in operations and
collection of receivables from related parties. Interest expense increased
$1,029,000 due to interest related to entities acquired in 1995 that were
included for a full year in 1996 and higher interest rates under the current
loan agreement.
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
Convertible preferred stock, outstanding warrants, options, contingent
shares and shares placed in escrow to satisfy claims are not included in the
calculation of loss per common share since their impact would be antidilutive.
The weighted average number of common shares outstanding will increase
significantly in 1997 due to conversion of preferred stock to 859,000 shares of
common stock in April 1996, issuance of 1,346,000 common shares underlying
certain unit options exercised in June 1996, issuance of 1,737,000 common shares
in April 1996 as final settlement of the class action lawsuits and scheduled
releases of shares from escrow.
FISCAL YEAR 1995 COMPARED TO 1994
In 1995, the Company acquired the following seven companies which are in
the business of installation and removal of USTs, related component distribution
and service, soil and groundwater remediation, and/or related consulting and
engineering services.
<TABLE>
<CAPTION>
Acquired Entities Acquisition Date
----------------- ----------------
<S> <C>
Fedco Tank and Equipment, Inc. and affiliates ("Fedco") May 24, 1994
Silicate Technology Corporation ("STC") September 22, 1994
Gurr & Associates, Inc. ("Gurr") November 18, 1994
Braswell Equipment Company and Arnold Equipment
Company ("Braswell/Arnold") November 21, 1994
Service Station Construction, Inc. ("SSC") November 30, 1994
Service Station Testing, Inc. ("SST") November 30, 1994
</TABLE>
The acquired entities' balance sheets and operations are included in the
Company's consolidated balance sheet and results of operations from their
acquisition dates and account for the majority of the Company's growth in 1995.
The Company's net loss increased by $8,264,000 to $17,174,000 in 1995
primarily due to the class action lawsuit settlement and related expenses
totaling $6,764,000. The Company has continued to incur
15
<PAGE>
significant losses largely due to the nonrecuring costs of identifying,
investigating and negotiating with acquisition candidates, and integrating them
into Omega's operations subsequent to acquisition.
SALES, COST OF SALES AND GROSS PROFIT
Sales and cost of sales increased 194% and 192% respectively, primarily due
to the inclusion of acquired entities since their acquisition dates. Sales and
cost of sales of acquired entities from the acquisition dates through the end of
the fiscal year were approximately $83,731,000 and $69,027,000, respectively.
The remaining increase was due to continued growth at existing operations,
principally in environmental remediation, consulting and engineering services.
Although gross profit remained constant at 18% a significant event in 1995 had a
negative impact on operations. One of the Company's larger entities lost a key
distributorship of fuel dispensing equipment which, over time, resulted in a
complete reorganization of its sales and service department related to this
product offering. As a result inventory had to be written down to NRV and the
mix of business changed from primarily distribution to more of a
construction/installation orientation. The Company has filed a lawsuit against
this manufacturer (See Legal Proceedings). The legal expenses incurred in 1995
associated with this lawsuit approximate $500,000 and are classified as SG&A.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased by $16,618,000
primarily due to (i) the inclusion of acquired entities since their acquisition
dates of approximately $14,704,000, (ii) expansion of environmental remediation,
consulting and engineering services, (iii) increases in national account
marketing and sales expenses, and (iv) increases in general and administrative
expenses associated with Omega's expansion. In fiscal years 1995 and 1994 Omega
incurred significant expenses associated with identifying, investigating, and
negotiating with acquisition candidates and integrating them into the Company's
operations subsequent to acquisition.
Goodwill amortization increased $918,000 due to acquisitions in 1995 which
created additional goodwill of $12,490,000 and inclusion of goodwill
amortization from entities acquired in 1994 for a full year in 1995. Future
amortization of goodwill associated with completed and future acquisitions will
have a material adverse effect on future results of operations. The current
rate of goodwill amortization is approximately $1,870,000 a year utilizing the
straight line method of amortization over 20 years.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased in fiscal 1995 due to reduced
research and development for the Company's Leak Prevention Technology and
related items.
CLASS ACTION LAWSUIT SETTLEMENT
In January 1995 the Company entered into an agreement in principle to
settle the May 17, 1994 lawsuits. On December 5, 1995, the United States
District Court in Seattle, Washington, approved the class action settlement.
Pursuant to such agreement, the settlement consisted of (i) $250,000 in cash,
(ii) $125,000 in cash or common stock, and (iii) 550,000 shares of the Company's
common stock. The Company guaranteed that the common stock to be issued in
settlement as of February 1, 1996 (the "guarantee date") would have a minimum
value of $9.50 per share. The stock value based upon the 20 trading-day average
of the closing market prices of the Company's common stock (as reported in the
Wall Street Journal the following day) through February 1, 1996 was $3.00795.
Since the average was less than $9.50 per share, the Company was required to
issue 1,187,063 additional shares of common stock. In April 1996, the Company
issued 1,737,063 shares as final settlement. Total expense to the Company in
1995, including legal and related expenses, was $6,764,000.
16
<PAGE>
OTHER INCOME (EXPENSE)
Interest income decreased $105,000 due to use of cash in operations.
Interest expense increased $727,000 primarily due to borrowings at entities
acquired in 1995. Other net expenses consist primarily of $400,000 of employee
severance expenses.
SEASONALITY
With regard to construction and other outdoor activities such as UST
installation and removal and soil remediation, it can be expected that sales
will experience some seasonality due to the effects of weather conditions, such
as the severe weather during the winter of fiscal years 1996 and 1994, and that
these effects will vary depending on the particular geographic area. Future
prolonged severe weather conditions may adversely affect results of operations.
ADOPTION OF NEW ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, Accounting for Stock-Based Compensation. This statement established
financial accounting and reporting standards for stock-based employee
compensation plans. It allows an entity to continue to measure compensation
cost for those plans using the intrinsic value based method of accounting
prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees, or
the fair value based method of accounting defined under this new standard.
Entities electing to remain with the accounting in Opinion No. 25 must make pro
forma disclosures of net income and earnings per share, as if the fair value
method had been applied. The Company must adopt this new standard for the
fiscal year ending March 31, 1997. The Company will continue to account for
stock-based employee compensation plans using the intrinsic value based method
of accounting and, therefore, believes adoption of Statement No. 123 will not
impact the Company's financial position and results of operations.
In March, 1995, the Financial Accounting Standards Board issued Statement
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of. This statement establishes accounting standards for
the impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets to be held and used and for long-lived assets
and certain identifiable intangibles to be disposed of. The Company must adopt
the provisions of this standard for the fiscal year ending March 31, 1997. The
Company believes adoption of Statement No. 121 will not impact the Company's
financial position and results of operations.
LIQUIDITY AND CAPITAL RESOURCES
(IN THOUSANDS)
Year Ended March 31, 1996 1995
----------------------
Net cash used in operations $ (10,589) (20,609)
Net cash provided by investing activities 710 20,771
Net cash provided by (used in) financing activities 9,046 (76)
March 31,
----------------------
1996 1995
----------------------
Working Capital $ 22,934 22,139
Long-term obligations, excluding current installments
and class action lawsuit settlement obligation (6,554) (2,345)
The Company has incurred significant losses since inception and
operations have not generated cash. In 1996 the use of cash in operations of
$10,589,000 was caused primarily by losses. To meet cash needs caused by
losses, the Company sold preferred and common stock for net proceeds of
$9,445,000. Net cash provided by investing activities resulted primarily
from collection of related party loans of
17
<PAGE>
$2,921,000 offset by payments to sellers of previously acquired entities for
guarantees related to the market value of the Company's common stock given as
consideration at closing totaling $1,431,000.
In 1995 the use of cash in operations of $20,609,000 was caused by losses
and cash needed to fund growth in certain current assets, net of current
liabilities, principally related to the Company's environmental services in
Florida and other states and operations in Mexico. Also in 1995, the Company
used cash to acquire new business entities, including loans made to related
parties in connection with the acquisitions, totaling $6,978,000. To meet cash
needs for operations and acquisitions in 1995, the Company used $29,925,000 of
cash held in short-term investments at March 31, 1994.
Working capital increased $795,000 at March 31, 1996 due to proceeds from
the sale of preferred and common stock and replacement of a portion of debt
previously included as current liabilities with long-term obligations, offset by
cash used in operations. Long-term obligations, excluding current installments
and class action lawsuit settlement obligation, increased $4,209,000 due to
borrowings under the term loan. In June 1996, certain unit options and
underlying warrants were exercised by the underwriters for net proceeds to the
Company of approximately $2,019,000. The proceeds were used to reduce the term
loan.
At March 31, 1996, the Company had receivables and costs and estimated
earnings in excess of billings on uncompleted contracts relating to a Florida
State Reimbursement Program of approximately $14,576,000. Subsequent to March
31, 1996, the Company has obtained commitments to fund up to $9 million of these
receivables and costs and estimated earnings in excess of billings on
uncompleted contracts and is pursuing additional funding. Management believes,
based upon changes in laws governing the Florida State Reimbursement Program,
that the majority of these receivables and costs and estimated earnings in
excess of billings on uncompleted contracts will be collected from Funders by
December 31, 1996. Management expects to continue to provide services in
Florida under the government assigned priority ranking system requiring pre-
approval and payment within 45 days of invoicing of completed tasks.
Additionally, the Company is responsible for any shortfalls related to
approximately $10,626,000 of billings to the Florida State Reimbursement Program
for services performed by the Company and paid to the Company by the Funders.
In accordance with certain Funder agreements, the Company has placed $1,012,000
in escrow to reimburse Funders for any shortfalls. Management believes the
Company has reserved adequate amounts to cover anticipated shortfalls.
On September 15, 1995, the Company entered into a $30,000,000 Revolving and
Term Loan Agreement ("Loan Agreement") with BNY Financial Corporation ("BNYFC").
