U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB/A
(Mark One)
X ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
- --- OF 1934 [Fee Required]
For the fiscal year ended April 30, 1999
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934 [No Fee Required]
For the transition period from _______ to _______
Commission file number 33-75276
OMNI Rail Products, Inc.
------------------------
(Name of Small Business Issuer in its Charter)
Delaware 68-0281098
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
975 SE Sandy Blvd. Portland, Oregon 97214
-----------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(Issuer's Telephone Number (503) 230-8034
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
- ----------------------------- ----------------------------
- ----------------------------- ----------------------------
Securities registered under Section 12(g) of the Exchange Act:
Common Stock $.01 Par Value
- ---------------------------
(Title of class)
Warrants to purchase Common Stock $.01 Par Value
- ------------------------------------------------
(Title of class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB.
State issuer's revenues for its most recent fiscal year. $12,438,192.
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was sold, or the average bid and asked prices of such common equity, as
of July 30, 1999. $851,000.
State the number of shares outstanding of each of the issuers classes of
common equity, as of July 30, 1999. 1,703,098 common shares.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
OMNI RAIL PRODUCTS, INC. AND SUBSIDIARY
(Formerly Creative Medical Development, Inc.)
Consolidated Financial Statements
April 30, 1999 and 1998
(With Independent Auditors' Report Thereon)
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
OMNI Rail Products, Inc.:
We have audited the accompanying consolidated balance sheets of OMNI Rail
Products, Inc. and Subsidiary (formerly Creative Medical Development, Inc., the
"Company") as of April 30, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for
each of the years in the three year period ended April 30, 1999. 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 OMNI Rail Products,
Inc. and Subsidiary (formerly Creative Medical Development, Inc.) as of April
30, 1999 and 1998, and the results of their operations and their cash flows for
each of the years in the three year period ended April 30, 1999 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 13 to
the consolidated financial statements, the Company suffers liquidity
constraints, has significant debt maturities within one year and has a working
capital deficit. In addition, the Company has a shareholder deficit. These
factors raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also disclosed in
note 13. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
KPMG Peat Marwick LLP
Portland, Oregon
June 25, 1999
<PAGE>
<TABLE>
<CAPTION>
OMNI RAIL PRODUCTS, INC.
AND SUBSIDIARY
Consolidated Balance Sheets
April 30, 1999 and 1998
Assets 1999 1998
---- ----
Current assets:
<S> <C> <C>
Cash $ 36,280 393,877
Accounts receivable, less allowance for doubtful
accounts of $56,916 in 1999 and $68,776 in 1998 1,478,337 1,853,280
Inventories, net 1,330,663 1,423,800
Prepaid expenses and deposits 51,241 52,158
----------- -----------
Total current assets 2,896,521 3,723,115
Real estate and other assets held for sale 1,400,000 1,618,275
Property, plant and equipment, net 1,904,156 2,272,214
----------- -----------
$ 6,200,677 7,613,604
=========== ===========
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable 1,480,166 1,884,679
Accrued liabilities 879,995 1,459,092
Notes payable 1,693,135 3,305,283
Current portion of long-term debt 1,373,412 2,136,376
----------- -----------
Total current liabilities 5,426,708 8,785,430
----------- -----------
Long-term debt, less current portion 1,403,115 522,342
Commitments and contingencies
Stockholders' deficit:
Convertible preferred stock, $.01 par value,
25,000,000 shares authorized:
Series B, 1,000,000 shares authorized, 195,619
and 207,355 shares issued and outstanding in
1999 and 1998, respectively 1,956 6,221
Common stock, 50,000,000 shares authorized, $.01
par value, 1,703,098 and 1,841,586 shares issued
and outstanding in 1999 and 1998, respectively 17,031 55,246
Additional paid-in capital 2,369,880 2,413,651
Accumulated deficit (3,018,013) (4,169,286)
----------- -----------
Total stockholders' deficit (629,146) (1,694,168)
----------- -----------
$ 6,200,677 7,613,604
=========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
OMNI RAIL PRODUCTS, INC.