The three year Loan Agreement provides for a $10,000,000 term loan and
$20,000,000 revolving loan and is secured by the Company's assets. Direct costs
to obtain financing from BNYFC totaling approximately $1.5 million, have been
deferred and are being amortized over the Loan Agreement term and are classified
as long-term. This financing agreement contains covenants which, among other
provisions, require the Company to maintain a minimum tangible net worth,
minimum working capital, minimum net income, and other financial ratios, and
places restrictions on acquisitions, capital expenditures, additional
indebtedness or liens, payment of dividends, and other restrictions. Some of
the covenants have been modified by BNYFC to accommodate changes in the
Company's operations. As partial consideration for these changes, the Company
agreed to an increase in the borrowing rate of 100 basis points.
At March 31, 1996, the Company was not in compliance with the minimum
tangible net worth, minimum net income and leverage ratio financial covenants.
BNYFC has waived these events of default for March 31, 1996 and agreed to modify
certain financial and other covenants consistent with management's forecast. As
partial consideration for these actions, the Company agreed to certain
additional fees. Further, until the final documentation of the covenant
modification is complete, the Company's interest rates have been increased 200
basis points.
18
<PAGE>
The term loan is due in monthly principal payments of $139,000 through
September 1, 1998, with a final principal payment of $5,000,000 due on
September 15, 1998. Interest accrues at the Eurodollar rate plus 3.75% or at
the Alternative Base rate (as defined in the Loan Agreement) plus 2%, at the
Company's option, and is payable monthly. As of March 31, 1996, the term
loan balance was $9,167,000.
Borrowing capacity under the revolving loan is based on certain asset
levels, principally receivables and inventories. Interest accrues at the
Eurodollar rate plus 3.25% or at Alternative Base rate (as defined in the
Loan Agreement) plus 2%, at the Company's option, and is payable monthly. At
March 31, 1996, the Company had borrowing capacity under the revolving loan
of approximately $13,000,000, of which the Company had borrowed $8,895,000.
As part of its organizational consolidation, management is continuing to
take steps to significantly reduce overhead and is evaluating further cost
reduction and margin improvement programs. There can be no assurance that the
Company will be able to generate cash from operations, borrowings or the sale of
additional Company equity securities. Additionally, there can be no assurance
that the Company will be in compliance with the Loan Agreement covenants or that
eligible assets will be adequate to support borrowing levels under the Loan
Agreement.
In addition to normal operating cash commitments, the Company has the
following existing and planned cash commitments and contingencies:
- - In accordance with the STC acquisition agreement, additional cash of up to
$875,000 will be paid if certain income levels, as defined in the
acquisition agreement, are achieved for each six month period between
September 1994 and September 1997. As of March 31, 1996, these income
levels have not been achieved.
- - Omega Financial Services was established in April 1994 to facilitate third
party financing primarily for customers of the Company's operating
entities. In addition to serving as an intermediary between customers and
funding sources, Omega Financial Services has been authorized by the
Company's Board of Directors to provide up to $2 million of limited
recourse assurance and guarantees to participating financial institutions.
As of March 31, 1996 the Company has guaranteed repayments totaling
$1,394,000.
FORWARD LOOKING STATEMENTS
Matters discussed herein contain forward looking statements that involve
risk and uncertainties. The Company's results may differ significantly from
results indicated by forward looking statements. Factors that might cause some
differences, including but not limited to:
- - Changes in general economic conditions, including but not limited to
increases in interest rates and supply and prices of petroleum products,
affecting customers or the Company;
- - Changes in government regulations effecting customers or the Company or
additional changes in governmental reimbursement programs particularly in
Florida;
- - Risks generally involved in the construction business, including weather,
fixed price contracts and shortages of materials or labor;
- - Competition;
- - Foreign operations in Mexico, which could be subject to an additional
devaluation of the peso and foreign currency and import restrictions;
- - The ability to successfully reorganize the Company into functional lines
and obtain quantity discounts from vendors and to continue relationships
with vendors;
- - The ability to generate cash from operations, borrowing, including funding
of receivables under the Florida State Reimbursement Program, or the sale
of additional equity securities;
19
<PAGE>
- - The ability to maintain compliance with the covenants and conditions of the
Company's loan agreement or that eligible assets will be adequate to
support borrowing levels under the loan agreement;
- - Recoverability of goodwill and its dependency on certain entities
achieving future profitable operations;
- - The occurrences of incidents which could subject the Company to liability
or fines under any environmental laws or the adequacy of insurances; and
- - The timing and nature of any future acquisitions.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
20
<PAGE>
OMEGA ENVIRONMENTAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
ASSETS 1996 1995
- --------------------------------------------------------------------------------
Current assets:
Cash $ 1,276 2,156
Receivables, net of allowance for
doubtful accounts of $2,518 in 1996
and $1,372 in 1995 29,758 26,134
Receivables from related parties 883 3,427
Inventories 10,512 11,279
Costs and estimated earnings in
excess of billings on uncompleted
contracts 18,757 17,317
Prepaid expenses and other assets 1,956 1,247
-------------------------------
Total current assets 63,142 61,560
Property and equipment, at cost, net of
accumulated depreciation
and amortization 9,752 11,442
Goodwill, net of accumulated amortization
of $3,820 in 1996 and $1,901 in 1995 28,554 35,504
Notes receivable from related parties - 920
Other assets 565 871
- --------------------------------------------------------------------------------
$ 102,013 110,297
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Current liabilities:
Lines of credit $ - 11,077
Revolving credit loan 8,895 -
Current installments of long-term
obligations 2,025 3,732
Payables to related parties - 319
Accounts payable 17,495 14,921
Accrued expenses 9,441 7,783
Billings in excess of costs and
estimated earnings on uncompleted
contracts 2,352 1,589
-------------------------------
Total current liabilities 40,208 39,421
Long-term obligations, excluding
current installments 6,554 2,324
Class action lawsuit settlement
obligation 5,225 5,225
Other liabilities - 21
-------------------------------
Total liabilities 51,987 46,991
-------------------------------
Shareholders' equity:
Preferred stock, $.0025 par value.
Authorized 5,000,000 shares;
500 shares of Series A Convertible
Redeemable Preferred Stock issued
and 210 outstanding in 1996 -
Common stock, $.0025 par value.
Authorized 60,000,000 shares;
issued and outstanding 38,662,637
shares in 1996 and 33,875,570
shares in 1995 97 85
Additional paid in capital 111,636 103,246
Treasury stock, 100,000 shares in
1996 and 1995, at cost (563) (563)
Foreign currency translation
adjustment (972) (732)
Accumulated deficit (60,172) (38,730)
-------------------------------
Total shareholders' equity 50,026 63,306
Commitments and contingencies
- --------------------------------------------------------------------------------
$ 102,013 110,297
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
21
<PAGE>
OMEGA ENVIRONMENTAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $ 151,718 137,044 46,640
Cost of sales 127,540 112,382 38,458
----------------------------------------
Gross profit 24,178 24,662 8,182
----------------------------------------
Operating expenses:
Selling, general and administrative 35,338 32,524 15,906
Goodwill write-down 5,699 - -
Amortization of goodwill 1,954 1,417 499
Research and development - 278 1,226
----------------------------------------
Total operating expenses 42,991 34,219 17,631
----------------------------------------
Operating loss (18,813) (9,557) (9,449)
----------------------------------------
Other income (expense):
Interest income 403 818 923
Interest expense (2,178) (1,149) (422)
Class action lawsuit settlement
and related expenses - (6,764) -
Other, net (854) (522) 38
----------------------------------------
Total other income (expense) (2,629) (7,617) 539
----------------------------------------
Net loss $ (21,442) (17,174) (8,910)
----------------------------------------
----------------------------------------
Net loss per common share $ (0.61) (0.55) (0.35)
----------------------------------------
----------------------------------------
Weighted average number of
common shares outstanding 34,910 31,320 25,486
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
OMEGA ENVIRONMENTAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Additional Foreign Accumu- Total
Common Common Preferred paid-in Treasury currency lated shareholders'
shares stock stock capital Shares translation deficit equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at March 31, 1993 18,647 $ 46 - 27,821 - - (12,646) 15,221
Sale of common stock for
cash, net of issuance costs 2,675 7 - 24,300 - - - 24,307
Issuance of common stock
for acquisitions 1,161 3 - 9,542 - - - 9,545
Issuance of common stock in
exchange for payment of
consulting services and
liabilities 85 - - 342 - - - 342
Issuance of common stock
pursuant to exercise of
stock options, unit purchase
options and employee
stock purchase plan 1,007 3 - 834 - - - 837
Issuance of common stock for
cash upon exercise of warrants,
net of issuance costs 7,190 18 - 22,683 - - - 22,701
Adjustment resulting from
translation of financial
statements into US dollars - - - - - (30) - (30)
Net loss for the year ended
March 31, 1994 - - - - - - (8,910) (8,910)
--------------------------------------------------------------------------------------------
Balances at March 31, 1994 30,765 77 - 85,522 - (30) (21,556) 64,013
Issuance of common stock
for acquisitions 2,553 6 - 16,622 - - - 16,628
Issuance of common stock
pursuant to exercise of
stock options and employee
stock purchase plan 386 1 - 555 - - - 556
Issuance of common stock
in exchange for consulting
services and liabilities 261 1 - 1,621 - - - 1,622
Purchase of treasury shares - - - - (1,502) - - (1,502)
Cancellation of treasury shares (89) - - (939) 939 - - -
Costs associated with
registration of common stock - - - (135) - - - (135)
Adjustment resulting from
translation of financial
statements into US dollars - - - - - (702) - (702)
Net loss for the year ended
March 31, 1995 - - - - - - (17,174) (17,174)
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at March 31, 1995 33,876 $ 85 - 103,246 (563) (732) (38,730) 63,306
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
OMEGA ENVIRONMENTAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Additional Foreign Accumu- Total
Common Common Preferred paid-in Treasury currency lated shareholders'
shares stock stock capital Shares translation deficit equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at March 31, 1995 33,876 $ 85 - 103,246 (563) (732) (38,730) 63,306
Sale of 500 shares of Series A
preferred stock for cash, net
of issuance costs - - 4,635 - - - 4,635
Conversion of 290 shares of
Series A preferred stock to
common stock 1,583 4 (4) - - - -
Issuance of common stock and
payment of cash related
to acquisitions 1,352 3 - (1,434) - - - (1,431)
Sale of common stock for cash,
net of issuance costs 1,675 4 - 4,806 - - - 4,810
Issuance of common stock
pursuant to exercise of
stock options and employee
stock purchase plan 99 1 - 234 - - - 235
Issuance of common stock for
cash upon exercise of warrants,
net of issuance costs 78 - - 153 - - - 153
Adjustment resulting from
translation of financial
statements into US dollars - - - - - (240) - (240)
Net loss for the year ended
March 31, 1996 - - - - - - (21,442) (21,442)
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at March 31, 1996 38,663 $ 97 - 111,636 (563) (972) (60,172) 50,026
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
OMEGA ENVIRONMENTAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(21,442) (17,174) (8,910)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 4,837 3,851 1,799
Goodwill write-down 5,699 - -
Class action lawsuit settlement expense to be paid in stock - 5,225 -
Expenses paid by issuance of common stock - 31 32
Loss (gain) on sale of equipment 63 107 (33)
Change in certain assets and liabilities, net of effect of acquisitions:
Increase in receivables (3,258) (7,667) (2,399)
Decrease (increase) in inventories 672 (2,003) (897)
Increase in costs and estimated earnings in excess of billings on
uncompleted contracts (1,451) (6,585) (2,851)
(Increase) decrease in prepaids and other assets (715) (510) 187
Increase in accounts payable and accrued expenses 4,339 3,727 970
Increase in billings in excess of cost and estimated
earnings on uncompleted contracts 771 376 227
Change in other assets and liabilities, net (104) 13 (102)
--------------------------------------
Net cash used in operations (10,589) (20,609) (11,977)
--------------------------------------
Cash flows from investing activities:
Decrease (increase) in short-term investments, net - 29,925 (20,708)
Payments for acquisitions, net of cash acquired (1,431) (3,866) (10,554)
Loans to related parties - (3,982) (1,258)
Collection of loans to related parties 2,921 551 -
Proceeds from sale of equipment 788 121 128
Additions to property and equipment (1,568) (1,978) (1,892)
--------------------------------------
Net cash provided by (used in) investing activities 710 20,771 (34,284)
--------------------------------------
Cash flows from financing activities:
Proceeds from lines of credit 29,625 38,815 11,058
Repayments of lines of credit (40,702) (34,854) (11,812)
Net proceeds from borrowings under revolving credit loan 8,895 - -
Proceeds from long-term obligations 11,913 970 1,736
Repayments of long-term obligations (9,033) (3,926) (2,668)
Debt issuance costs (1,485) - -
Proceeds from exercise of stock options, unit purchase options and
employee stock purchase plan 235 556 837
Proceeds from exercise of warrants 153 - 23,356
Costs associated with exercise of warrants - - (875)
Proceeds from sale of common and preferred stock 9,831 - 25,011
Costs associated with sale and registration of common and
preferred stock (386) (135) (704)
Purchase of treasury shares - (1,502) -
--------------------------------------
Net cash provided by (used in) financing activities 9,046 (76) 45,939
--------------------------------------
Effect of exchange rate changes on cash (47) 1,265 -
--------------------------------------
Net increase (decrease) in cash (880) 1,351 (322)
Cash at beginning of year 2,156 805 1,127
--------------------------------------
Cash at end of year $ 1,276 2,156 805
--------------------------------------
--------------------------------------
Supplemental disclosure of cash flow information:
Equipment acquired in exchange for long-term obligations $ 489 1,891 -
Cash paid for interest $ 1,926 1,032 404
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
OMEGA ENVIRONMENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(1) NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) NATURE OF OPERATIONS
Omega Environmental, Inc. (the "Company") provides products and services to
operators and owners of fueling facilities. The Company's products and
services include underground storage tank installations and removal,
distribution of parts and equipment for fuel storage and delivery,
construction of convenience store/service station facilities, maintenance
of such equipment and facilities, environmental consulting and engineering
and soil and groundwater remediation. The principal market for these
products and services is the retail and commercial petroleum industry in
the United States and Mexico.
(b) CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all of its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
Included in the Company's consolidated balance sheet at March 31, 1996, are
the net assets of the Company's operations in Mexico, which total
approximately $2.5 million.
(c) REVENUE RECOGNITION
Revenue is recorded when products are shipped or services are rendered.
Contract revenue is recognized using the percentage-of-completion method of
contract accounting measured by the percentage of contract costs incurred
to date to total estimated contract costs.
Contract costs include all direct materials, subcontractor and labor costs
and those indirect costs related to contract performance, such as indirect
labor, supplies, tools, repairs and depreciation costs. Provisions for
estimated losses on uncompleted contracts are made in the period in which
such losses are determined. Changes in job performance, job conditions,
estimated profitability and final contract settlements may result in
revisions to costs and income and are recognized in the period in which the
revisions are determined. Due to uncertainties inherent in the estimation
process, it is at least reasonably possible that costs to complete
contracts will be further revised in the near term.
The Company has time and material contracts, most of which involve site
assessment and remediation, in which state government reimbursement
programs will pay for the reasonable cost of such activities. Under the
government reimbursement programs, the Company performs environmental
services for a client with the understanding that the government
reimbursement program will pay for the clean-up costs to the extent
permitted by the programs and not the client. Revenue is recognized as
services are performed for tasks that are eligible for reimbursement under
the programs using rates that management believes, based on historical
reimbursed rates, are reasonable and eligible for reimbursement. Due to
uncertainties inherent in the process under state government reimbursement
programs, it is at least reasonably possible that estimated earnings will
be further revised in the near term.
26
<PAGE>
OMEGA ENVIRONMENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts" represents revenues recognized in excess of amounts
billed. The liability, "Billings in excess of costs and estimated earnings
on uncompleted contracts" represents billings in excess of revenues
recognized.
(d) SHORT-TERM INVESTMENTS
The Company accounts for short-term investments under Statement of
Financial Accounting Standards No. 115, which classifies marketable debt
and equity securities as those investments held-to-maturity, trading
securities and securities available-for-sale. Proceeds from sales of
available-for-sale securities totaled $34,305,000 during the year ended
March 31, 1995. Realized gains and losses on sales of short-term
investment securities are determined on the specific identification method.
No material realized gains or losses were recognized in 1995 and 1994.
(e) USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
(f) CONCENTRATIONS OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of receivables and costs and estimated
earnings in excess of billings on uncompleted contracts resulting from
sales to the retail petroleum industry. Other than amounts related to the
Florida State Reimbursement Program, concentrations of credit risk are
limited due to the Company's large number of customers and their geographic
dispersion. At March 31, 1996, the Company had receivables and costs and
estimated earnings in excess of billings on uncompleted contracts relating
to a Florida State Reimbursement Program of approximately $14,576,000.
(g) INVENTORIES
Inventories, which consist primarily of component parts used in the retail
petroleum industry and construction and maintenance materials, are stated
at the lower of cost or market (net realizable value). Cost is determined
using the average cost method.
As part of the Company's organizational consolidation, distribution
inventories will be controlled under one inventory system and excess
inventories will be disposed. Management estimates that the loss on
disposition will be approximately $1,800,000, and an allowance for excess
inventories has been recorded for that amount at March 31, 1996. The
amount the
27
<PAGE>
OMEGA ENVIRONMENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Company will ultimately realize could differ in the near term from amounts
used to estimate the loss.
(h) GOODWILL
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over 20 years,
the expected period to be benefited. The Company assesses the
recoverability of this intangible asset by determining whether the
amortization of the goodwill balance over its remaining life can be
recovered through projected undiscounted future operating results. The
amount of goodwill impairment, if any, is measured based on projected
discounted future results using a discount rate reflecting the Company's
average cost of funds.
The Company has assessed the recoverability of goodwill, and it is
dependent upon certain entities achieving future profitable operations.
Management's assessment determined that goodwill was impaired and a write-
down of $5,699,000 was recorded at March 31, 1996. In the opinion of
management, based upon current information and projections, the remaining
goodwill balance at March 31, 1996 will be recovered over the expected
period of benefit. However, if future profitable operations are not
achieved at these entities, goodwill will be impaired.
(i) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of 3 to 10 years for
vehicles, field and shop equipment, and 3 to 7 years for furniture,
fixtures and office equipment. Leasehold improvements are amortized over
the shorter of the term of the respective lease or estimated useful life.
(j) INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities due to a change in tax rates is
recognized in the statement of operations in the period that includes the
enactment date.
(k) FOREIGN CURRENCY TRANSLATION
The consolidated financial statements include foreign currency amounts
attributable to operations in Mexico. These amounts have been translated
into U.S. dollars using year-end exchange rates for assets and liabilities
and average annual rates for revenue, expenses and cash flows. The net
exchange adjustment resulting from these transactions is included as a
separate component of shareholders' equity.
28
<PAGE>
OMEGA ENVIRONMENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(l) NET LOSS PER COMMON SHARE
Net loss per common share is computed using the weighted average number of
common shares actually outstanding. Convertible preferred stock,
outstanding warrants, options, contingent shares and shares placed in
escrow to satisfy claims are not included in the calculation of net loss
per common share since their impact is antidilutive. The shares held in
escrow to satisfy claims are included in the weighted average computation
when released from escrow.
(m) RECLASSIFICATIONS
Certain 1995 and 1994 amounts have been reclassified to conform to the 1996
presentation.
(n) NEW ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, Accounting for Stock-Based Compensation. This statement
established financial accounting and reporting standards for stock-based
employee compensation plans. It allows an entity to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting prescribed by APB Opinion No. 25, Accounting for Stock Issued to
Employees, or the fair value based method of accounting defined under this
new standard. Entities electing to remain with the accounting in Opinion
No. 25 must make pro forma disclosures of net income and earnings per
share, as if the fair value method had been applied. The Company must
adopt this new standard for the fiscal year ending March 31, 1997. The
Company will continue to account for stock-based employee compensation
plans using the intrinsic value based method of accounting and, therefore,
believes adoption of Statement No. 123 will not impact the Company's
financial position and results of operations.