AND SUBSIDIARY
Consolidated Statements of Operations
Years ended April 30, 1999, 1998 and 1997
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net sales $ 12,438,192 16,448,876 12,902,491
Cost of sales 9,100,437 13,446,678 10,557,688
------------ ------------ ------------
Gross profit 3,337,755 3,002,198 2,344,803
------------ ------------ ------------
General and administrative expenses 1,117,020 1,586,956 1,137,978
Selling expenses 985,350 1,665,506 1,323,070
Research, development and engineering 113,795 127,624 61,646
Restructuring charges (130,435) 1,684,833 --
------------ ------------ ------------
2,085,730 5,064,919 2,522,694
------------ ------------ ------------
Earnings (loss) from operations 1,252,025 (2,062,721) (177,891)
------------ ------------ ------------
Other income (expense):
Interest expense (537,952) (772,984) (827,095)
Legal settlement -- -- (334,500)
Amortization of organization costs -- (237,955) (119,249)
Miscellaneous income 273,151 163,686 133,219
Gain (loss) on sale of assets 164,049 29,683 (25,156)
------------ ------------ ------------
Total other expense (100,752) (817,570) (1,172,781)
------------ ------------ ------------
Earnings (Loss) before income taxes 1,151,273 (2,880,291) (1,350,672)
Provision (benefit) for income taxes -- 1,894 (55,607)
------------ ------------ ------------
Net earnings (loss) $ 1,151,273 (2,882,185) (1,295,065)
============ ============ ============
Basic earnings (loss) per share $ 0.66 (1.56) (1.24)
============ ============ ============
Diluted earnings (loss) per share $ 0.52 (1.56) (1.24)
============ ============ ============
Basic weighted common shares outstanding 1,735,473 1,844,242 1,042,098
============ ============ ============
Diluted weighted common shares outstanding 2,232,940 1,844,242 1,042,098
============ ============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
OMNI RAIL PRODUCTS, INC.
AND SUBSIDIARY
Consolidated Statements of Stockholders' (Deficit) Equity
Years ended April 30, 1999, 1998 and 1997
Preferred stock
Series B Common stock Additional Total
-------------------------- -------------------------- paid-in Accumulated stockholders'
Shares Amount Shares Amount capital deficit equity (deficit)
------ ------ ------ ------ ------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, April 30, 1996 -- $ -- 1,033,721 $ 31,010 $ 1,328,990 $ 72,964 $ 1,432,964
Issuance of common stock -- -- 37,248 1,117 116,383 -- 117,500
Dividends -- -- -- -- -- (65,000) (65,000)
Payment of stock dividend -- -- 77,809 2,334 186,478 -- 188,812
Preferred and common shares
issued in merger 207,355 6,221 702,715 21,082 812,755 -- 840,058
Net loss -- -- -- -- -- (1,295,065) (1,295,065)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, April 30, 1997 207,355 6,221 1,851,493 55,543 2,444,606 (1,287,101) 1,219,269
Repurchase of stock puts -- -- (9,907) (297) (30,955) -- (31,252)
Net loss -- -- -- -- -- (2,882,185) (2,882,185)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, April 30, 1998 207,355 6,221 1,841,586 55,246 2,413,651 (4,169,286) (1,694,168)
Repurchase of stock put (5,944) (59) (18,693) (18,752)
Conversion of stock puts
to debt (21,397) (214) (67,285) (67,499)
Cancellation of escrowed
shares (11,736) (117) (111,147) (1,111) 1,228 --
Effect of one for three
reverse split (4,148) (36,831) 40,979 --
Net income 1,151,273 1,151,273
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, April 30, 1999 195,619 $ 1,956 1,703,098 $ 17,031 $ 2,369,880 $(3,018,013) $ (629,146)
=========== =========== =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
OMNI RAIL PRODUCTS, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended April 30, 1999, 1998 and 1997
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net (loss) earnings $ 1,151,273 (2,882,185) (1,295,065)
Adjustments to reconcile net (loss) earnings to net
cash provided by operating activities:
Depreciation and amortization 161,417 587,552 491,642
Legal settlement -- -- 334,500
(Gain) loss on sale of assets (164,049) (29,683) 25,156
Asset impairment - write down of assets -- 1,239,567 --
Deferred income taxes -- -- (55,607)
Change in assets and liabilities:
Accounts receivable 374,943 (35,171) (199,814)
Inventories 93,137 1,070,943 296,361
Prepaid expenses and deposits 917 (31,478) 1,876
Accounts payable (404,513) 520,600 425,992
Accrued liabilities (579,097) 377,038 306,383
----------- ----------- -----------
Net cash provided by operating activities 634,028 817,183 331,424
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment 842,557 571,038 17,166