In March, 1995, the Financial Accounting Standards Board issued Statement
No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of. This statement establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held
and used and for long-lived assets and certain identifiable intangibles to
be disposed of. The Company must adopt the provisions of this standard for
the fiscal year ending March 31, 1997. The Company believes adoption of
Statement No. 121 will not impact the Company's financial position and
results of operations.
(2) LIQUIDITY
The Company has incurred significant losses since inception and operations
have not generated cash. To meet cash needs in 1996, the Company sold 500
shares of Series A Convertible Redeemable Preferred Stock for net proceeds
of $4,635,000 and sold 1,675,000 shares of common stock for net proceeds of
$4,810,000.
29
<PAGE>
OMEGA ENVIRONMENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
In 1996, the Company entered into a loan agreement with BNY Financial
Corporation ("BNYFC"), which replaced substantially all previous lines of
credit and long-term obligations and increased the Company's borrowing
capacity. Borrowing capacity under this agreement is limited to a percent
of eligible assets, primarily receivables, inventories and property and
equipment. At March 31, 1996, the Company had borrowing capacity under the
revolving loan of approximately $13,000,000, of which the Company had
borrowed $8,895,000.
Subsequent to March 31, 1996, the Company has obtained commitments to fund
up to $9 million of receivables under the Florida State Reimbursement
Program. Also, certain unit options and underlying warrants were exercised
by the underwriters for net proceeds to the Company of approximately
$2,019,000.
As part of its organizational consolidation, management has continued to
take steps to significantly reduce overhead and is evaluating further cost
reduction and margin improvement programs. There can be no assurance that
the Company will be able to generate cash from operations, borrowings or
the sale of additional Company equity securities. Additionally, there can
be no assurance that the Company will be in compliance with the loan
agreement covenants or that eligible assets will be adequate to support
borrowing under the loan agreement. The accompanying consolidated
financial information has been prepared on the basis that the Company will
be able to meet its cash needs and continue as a going concern.
(3) ACQUISITIONS
The consolidated financial statements include the accounts of the acquired
companies below since their acquisition date. The acquisitions were
accounted for using the purchase method of accounting, wherein the purchase
prices were allocated to the assets acquired and liabilities assumed based
upon their relative fair values. The excess of the cost over the fair
value of net assets acquired was accounted for as goodwill and is being
amortized consistent with Company policy.
The acquired entities listed below provide one or more of the products
and/or services described in Note 1.
Acquired Entities Acquisition Date
----------------- ----------------
Watkins Service Company June 1, 1993
Kelley Equipment Sales & Services, Inc. June 1, 1993
Environmental Solutions & Services, Inc. September 29, 1993
W.B. Goode Company, Incorporated September 30, 1993
Petroleum Equipment Sales, Inc. October 5, 1993
Tecniflo, Inc. December 17, 1993
Applied Technical Services, Inc. ("ATS") and
ATS de Mexico S.A. de C.V. March 31, 1994
Fedco Tank and Equipment, Inc. and affiliates May 24, 1994
30
<PAGE>
OMEGA ENVIRONMENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Silicate Technology Corporation ("STC") September 22, 1994
Gurr & Associates, Inc. ("Gurr") November 18, 1994
Braswell Equipment Company and Arnold Equipment
Company November 21, 1994
Service Station Construction & Installation, Inc.
("SSC") November 30, 1994
Service Station Testing, Inc. ("SST") November 30, 1994
The purchase prices related to the acquisitions made in 1995 and 1994 were
allocated as follows:
1995 1994
------------------------
(in thousands)
Fair value of assets acquired $ 20,317 20,264
Goodwill 12,490 15,356
------------------------
$ 32,807 35,620
------------------------
------------------------
Fair value of liabilities assumed $ 13,577 14,937
Fair value of common stock issued and cash 19,230 20,683
------------------------
$ 32,807 35,620
------------------------
------------------------
The unaudited combined pro forma information which follows assumes the
acquisitions had been combined on April 1, 1993 and carried forward through
March 31, 1995. The calculations include adjustments for depreciation
expense and amortization of goodwill. The unaudited combined pro forma
information which follows may not be indicative of the results that would
have occurred if the acquisitions had been consummated as of that date or
of the results that may be obtained in the future.
Unaudited Unaudited
1995 1994
------------------------
(in thousands,
except per share amounts)
Sales $ 161,851 151,110
Net loss $ (16,009) (5,453)
Net loss per common share $ (.49) (.20)
------------------------
------------------------
Pursuant to the indemnifications included in the acquisition agreements,
certain portions of the purchase price were placed in escrow to satisfy
claims which may be made by the Company against the sellers. At March 31,
1996, the Company has 599,052 shares of the Company's common stock and
$310,000 held in escrow for any such claims, which are scheduled for
release during 1997 and 1998.
In accordance with the Gurr acquisition agreement, the Company issued
1,273,750 additional shares of the Company's common stock because the
aggregate market value of the
31
<PAGE>
OMEGA ENVIRONMENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Company's stock given as consideration at closing did not exceed
$10,000,000 for at least 30 consecutive trading days prior to November 18,
1995.
In accordance with the SSC acquisition agreement, the Company paid
approximately $1,004,000 in cash to the sellers because the aggregate
average market value of the Company's common stock given as consideration
at closing was less than $3,000,000 on November 30, 1995.
In accordance with the SST acquisition agreement, the Company paid
approximately $112,000 in cash and issued 28,356 additional shares in
common stock to the seller because the aggregate market value of Company's
common stock given as consideration at closing was less than $700,000 on
November 30, 1995.
In accordance with the STC acquisition agreement, additional consideration
of up to $1,750,000 will be paid if certain income levels, as defined in
the acquisition agreement, are achieved for each six month period between
September 30, 1994 and September 30, 1997. This consideration will be paid
in equal amounts of cash and the Company's common stock valued at the
average market price as of the last trading day of each six month period.
The Company will record the value of the cash and additional shares paid as
additional purchase price if the earnings target is met, and will include
the contingent shares in primary earnings per share if the earnings target
is being attained currently. At March 31, 1996, no additional
consideration has been earned under this agreement.
(4) GOODWILL WRITE-DOWN
In March 1996, the Company recognized a goodwill write-down of $5,699,000
related to the acquisition of ATS in March 1994. ATS incurred significant
losses in 1996 and 1995 and has not been able to recover from the
cancellation of a distributorship agreement with a manufacturer of fuel
dispensing equipment. In March 1996, management made a strategic decision
to significantly downsize ATS's operations and eliminate non-core
businesses. Reduced future operating levels, past losses and debt incurred
to finance these losses have impaired ATS's ability to recover goodwill
over the expected period of benefit.
The methodology that management used to assess the recoverability of
goodwill was to project results of operations forward 18 years, which
represents the remaining expected period of benefit of ATS' goodwill at
March 31, 1996. Projections were based on the past two years of core
business operations and management's changes to downsize the operations.
The forecast through the year 2014 is management's best estimate of future
results and includes a 3% annual increase in sales and slightly increasing
margins. Projected future results were discounted at 10%, the Company's
estimated cost of funds. The evaluation resulted in a $5,699,000 write-
down of ATS goodwill to $1,340,000. The remaining balance will be
amortized over 18 years, the expected period of benefit.
32
<PAGE>
OMEGA ENVIRONMENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(5) SHAREHOLDERS' EQUITY
(a) PREFERRED STOCK
On December 26, 1995, the Board of Directors designated 500 shares of the
preferred stock to be Series A Convertible Redeemable Preferred Stock
("Preferred Stock"). On December 28, 1995, the Company sold 500 shares of
Preferred Stock for net proceeds of $4,635,000.
The holders of Preferred Stock have the right to vote, together with the
holders of all the outstanding shares of Common Stock, on all matters on
which holders of Common Stock have the right to vote. The holders of
shares of Preferred Stock shall have the right to cast one vote for each
share of Common Stock into which each share of Preferred Stock held by them
is convertible. The holder of Preferred Stock shall not receive any
liquidation preference.
Each share of Preferred Stock is convertible into shares of Common Stock,
through December 28, 1996. The number of shares of Common Stock to be
issued upon conversion is determined by dividing $10,000 by the lower of
(i) $3.3625 or (ii) 85% of the average closing bid price of the Company's
Common Stock over the five trading-day period immediately preceding each
written notice by a holder of the Preferred Stock of such conversion.
The Company has the right to redeem any conversion of Preferred Stock for
$11,765 per share of Preferred Stock. The Company also has the right to
redeem all of the outstanding Preferred Stock for $12,195 per share of
Preferred Stock. Unless redeemed or converted, the Preferred Stock will
automatically convert to Common Stock on December 28, 1996.
As of March 31, 1996, 290 shares of Preferred Stock had been converted into
1,582,794 shares of common stock. On April 3, 1996, 190 shares of
Preferred Stock were converted into 859,421 shares of common stock.
(b) COMMON STOCK
In 1996, the Company sold 1,675,000 shares of common stock for net proceeds
of $4,810,000.
In 1994, the Company completed a secondary public offering and issued
2,675,000 shares of common stock. Net proceeds received from the offering
were $24,307,000.
(c) WARRANTS
The Company has issued redeemable Class A and B common stock purchase
warrants and Class C common stock purchase warrants. Each Class A warrant
entitles the holder to purchase one share of common stock and one Class B
warrant at a price of $2.50, subject to adjustment in certain
circumstances, at any time through 1996. Each Class B and C warrant
entitles the holder to purchase one share of common stock at a price of
$4.00 and $2.25, respectively, subject to adjustment in certain
circumstances, at any time through July 1996.
33
<PAGE>
OMEGA ENVIRONMENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
As a result of the 1992 private placement, the exercise prices of Class A,
B and C warrants were adjusted to $2.167, $3.467 and $1.95, respectively.
In 1994, the Company completed the call of its Class A and B warrants. Net
proceeds from the exercise of Class A and B warrants were $22,257,000.
In 1994, 120,000 Class C warrants were exercised with net proceeds of
$225,000 to the Company. In 1996, 76,800 Class C warrants were exercised
with net proceeds of $153,000 to the Company. In April 1996, 140,400
warrants were exercised for net proceeds of $274,000. All remaining Class
C warrants have expired.
In 1994, 400,000 warrants were exercised by a former officer. Each warrant
entitled the officer to purchase one share of common stock at a price of
$.55.
In 1996, the Company issued a three-year warrant in connection with an
agreement for the holder to provide financial advisory services. The
warrant is for 150,000 shares and is exercisable at $3.25 a share, at any
time, in whole or in part, through February 1999.
(d) UNIT OPTIONS
In connection with its initial public offering of common stock, the Company
granted the underwriter an option to purchase 100,000 IPO units at $7.80
per unit. The number of units which could be purchased and the exercise
price were adjusted to 120,931 units and $6.45 per unit, respectively, as a
result of the antidilution provisions of the IPO unit purchase agreement,
which were triggered by the private placement in April 1992. Each IPO unit
consists of three shares of common stock, three Class A common stock
purchase warrants and one-quarter of a Class B common stock purchase
warrant. This option is exercisable through July 1996 and continues to
have antidilution protection.
During 1994, 6,920 IPO units were exercised, including underlying Class A
and B common stock purchase warrants, under this option resulting in 64,008
shares of common stock issued for $168,000 in cash. At March 31, 1996,
total common shares underlying the remaining 114,011 IPO units, including
common shares related to Class A and B common stock purchase warrants, is
1,055,000.
In connection with a private placement in April 1992, the Company granted
the underwriters an option to purchase 8.94 units, with each unit
consisting of 77,670 shares of common stock and 46,602 Class A common stock
purchase warrants at $100,000 per unit. At March 31, 1996, total common
shares underlying this option is 1,528,000. This option is exercisable
through April 1997.
In June 1996, 65,271 IPO unit options and 4.34375 Private Placement unit
options were exercised by the underwriters, including underlying Class A
and B common stock purchase warrants. The Company issued 1,346,000 shares
of common stock for net proceeds to the Company of $2,019,000.
34
<PAGE>
OMEGA ENVIRONMENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(e) DIRECTORS' STOCK OPTION PLAN
In July 1993, the Company adopted the Directors' Stock Option Plan
(Directors' Plan) under which 100,000 shares of common stock are reserved
for issuance upon the exercise of options. The Directors' Plan authorizes
the grant of stock options to nonemployee directors of the Company at times
in amounts fixed by the Directors' Plan. The exercise price of options
granted under the Directors' Plan will be 100% of the fair value of the
common stock on the date of grant. Options granted under the Directors'
Plan will become exercisable at a rate of 25% annually from the date of
grant, provided that the director remains a director on the dates the
options become exercisable. Unexercised options will expire ten years
after the date of grant. At March 31, 1996, 5,000 options are outstanding
under the Directors' Plan at $5.75 per share.
(f) STOCK OPTIONS
The Company has a stock option plan (Plan) which provides for the granting
of incentive and non-qualified stock options to certain employees to
purchase up to an aggregate of 4,000,000 shares of common stock.
Generally, options vest 25% each year over a 4-year period and expire in 10
years.
The Company also grants non-qualified stock options outside the Plan to
certain employees. Generally, these options vest in 10 years, but can vest
earlier if certain milestones are met.
Details of stock options, under the Plan and outside the Plan, are as
follows:
<TABLE>
<CAPTION>
Shares under option
-----------------------------------------
1996 1995 1994
-----------------------------------------
<S> <C> <C> <C>
Outstanding at beginning of year 5,213,344 4,384,750 2,512,250
Options granted 1,068,000 2,137,606 2,833,750
Options canceled (775,384) (804,500) (56,500)
Options exercised (prices ranging from
$.55 to $5.0547 per share) (70,250) (504,512) (904,750)
-----------------------------------------
Outstanding at end of year (prices ranging
from $.55 to $5.0625 per share) 5,435,710 5,213,344 4,384,750
-----------------------------------------
-----------------------------------------
Options exercisable at end of year
(prices ranging from $.55 to
$5.0625 per share) 1,534,817 976,735 478,841
-----------------------------------------
-----------------------------------------
</TABLE>
At March 31, 1996, there were 569,000 shares of common stock reserved for
future grants under the Plan.
(g) EMPLOYEE STOCK PURCHASE PLANS
The Company adopted three noncompensatory employee stock purchase plans
which provide for the purchase of up to 2,050,000 shares of common stock at
85% of market value at specific dates by eligible employees. The maximum
number of shares any individual
35
<PAGE>
OMEGA ENVIRONMENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
employee can purchase under a plan is 10,000 shares. Shares of common
stock issued under the plans were 28,966 in 1996, 24,291 in 1995 and 49,070
in 1994 at prices ranging from $1.59 to $3.80.
(h) CONSULTING SERVICES
The Company received certain consulting services valued at $71,000 in 1995
and $222,000 in 1994 in exchange for 11,347 and 28,349 shares of the
Company's common stock, respectively.
(6) CONTRACT RECEIVABLES
Contract receivables, which are included in receivables on the balance
sheet, consist of the following:
March 31
-----------------------
1996 1995
-----------------------
(in thousands)
Completed contracts $ 13,371 10,109
Contracts in progress 8,655 7,465
Retainage due upon completion of contracts 865 362
-----------------------
$ 22,891 17,936
-----------------------
-----------------------
36
<PAGE>
OMEGA ENVIRONMENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(7) COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Cumulative costs and estimated earnings on uncompleted contracts are as
follows:
<TABLE>
<CAPTION>
March 31
-----------------------
1996 1995
-----------------------
(in thousands)
<S> <C> <C>
Costs incurred on uncompleted contracts $ 43,045 35,480
Estimated earnings 13,009 13,006
-----------------------
56,054 48,486
Less billings 39,649 32,758
-----------------------
$ 16,405 15,728
-----------------------
-----------------------
Included in the accompanying balance sheet
under the following captions:
Costs and estimated earnings in excess
of billings on uncompleted contracts $ 18,757 17,317
Billings in excess of costs and estimated
earnings on uncompleted contracts (2,352) (1,589)
-----------------------
$ 16,405 15,728
-----------------------
-----------------------
</TABLE>
(8) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
March 31
-----------------------
1996 1995
-----------------------
(in thousands)
<S> <C> <C>
Field and shop equipment $ 7,064 6,737
Vehicles 4,561 4,524
Furniture, fixtures and office equipment 2,859 2,948
Leasehold improvements 865 621
-----------------------
15,349 14,830
Less accumulated depreciation and amortization 5,597 3,388
-----------------------
Net property and equipment $ 9,752 11,442
-----------------------
-----------------------
</TABLE>
(9) RELATED PARTY RECEIVABLES AND PAYABLES
At March 31, 1996 and 1995, receivables from related parties of $883,000
and $4,347,000, respectively, are from certain current and former employees
and are due on demand or in 1997. Receivables accrue interest at 4.5% to
9.0% and certain notes are secured by common stock owned by the
individuals.
37
<PAGE>
OMEGA ENVIRONMENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
As of March 31, 1995, current payables to related parties of $319,000 are
to employees, accrue interest at 12%, and were paid in 1996.
(10) REVOLVING CREDIT LOAN AND LINES OF CREDIT
On September 15, 1995, the Company entered into a $30,000,000 Revolving and
Term Loan Agreement ("Loan Agreement") with BNY Financial Corporation
("BNYFC"). The three year Loan Agreement provides for a $10,000,000 term
loan and $20,000,000 revolving loan and is secured by the Company's assets.
Borrowing capacity under the Loan Agreement is limited to a percent of
eligible assets (as defined in the Loan Agreement), primarily receivables,
inventories and property and equipment. Direct costs to obtain financing
from BNYFC totaling approximately $1.5 million, have been deferred and are
being amortized over the Loan Agreement term. Proceeds of approximately
$17,000,000 from the loans were used to replace previous lines of credit
and pay off the majority of long-term obligations and obligations under
capital leases. This financing agreement contains covenants which, among
other provisions, require the Company to maintain a minimum tangible net
worth, minimum working capital, minimum net income, and other financial
ratios, and restrictions on acquisitions, capital expenditures, additional
indebtedness or liens, payment of dividends, and other restrictions. Some
of the covenants have been modified by BNYFC to accommodate changes in the
Company's operations. As partial consideration for these changes, the
Company agreed to an increase in the borrowing rate of 100 basis points and
incurred a modification fee.
At March 31, 1996, the Company was not in compliance with the minimum
tangible net worth, minimum net income and leverage ratio financial
covenants. BNYFC has waived these events of default for March 31, 1996 and
agreed to modify certain financial and other covenants consistent with
management's forecast. As partial consideration for these actions, the
Company agreed to certain additional fees. Further, until the final
documentation of the covenant modifications is complete, the Company's
interest rates, as shown below, will be increased 200 basis points.
Borrowing capacity under the revolving loan is limited to a percentage of
certain asset levels, principally receivables and inventories. Interest
accrues at the Eurodollar rate plus 3.25% (8.5625% at March 31, 1996) or at
the Alternative Base rate (as defined in the Loan Agreement) plus 2%
(10.25% at March 31, 1996), at the Company's option, and is payable
monthly. As of March 31, 1996, the Company had a borrowing capacity under
the revolving loan of approximately $13,000,000, based on certain asset
levels, of which the Company had borrowed $8,895,000.
At March 31, 1996, the Company's borrowing arrangements are concentrated at
BNYFC and the aforementioned Loan Agreement. Although it has not expressed
any intent to do so, should BNYFC choose not to continue the borrowing
arrangement with acceptable terms and conditions, or should interest rates
increase, the Company could experience significant adverse impact.
38
<PAGE>
OMEGA ENVIRONMENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
In 1995, the Company had line of credit arrangements with several banks.