Purchase of property, plant and equipment (253,592) (231,802) (375,316)
Proceeds from sale of securities -- 752,573 --
----------- ----------- -----------
Net cash provided by (used in) investing
activities 588,965 1,091,809 (358,150)
----------- ----------- -----------
Cash flows from financing activities:
Net payment on notes payable (1,612,148) (1,071,440) (116,326)
Payments on long-term debt (762,964) (552,058) (14,281)
Proceeds from Subordinated Convertible debt 275,160 -- --
Borrowings on Subordinated and other debt 538,114 -- --
Sale (repurchase) of stock (18,752) (31,252) 100,000
Acquisition costs -- -- (185,065)
----------- ----------- -----------
Net cash used in financing activities (1,580,590) (1,654,750) (215,672)
----------- ----------- -----------
(Decrease) increase in cash (357,597) 254,242 (242,398)
Cash at beginning of year 393,877 139,635 382,033
----------- ----------- -----------
Cash at end of year $ 36,280 393,877 139,635
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 530,355 768,630 807,847
Income taxes -- 1,894 --
Supplemental schedule of non-cash investing and
financing activities:
Stock dividend -- -- 65,000
Issuance of common stock on conversion of debt -- -- 17,500
Issuance of debt in exchange for common stock 67,499 -- --
Effect of acquisition:
Fair value of assets acquired -- -- 2,255,123
Liabilities assumed -- -- 1,230,000
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
OMNI RAIL PRODUCTS, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
April 30, 1999, 1998 and 1997
(1) Summary of Significant Accounting Policies
Principles of Consolidation, Description of the Company and Basis of
Presentation
---------------------------------------------------------------------------
The consolidated financial statements include the accounts of OMNI Rail
Products, Inc. (the Company, a Delaware corporation), formerly Creative
Medical Development, Inc. ("CMD", name changed during fiscal 1999), and its
wholly-owned subsidiary, OMNI Products, Inc. All material intercompany
transactions and balances have been eliminated in the consolidated
financial statements. Effective April 30, 1997, CMD and OMNI International
Rail Products, Inc. (OMNI), completed an agreement and plan of merger. The
transaction between CMD and OMNI was considered a reverse acquisition for
financial reporting purposes and was accounted for under the purchase
method of accounting.
The Company designs, engineers, manufactures and distributes a variety of
rubber, rubber/concrete and concrete premium grade railroad crossing
surface products primarily for the United States market. OMNI's products
are approved by all major North American Class 1 railroads, such as
Burlington Northern-Santa Fe and Union Pacific and many regional railroads
and transit systems. From its operating facilities in Illinois, Texas,
Oregon and through its relationship with key suppliers, OMNI markets its
products to all 50 states and Canada. 67% of the Company's fiscal 1999
sales were concentrated in the three largest United States railroad
companies (down from 72% in fiscal 1998) (Note 12).
Inventories
-----------
The Company values inventories at the lower of average production cost or
market (net realizable value). The Company determines cost on the first-in,
first-out (FIFO) basis.
Accounts Receivable
-------------------
The Company extends sales credit to virtually all of its customers under
specific terms and conditions. The Company performs periodic credit
evaluations of its customers to determine the extent of each customer's
allowable credit limit and to determine the need for an allowance on
potential credit losses.
Property, Plant and Equipment
-----------------------------
Property, plant and equipment are stated at cost. Depreciation is provided
over the estimated useful lives of the assets using the straight-line
method. The estimated useful lives for furniture, vehicles and equipment
are between three and ten years; buildings are forty years.
Expenditures for additions and major improvements are capitalized.
Expenditures for repairs and maintenance are charged to income as incurred.
Warranty
--------
The Company provides a six-year warranty for its products and establishes
an accrual at the time of sale, based on historical warranty experience, to
provide for estimated warranty costs.
<PAGE>
Income Taxes
------------
The Company accounts for income taxes under the asset and liability method.
Under the asset and liability method, deferred income taxes reflect the
future tax consequences of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year-end.