At March 31, 1995, borrowings were $11,077,000 with interest rates ranging
from the prime rate plus 0.25% to prime rate plus 3%. All line of credit
arrangements were replaced with the proceeds from the BNYFC Loan Agreement.
(11) LONG-TERM OBLIGATIONS
Long-term obligations are as follows:
<TABLE>
<CAPTION>
March 31
------------------------
1996 1995
------------------------
(in thousands)
<S> <C> <C>
Term loan payable to BNYFC, due in monthly
installments of principal of $139,000 plus
interest at the Alternative Base rate
(as defined in the Loan Agreement) plus 2%
(10.25% at March 31, 1996) and the Eurodollar
rate plus 3.75% (9.0625% at March 31, 1996),
with a final principal payment of $5,000,000
due September 15, 1998, secured by substantially
all assets, less net deferred loan costs
totaling $1,229,000. $ 7,938 -
Notes payable to banks, due in monthly installments
of principal and interest at 6.5% to 18% and prime
plus 0.5% to 2%. Paid in full in September 1995. - 2,375
Notes payable to banks and others in monthly
installments of principal and interest at 5.9%
to 14.5% and prime plus 1% to 2.75%. Paid in
full in September 1995. - 3,239
Notes payable to employees and others 641 442
------------------------
Total long-term obligations 8,579 6,056
Less current installments 2,025 3,732
------------------------
Long-term obligations, excluding
current installments $ 6,554 2,324
------------------------
------------------------
</TABLE>
39
<PAGE>
OMEGA ENVIRONMENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Maturities of long-term obligations are as follows:
Year ending March 31:
1997 $ 2,025
1998 1,845
1999 5,867
2000 16
2001 14
Thereafter 41
---------
$ 9,808
---------
---------
(12) LEASES
The Company has several noncancelable operating leases, primarily for
office, yard, and warehouse space, expiring over the next nine years.
Certain facilities are leased from related parties.
Future minimum lease payments for the next five years under noncancelable
operating leases, with initial or remaining lease terms in excess of one
year as of March 31, 1996 are as follows:
Unrelated Related
parties parties
------------------------
Year ending March 31: (in thousands)
1997 $ 882 980
1998 656 961
1999 362 853
2000 78 582
2001 8 337
Rent expense was $1,559,000 in 1996 and $1,888,000 in 1995, including rent
expense of $702,000 and $721,000 to related parties for the years ended
March 31, 1996 and 1995, respectively.
(13) INCOME TAXES
At March 31, 1996, total net deferred tax assets consist primarily of the
tax effect of net operating loss carryforwards, which are fully reserved.
At March 31, 1996, the Company has Federal net operating loss carryforwards
of approximately $40,000,000 that expire from 2006 to 2011. Utilization of
the net operating loss carryforwards to offset future taxable income,
however, may be limited due to ownership changes under Section 382 of the
Internal Revenue Code.
40
<PAGE>
OMEGA ENVIRONMENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(14) CLASS ACTION LAWSUIT SETTLEMENT
In January 1995 the Company entered into an agreement in principle to
settle the May 17, 1994 class action lawsuits. On December 5, 1995, the
United States District Court in Seattle, Washington, approved the class
action settlement agreement. Pursuant to such agreement in principle, the
settlement consisted of (i) $250,000 in cash, (ii) $125,000 in cash or
common stock, and (iii) 550,000 shares of the Company's common stock.
However, Omega guaranteed that the common stock to be issued in settlement,
as of February 1, 1996 (the "guarantee date"), would have a minimum value
of $9.50 per share. The stock value based upon the 20 trading-day average
of the closing market prices of the Company's common stock (as reported in
the Wall Street Journal the following day) through February 1, 1996 was
$3.00795. Since the average was less than $9.50 per share, the Company was
required to issue 1,187,063 additional shares of common stock. In April
1996, the Company issued 1,737,063 shares as final settlement.
(15) COMMITMENTS AND CONTINGENCIES
The Company enters into contracts with clients to assess and remediate
sites that are eligible for cost reimbursement from state reimbursement
programs. Under these contracts, the client assigns the right of
reimbursement to the Company. In Florida, the Company may enter into
financing agreements with unrelated entities ("Funders") and assign the
right of reimbursement to the Funder for that specific reimbursement
application. This provides the Company with immediate payment on completed
cleanup tasks. The Company received $8,138,000 and $3,516,000 in 1996 and
1995, respectively, from Funders for services performed by the Company
under the Florida State Reimbursement Program.
As of March 31, 1996, principal amounts owing to Funders from the Florida
State Reimbursement Program for services performed by the Company were
$10,626,000. The reimbursement received by the Funder may be less than the
amounts originally submitted due to deductions for costs which, in the
state's opinion, are not allowable under the reimbursement regulations.
Upon such notification, the Funder may appeal and/or require the Company to
repurchase the denied amount. As of March 31, 1996, the Company has
recorded an estimated liability for denied amounts in accrued expenses of
$1,205,000. The Company has also included in costs and estimated earnings
in excess of billings on uncompleted contracts estimated costs for fees
payable to Funders of $851,000 at March 31, 1996.
As of March 31, 1996, the Company has guaranteed repayment of certain loans
of customers totaling $1,394,000.
On December 4, 1995, in the U.S. Federal Court for the Western District of
Washington, in Seattle, a jury awarded the Company and two of its
divisions, $27 million in damages and related interest and attorneys' fees
and costs from a manufacturer of fuel dispensing equipment, Gilbarco, Inc.
(a unit of General Electric PLC in the United Kingdom) for its violation of
anti-trust law and for the wrongful cancellation of distributorship
agreements. Gilbarco, Inc. has filed an appeal. The Company will not
recognize the award in its
41
<PAGE>
OMEGA ENVIRONMENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
consolidated financial statements until it is received or assured.
Although receipt or assurance is not certain, it is reasonably possible
that such could occur in the near term.
The Company is subject to other legal proceedings and claims which have
arisen in the ordinary course of its business. These actions when
ultimately concluded and determined will not, in the opinion of management,
have a material effect on results of operations or the financial condition
of the Company. The Company is not currently a party to any litigation or
regulatory investigation or inquiry with respect to environmental matters.
(16) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments that are short-term or re-priced
frequently and that have little or no risk are considered to have a fair
value equal to book value. Assets and liabilities that are included in
this category are cash, receivables, accounts payable and accrued
liabilities. The fair value of receivables from related parties, estimated
by discounting future cash flows using the current rates at which loans
would be made to borrowers with similar credit ratings, approximates the
carrying amount. The fair value of the revolving credit loan and long term
obligations, estimated by discounting future cash flows of estimated market
rates of interest, approximates the carrying amount.
In the normal course of business, the Company is a party to financial
instruments with off-balance sheet risk, such as performance bonds and
other guarantees, which are not reflected in the accompanying consolidated
balance sheet. Such financial instruments are to be valued based on the
amount of exposure under the instrument and the likelihood of performance
being required. In the Company's past experience, no claims have been made
against these financial instruments. Management does not expect any
material losses to result from these instruments and, therefore, the fair
value is zero.
(17) 1996 FOURTH QUARTER RESULTS
During the fourth quarter of 1996 the Company recorded a goodwill write-
down of $5,699,000, expenses incurred to consolidate operations totaling
approximately $4,100,000, reimbursement rate and other changes associated
with state government petroleum clean-up reimbursement programs totaling
approximately $2,500,000, and a provision for estimated uncollectable
receivables of $1,700,000.
42
<PAGE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
The Board of Directors
Omega Environmental, Inc.:
We have audited the accompanying consolidated balance sheets of Omega
Environmental, Inc. and subsidiaries as of March 31, 1996 and 1995, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the years in the three-year period ended March 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Omega Environmental,
Inc. and subsidiaries as of March 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended March 31, 1996, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note 2 to
the consolidated financial statements, the Company has incurred significant
losses since inception and operations have not generated sufficient cash to
cover current obligations. These matters raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in note 2 to the consolidated financial
statements. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Seattle, Washington /s/ KPMG PEAT MARWICK LLP
May 31, 1996, except as to notes 2
and 5 (d), which are as of June 26, 1996
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information for Part III, Items 10, 11, 12 and 13 are hereby
incorporated by reference to the Company's Proxy Statement, which will be filed
with the Commission within one hundred twenty (120) days of the close of the
fiscal year pursuant to regulation 14.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Financial Statements, Schedules and Exhibits
1. Financial Statements:
Consolidated Balance Sheets as of March 31, 1996 and 1995
Consolidated Statements of Operations for the years ended
March 31, 1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity for the years ended
March 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended
March 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
Independent Auditors' Report
2. Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts
Independent Auditors' Report
3. Exhibits
3 (i) Certificate of Incorporation (3)
3 (ii) Bylaws of Omega Environmental, Inc. (3)
4 $30,000,000 Revolving and Term Loan Agreement by and between
Registrant and BNY Financial Corporation (2)
10(a) Consulting Agreement by and between the Registrant and
Dominick & Dominick, Incorporated, dated as of
February 8, 1996 (4)
10(b) Employment Agreement with Louis J. Tedesco (4), (5)
11 Statement regarding computation of per share loss (4)
21 Subsidiaries of Omega Environmental, Inc.(4)
23 Consent of KPMG Peat Marwick LLP (4)
27 Financial Data Schedule
44
<PAGE>
99 Omega Environmental Securities Litigation - Stipulation of
Settlement (1)
99 Omega Environmental Securities Litigation - Order Approving
Settlement and Awarding Attorney Fees and Expenses (3)
------------------------------------------------------------
(1) Previously filed and incorporated herein by reference to the
Registrant's Form 10-Q, dated August 14, 1995.
(2) Previously filed and incorporated herein by reference to the
Registrant's Form 8-K, dated September 15, 1995.
(3) Previously filed and incorporated herein by reference to the
Registrant's Form 10-Q, dated February 13, 1996.
(4) Filed herewith.
(5) Management compensation contract.
(b) REPORTS ON FORM 8-K
None.
45
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Omega Environmental, Inc.
By: /s/ Louis J. Tedesco
-----------------------------------
Chief Executive Officer, President
and Director
By: /s/ Dan S. Steigerwald
-----------------------------------
Chief Financial Officer
By: /s/ Bradley S. Powell
-----------------------------------
Vice President and Corporate
Controller
Date: June 28, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By: /s/ Leo L. Azure Date: June 28, 1996
------------------------------ -------------------------
Chairman of the Board of Directors
By: /s/ Louis J. Tedesco Date: June 28, 1996
------------------------------ -------------------------
Chief Executive Officer,
President and Director
By: /s/ Edgar S. Brower Date: June 28, 1996
------------------------------ -------------------------
Director
By: /s/ Edward J. O'Sullivan Date: June 28, 1996
------------------------------ -------------------------
Director
By: /s/ Douglas R. Rogers Date: June 28, 1996
------------------------------ -------------------------
Director
By: /s/ Steve Sarich, Jr. Date: June 28, 1996
------------------------------ -------------------------
Director
<PAGE>
SCHEDULE II
OMEGA ENVIRONMENTAL, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Column A Column B Column C - Additions Column D Column E
-----------------------------------
Balance at Charged to Charged
beginning of costs and to other Deductions Balance at
Description year expenses accounts (1) end of year
<S> <C> <C> <C> <C> <C>
Year Ended March 31, 1996
Valuation accounts deducted from assets:
Allowance for doubtful accounts $1,372 $1,896 $0 $750 $2,518
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Inventory reserve $0 $1,800 $0 $0 $1,800
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Year Ended March 31, 1995
Valuation accounts deducted from assets:
Allowance for doubtful accounts $209 $998 (2) $334 $169 $1,372
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Inventory reserve $0 $0 $0 $0 $0
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
</TABLE>
(1) Represents amounts written-off.
(2) Allowance for doubtful accounts of entities acquired in 1995
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Omega Environmental, Inc.
Under date of May 31, 1996, except as to notes 2 and 5 (d) which are as of June
26, 1996, we reported on the consolidated balance sheets of Omega Environmental,
Inc. and subsidiaries as of March 31, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the years in the three-year period ended March 31, 1996, as contained in
the March 31, 1996 annual report on Form 10-K. In connection with our audits of
the aforementioned consolidated financial statements, we also audited the
related consolidated financial statement schedule of valuation and qualifying
accounts. This consolidated financial statement schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion on
this consolidated financial statement schedule based on our audits.
In our opinion, such consolidated financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
The audit report on the consolidated financial statements of Omega
Environmental, Inc. and subsidiaries referred to above contains an explanatory
paragraph that states that the Company has incurred significant losses since
inception and operations have not generated sufficient cash to cover current
obligations. These matters raise substantial doubt about the Company's ability
to continue as a going concern. The financial statement schedule included in
the March 31, 1996 annual report on Form 10-K does not include any adjustments
that might result from the outcome of this uncertainty.
Seattle, Washington /s/ KPMG PEAT MARWICK LLP
May 31, 1996
<PAGE>
EXHIBIT 10(a)
February 8, 1996
Mr. David C. Kravitz
Chairman of the Board
Omega Environmental, Inc.
19805 North Creek Parkway
Bothell, WA 98041-3005
Dear Mr. Kravitz:
You have requested that Dominick & Dominick, Incorporated ("Dominick") act as a
financial adviser for Omega Environmental, Inc. ("OE"), on an on-going, non-
exclusive basis. We have had certain discussions concerning our role as OE's
financial adviser and, in this regard, we are pleased to confirm the following:
1. Dominick will act as financial adviser for OE, performing services of the
type we have discussed.
2. In its capacity as financial adviser, Dominick will be available to advise
OE on investment banking and other matters such as mergers, acquisitions,
potential public and private financings, bank borrowings, licensing and
other business arrangements. In the event that Dominick first introduces
OE to a third party with whom OE consummates any of these types of
arrangements, OE will pay reasonable compensation to Dominick in an amount
to be negotiated between the parties.
3. Dominick will receive reimbursement for reasonable out-of-pocket expenses
incurred as a result of its activities for and on behalf of OE, to be
reimbursed within 30 days of invoice. However, before commencing work on
any project involving any single expenditure greater than $2,000, Dominick
will obtain OE's approval as to the scope of the project and the specific
nature of all expenses for which Dominick will expect reimbursement.
4. Dominick or its assigns will purchase for $200.00 a three year warrant to
purchase 150,000 common shares of OE immediately upon the OE Board of
Directors' approval of this agreement. The warrant is exercisable at $3.25
a share, or $487,500, at any time, at the holder's option, in whole or in
part, during its three year life. The warrant shall be subject to
customary terms, including anti-dilution protection as to stock splits and
recapitalizations, and the holder of the warrant or any shares receivable
upon exercise will have "piggy-back" registration rights at any time OE
files a registration statement.
5. OE will pay Dominick for its financial advisory services, over and above
any transaction consummation fees, an initial engagement fee of $15,000
upon execution of this agreement. Further, OE agrees to pay Dominick a
quarterly retainer fee of $15,000, payable at the start of each quarterly
period commencing May 1, 1996.
<PAGE>
Exhibit 10(a)
6. Except for references and descriptions that OE may be obligated to include
in its SEC filings and disclosure statements, OE shall not issue any press
release, statement, notice, document or other instrument referring to or
mentioning Dominick without Dominick's prior written approval.
7. As Dominick will be acting on OE's half, OE agrees to indemnify and hold
harmless Dominick (including any affiliated companies and respective
officers, directors, employees and controlling persons) from and against
all claims, liabilities, losses, damages and expenses (including reasonable
expenses of counsel) as they are incurred in connection with any
proceeding, whether or not Dominick is a party, relating to or arising out
of such engagement or Dominick's role in connection therewith. OE will
not, however, be responsible for any such claims, liabilities, losses,
damages or expenses to the extent that they result primarily from actions
taken or omitted to be taken by Dominick (or its affiliates, officers,
directors, employees or controlling persons) in bad faith or from its or
their negligence. The foregoing indemnification is effective immediately
in respect of all events occurring or omitted prior to or after the date
hereof.
8. This agreement shall be governed by the laws of the State of New York.
9. This agreement, excluding the warrant described in paragraph 4, may be
canceled by either OE or Dominick at any time by notification of
termination in writing; provided that if Dominick terminates its activities
hereunder with 12 months after the date hereof, then the number of warrants
that Dominick shall be entitled to shall be reduced pro rata on a month by
month basis.
We look forward to a long and mutually rewarding relationship and we are
confident that we can assist OE in various aspects of its business and its
intended growth.
Very truly yours,
DOMINICK & DOMINICK INCORPORATED
By:
/s/ John F. Doss
Managing Director
The foregoing is agreed to and accepted,
subject to approval by OE's Board of
Directors:
OMEGA ENVIRONMENTAL, INC.
By:
/s/ Mr. David C. Kravitz
Chairman of the Board
<PAGE>
EXHIBIT 10 (b)
LETTER OF AGREEMENT
THIS LETTER OF AGREEMENT, is entered into by Omega Environmental, Inc.
("Omega") and Louis J. Tedesco ("Tedesco") on this 5 day of October, 1995.
1. EMPLOYMENT
Omega will employ Tedesco as its President and Chief Executive Officer.
Tedesco will perform the duties customarily performed by the President and Chief
Executive Officer of a corporation and such other duties as may be assigned from
time to time by Omega's Board of Directors. Such duties include the principal
responsibility and associated authority for the leadership, management and
performance of Omega. Tedesco shall be responsible and report to the Board of
Directors.
2. COMMENCEMENT OF EMPLOYMENT
Tedesco shall commence employment on October 16, 1995.
3. COMPENSATION
Omega Agrees To Compensate Tedesco as follows:
3.1 Base salary. Omega shall pay Tedesco an initial base salary of
$190,000 per year, before all customary deductions, payable in equal biweekly
installments.
3.2 Bonuses. In addition to his base salary, Tedesco shall be eligible to
receive an annual bonus with a target payment of forty percent (40%) of his base
salary, based upon the performance of Omega as measured at the end of each
fiscal year. A bonus plan and performance targets shall be developed on or
before March 1, 1996, subject to approval of the Board of Directors. Tedesco
shall receive, in addition to any bonus paid referenced above, a hiring bonus of
$25,000, payable with his first biweekly salary payment.
3.3 Stock Options. Tedesco shall be entitled to a grant of options
pursuant to the terms of the Omega Environmental, Inc. 1990 Stock Option Plan
(as amended) to purchase 330,000 shares of Omega's common stock. The maximum
term of the options shall be ten (10) years. The exercisability of the options
shall vest 25 percent per year. The options to purchase shares shall be granted
with an exercise price equal to the closing price of Omega's common stock on the
date of grant, with the intent that such options shall be eligible for incentive
stock option treatment to the maximum extent permitted by law.
<PAGE>
EXHIBIT 10 (b)
4. BENEFITS
Tedesco shall be entitled to participate, at Omega's expense, in all health
care and insurance plans generally available to executives of Omega, consistent
with the terms of those plans as they may currently exist or be modified from
time to time. Health care coverage for Tedesco's eligible dependents shall be
provided at Omega's expense pursuant to its plans. Tedesco shall also be
entitled to four (4) weeks vacation, holidays, and participation in retirement
and other fringe benefit plans provided by Omega policy to its executives, as
those policies may currently exist or be modified from time to time. Further,
Tedesco shall be entitled to the following: $600 per month as an automobile
allowance; reimbursement of reasonable and necessary business expenses pursuant
to Omega policy; and two (2) round-trip airfares per month between Seattle and
San Diego for use by Tedesco or his immediate family.
5. RELOCATION EXPENSES
Omega shall reimburse Tedesco to a maximum of $80,000 for expenses directly
or indirectly related to moving him and his family from Southern California to
the Seattle area. Such reimbursement shall include any taxes attributable to
the relocation reimbursement that are not deductible by Tedesco. The
reimbursement offer shall remain open until October 23, 1998, with such
reimbursement to be adjusted in light of the Consumer Price Index, using as a
base the third quarter of 1995. In the event Omega's corporate headquarters is
relocated outside the Seattle area during this period, Omega shall reimburse
moving expenses in the same manner.