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 of a change in tax rates is recognized in income
in the period that includes the enactment date.
Research and Development Costs
------------------------------
The Company charges all research and development costs associated with the
development of products to expense when incurred.
Advertising Expenses
--------------------
Advertising expenses are charged to expense as incurred and were $17,346,
$44,424 and $102,310 for 1999, 1998 and 1997, respectively.
Revenue Recognition
-------------------
Revenues are recognized when products are shipped.
Stock Option Plan
-----------------
As permitted by Financial Accounting Standards No. 123 (FAS 123),
Accounting for Stock-Based Compensation, the Company measures compensation
expense for its stock-based employee compensation plans using the intrinsic
method prescribed by APB 25 Accounting for Stock Issued to Employees.
Fair Value of Financial Instruments
-----------------------------------
At April 30, 1999 and 1998, the carrying value of cash, trade receivables,
accounts payable and notes payable approximate fair value due to the
short-term nature of these instruments. At April 30, 1999 and 1998, the
fair value of the Company's long-term debt approximates carrying value as
such instruments' stated interest rates do not differ significantly from
current market rates available to the Company.
Basic and Diluted Net Earnings (Loss) Per Common Share
------------------------------------------------------
In 1997, the Financial Accounting Standards Board issued Financial
Accounting Standards No.128 (FAS 128), "Earnings Per Share" which replaced
the calculation of primary and fully diluted earnings per share with basic
and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants, and
convertible securities. Diluted earnings per share is similar to the
previously reported fully diluted earnings per share. The calculation of
diluted earnings (loss) per share for fiscal years ended April 30, 1998 and
1997, excludes any potentially dilutive shares as such shares would have an
antidilutive affect (Note 11). The Company adopted FAS 128 in fiscal 1998.
Reverse Stock Split
-------------------
The Company effected a one-for-three stock split to stockholders of record
as of the close of business on February 25, 1999. Share and per share
amounts for all periods presented have been adjusted to reflect the reverse
stock split.
<PAGE>
Use of Estimates
----------------
The preparation of 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.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
-----------------------------------------------------------------------
The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying
amount of an asset to future net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, then the impairment to
be recognized is measured by the amount by which the carrying amount of the
assets exceeds its fair value. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell.
Recent Accounting Pronouncements
--------------------------------
The Company adopted Financial Accounting Standards No.130 (FAS 130),
"Reporting Comprehensive Income" and Financial Accounting Standards No.131
(FAS 131), "Disclosures About Segments of an Enterprise and Related
Information" in fiscal 1999. FAS 130 requires companies to report, in
addition to net income, other components of comprehensive income, including
unrealized gains or losses on available-for-sale securities, foreign
currency translation adjustments and minimum pension liability adjustments.
The Company had no components of other comprehensive income during fiscal
1999. FAS 131 requires an enterprise to report segment information based on
how management internally evaluates the operating performance of its
business units (segments). The Company's operations are confined to one
business segment, the production and sale of premium railroad crossing
materials.
In 1998, Financial Accounting Standards No.133 (FAS 133), "Accounting for
Derivative Instruments and Hedging Activities" was issued and is effective,
as amended by FAS 137, for fiscal years commencing after June 15, 2000. The
Company will comply with the requirements of FAS 133 in fiscal year 2000
and does not expect the adoption of FAS 133 will be material to the
Company's consolidated results of operations.
Reclassifications
-----------------
Certain reclassifications have been made to the 1997 and 1998 balance
sheets, statements of operation and statements of cash flows to conform
with 1999 presentation.
(2) Restructuring charges and Asset Impairments
In fiscal year 1998, the Company recorded restructuring charges associated
with the shut down of two factories and charges associated with the write
down and liquidation of manufacturing equipment. These charges are the
result of the Company's refocus of its operation into producing primarily
concrete and virgin rubber grade crossings and elimination of excess
capacity in the Company's recycled rubber manufacturing operations. Total
fiscal 1998 charges of $1,684,833 included $1,239,567 in write down of
manufacturing equipment to fair value, $226,950 in costs associated with
plant shut downs and equipment liquidation, $158,316 in severance costs and
$60,000 in other restructuring charges. Total accrued and unpaid
restructuring costs at the end of 1998 were $249,295 not including
severance costs that were accounted for in accrued compensation. All
associated charges were paid during fiscal 1998 and 1999. During fiscal
<PAGE>
1999, the Company sold or disposed virtually all assets written down in
fiscal 1998, at amounts at or below the assets' written down values. The
Company did not write down its Lancaster, PA facility in fiscal 1998 and
sold the facility at a gain of approximately $159,000 in the Company's
third quarter of fiscal 1999. In addition, the Company wrote off excess or
out of specification inventory as part of the restructuring. During fiscal
1999 the Company recovered certain costs associated with the fiscal 1998
restructuring charge. These recovered costs included accrued anticipated
lease charges of $105,435 and accrued severance charges of $25,000.