6. COMPANY APARTMENT
Tedesco shall have use of an apartment, maintained and paid for by Omega,
during periods when he is in the Seattle area.
7. SEVERANCE
Tedesco may be terminated for cause, provided, however, that if his
termination is (a) without cause or (b) following a change in control of Omega,
or a leveraged buyout, merger or acquisition, Tedesco shall receive severance
pay equal to his then current base annual salary, payable in twelve (12) equal
monthly installments. All stock options shall become vested immediately in the
event of a termination other than for cause. In the event that Tedesco desires
to resign from Omega, he shall not be entitled to severance pay and agrees to
provide sixty (60) days written notice of his resignation
<PAGE>
EXHIBIT 10 (b)
8. CONFIDENTIALITY AND NONCOMPETITION
Tedesco agrees to execute and be bound by the terms of the following Omega
policies: "Employee Confidential Information and Invention Agreement" and
"Compliance with Securities Laws." Tedesco further agrees that during the period
he is receiving severance or other payments from Omega, he will not directly or
indirectly be employed by, or otherwise manage or perform services for any
Competitor of Omega. A "Competitor" shall include any entity which produces,
markets or distributes any product or service which competes with any product or
service Omega produces, markets or distributes (or which Omega is studying the
feasibility of producing, marketing, or distributing). This noncompetition
agreement shall survive the termination of this Letter of Agreement and the
termination of the employment relationship between Omega and Tedesco. This
provision shall not prevent Tedesco from holding shares in, or sitting on the
board of directors of , other companies in the industry, however, to approval by
Omega's Board of Directors.
9. RELEASE OF CLAIMS
In order to receive the severance payments described in Paragraph 7 above,
Tedesco agrees to execute a separation agreement that shall include (a) a
release of claims against Omega, its directors, officers and agents, and (b) a
confidentiality provision regarding the terms of any such separation agreement.
10. APPLICABLE LAW
This Agreement shall in all respects, including all matters of
construction, validity and performance, be governed by and construed and
enforced in accordance with the laws of the State of Washington.
IN WITNESS WHEREOF, the parties have executed and entered into this Letter
of Agreement, to be effective on the date first set forth above.
OMEGA ENVIRONMENTAL, INC. LOUIS J. TEDESCO
By: /s/ LEO L. AZURE /s/ LOUIS J. TEDESCO
-------------------------------- -----------------------------------
Title: Chairman
-----------------------------
<PAGE>
OMEGA ENVIRONMENTAL, INC. EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER SHARE LOSS
FOR THE YEAR ENDED MARCH 31, 1996
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
<TABLE>
<CAPTION>
Weighted
Number Average Shares
of Shares (366 Day Period)
------------ ---------------
<S> <C> <C> <C> <C>
Non-Escrow Shares at March 31, 1995 32,820,768 32,820,768
April Activity 77,462 75,796
May Activity 165,483 135,827
June Activity 600,000 460,051
July Activity 13,250 9,377
August Activity 1,093,602 681,636
September Activity 18,750 10,707
October Activity 17,279 8,451
November Activity 1,475,180 541,995
December Activity 18,548 5,118
January Activity 78,600 15,089
February Activity 1,584,663 144,721
March Activity 0 0 Historical
Historical Loss Loss Per Share
------------ -----------------------------------------------
Total Historical Non-Escrow or Treasury Shares 37,963,585 34,909,536 (21,442,000) (0.61)
-----------------------------------------------
-----------------------------------------------
Parks escrowed shares 150,000
Kelley escrowed shares 5,176
ESSI escrowed shares 50,000
PEC escrowed shares 17,279
Fedco escrowed shares 52,174
STC escrowed shares 18,547
Gurr escrowed shares 267,766
SSC escrowed shares 25,988
SST escrowed shares 12,122
Treasury Shares 100,000
------------
Total Issued & Outstanding Shares
@ March 31, 1996 38,662,637
------------
------------
</TABLE>
<PAGE>
OMEGA ENVIRONMENTAL, INC. EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER SHARE LOSS
FOR THE YEAR ENDED MARCH 31, 1995
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
<TABLE>
<CAPTION>
Number Weighted
Number of Days Average Shares
of Shares O/S (365 Day Period)
------------ -------- ---------------
<S> <C> <C> <C> <C> <C>
Non-Escrow Shares at March 31, 1994 30,098,194 365 30,098,194
April Activity 194,085 353 187,806
May Activity 8,263 328 7,433
Treasury Shares Purchase (39,498) 328 (35,524)
Fedco Purchase (5/24/94) 26,997 312 23,077
June Activity 65,365 285 51,062
July Activity 201,366 274 151,121
Treasury Shares Purchase (100,000) 229 (62,740)
August Activity 6,374 219 3,816
Goode Contingent Purchase (9/12/94) 179,759 201 98,991
STC Purchase (9/22/94) 226,844 191 118,705
September Activity 152,124 184 76,880
October Activity 42,056 173 19,967
Gurr Purchase (11/18/94) 803,300 134 294,910
Braswell/Arnold Purchase (11/21/94) 50,000 131 17,945
November Activity 12,500 124 4,247
SSC Purchase (11/30/94) 467,782 122 156,355
SST Purchase (11/30/94) 97,032 122 32,433
December Activity 144,000 116 45,666
Tecniflo Contingent Purchase (12/31/94) 47,619 91 11,872
January Activity 640 86 150
STC Guarantee Purchase Price (2/13/95) 60,367 47 7,773
February Activity 72,808 47 9,287 Historical
March Activity 2,791 31 237 Historical Loss Loss Per Share
------------ ---------------------------------------------------
Total Historical Non-Escrow or Treasury Shares 32,820,768 31,319,663 (17,174,000) (0.55)
---------------------------------------------------
------------------------------------------------
Parks escrowed shares 150,000
Kelley escrowed shares 10,352
ESSI escrowed shares 166,666
PEC escrowed shares 34,558
Fedco escrowed shares 78,261
STC escrowed shares 37,095
Gurr escrowed shares 401,649
SSC escrowed shares 51,976
SST escrowed shares 24,245
Treasury shares purchased 189,510
Treasury shares cancelled (89,510)
------------
Total Issued & Outstanding Shares
@ March 31, 1995 33,875,570
------------
------------
Pro Forma Shares Adjustment:
Fedco 3,920
STC 108,139
STC Guarantee Purchase Price 52,594
Goode Contingent Purchase 80,768
Gurr 508,390
Braswell & Arnold 32,055
SSC 311,427
SST 64,599 Pro Forma
Tecniflo 35,747 Pro Forma Loss Loss Per Share
---------------------------------------------
Total Pro Forma Non-Escrow or Treasury Shares 32,517,302 (16,009,000) (0.49)
---------------------------------------------
---------------------------------------------
</TABLE>
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF OMEGA ENVIRONMENTAL, INC.
Omega Environmental Financial Services, Inc.
(a Washington corporation)
ATS Omega de Mexico S.A. de C.V.
(a Mexico corporation)
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
The Board of Directors
Omega Environmental, Inc.:
We consent to incorporation by reference in the registration statements on the
Form S-3 of Omega Environmental, Inc. (File Nos. 33-81730 and 33-73950) and the
1991 Employee Stock Purchase Plan (File No. 33-45044), the 1993 Employee Stock
Purchase Plan (File No. 33-62546), the 1995 Employee Stock Purchase Plan (File
No. 33-03617), the 1990 Stock Option Plan Miscellaneous Stock Option Agreements
(File Nos. 33-68812 and 33-03615) and Stock Option Agreements (File No. 33-
03625) on Forms S-8 of Omega Environmental, Inc. of our reports dated May 31,
1996, except as to notes 2 and 5 (d) which are as of June 26, 1996, on the
consolidated balance sheets of Omega Environmental, Inc. and subsidiaries as of
March 31, 1996 and 1995, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the years in the three-year
period ended March 31, 1996 and our report dated May 31, 1996 on the related
consolidated financial statement schedule of valuation and qualifying accounts,
which reports appear in the March 31, 1996 annual report on Form 10-K of Omega
Environmental, Inc.
Our report dated May 31, 1996, except as to notes 2 and 5 (d), which are as of
June 26, 1996, contains an explanatory paragraph that states that the Company
has incurred significant losses since inception and operations have not
generated sufficient cash to cover current obligations. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
The consolidated financial statements and financial statement schedule do not
include any adjustments that might result from the outcome of this uncertainty.
Seattle, Washington /s/ KPMG PEAT MARWICK LLP
June 28, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEETS, CONSOLIDATED STATEMENT OF OPERATIONS, CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY, SCHEDULE II, VALUATION AND QUALIFYING ACCOUNTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 1,276
<SECURITIES> 0
<RECEIVABLES> 30,641<F1>
<ALLOWANCES> 0
<INVENTORY> 10,512
<CURRENT-ASSETS> 63,142
<PP&E> 9,752<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 102,013
<CURRENT-LIABILITIES> 40,208
<BONDS> 0
0
0
<COMMON> 97
<OTHER-SE> 49,929
<TOTAL-LIABILITY-AND-EQUITY> 102,013
<SALES> 151,718
<TOTAL-REVENUES> 151,718
<CGS> 127,540
<TOTAL-COSTS> 127,540
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,896
<INTEREST-EXPENSE> 2,178
<INCOME-PRETAX> (21,442)
<INCOME-TAX> 0
<INCOME-CONTINUING> (21,442)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,442)
<EPS-PRIMARY> (0.61)
<EPS-DILUTED> (0.61)
<FN>
<F1>THIS AMOUNT IS NET OF ALLOWANCES FOR DOUBTFUL ACCOUNTS
<F2>THIS AMOUNT IS NET OF ACCUMULATED DEPRECIATION AND
AMORTIZATION
</FN>
</TABLE>