(3) Inventories
Inventories consist of the following at April 30, 1999 and 1998:
1999 1998
---------- ----------
Raw materials $ 175,692 383,527
Finished goods 1,179,971 1,054,828
---------- ----------
1,355,663 1,438,355
Less allowance for excess or obsolete
inventory 25,000 14,555
---------- ----------
Inventories, net $1,330,663 1,423,800
========== ==========
In conjunction with the fiscal 1998 restructuring, the Company wrote-off
$812,840 of excess and out of specification recycled rubber inventory and
included such charge in Cost of sales. Total fiscal 1999, 1998 and 1997
inventory write-offs were $14,555, $1,085,000 and $571,200, respectively.
(4) Property, Plant and Equipment
Property, plant and equipment consist of the following at April 30, 1999
and 1998:
1999 1998
---------- ----------
Land $ 93,024 217,593
Buildings 812,684 1,163,115
Office furniture, manufacturing
equipment and vehicles 1,587,694 1,382,915
---------- ----------
2,493,402 2,763,623
Less accumulated depreciation 589,246 491,409
---------- ----------
$1,904,156 2,272,214
========== ==========
Certain property, plant and equipment serves as collateral for short and
long-term debt obligations. As discussed in note 2, certain manufacturing
equipment was written down during 1998 as part of the Company's
restructuring
<PAGE>
(5) Accrued Liabilities
Accrued liabilities consist of the following at April 30, 1999 and 1998:
1999 1998
---------- ----------
Warranties and other customer claims $ 353,635 268,902
Accrued compensation 206,416 486,520
Accrued restructuring charges -- 249,195
Accrued merger costs -- 60,000
Accrued interest 80,162 72,565
Other 239,782 321,910
---------- ----------
$ 879,995 1,459,092
========== ==========
(6) Notes Payable
The Company has a revolving line of credit totaling $1,396,195 and
$2,107,966 as of April 30, 1999 and 1998, respectively, under a Loan and
Security Agreement ("Loan Agreement") with Finova Capital Corporation
(Finova). The line of credit allows the Company to borrow up to $3,500,000
against 85% of eligible accounts receivable and 50% of eligible inventory.
Interest on the line is at prime rate plus 2.25% (10% and 10.75% at April
30, 1999 and 1998, respectively), with a minimum interest charge of $9,000
per month. The Company also has a capital loan payable to Finova totaling
$296,940 and $507,502 at April 30, 1999 and 1998, respectively, payable in
monthly installments of $12,500 plus interest of 11.5%. At the end of
fiscal 1998, the Company also had a term note payable to Finova of
$689,815, that was fully paid at April 30, 1999. The loans payable to
Finova are secured by equipment and inventory. The original maturity date
was extended from April 26, 1999 to August 31, 1999 as noted below. The
Company is restricted from paying dividends by covenant with Finova.
From time to time the Company has entered into various amendments to the
Loan Agreement with Finova. These amendments have modified the various loan
agreements providing for certain changes to the underlying provisions of
the various notes. One such amendment extended the loans' maturity dates
until August 31, 1999. At the end of fiscal 1998, the Company was in
violation of certain financial and non-financial loan covenants, including
negative covenants for cash requirements for Senior Debt Coverage and Net
Worth of Borrower.
On July 15, 1998, the Company entered into a Forbearance Agreement
("Agreement") that significantly realigned the borrowing arrangement
between the Company and Finova. This Agreement, that continued through June
1, 1999, allowed the Company to borrow up to an additional $400,000 over
the calculated eligible borrowing balance ("Permitted Overadvance"), and
deferred installment payments on the Company's term debt. The Permitted
Overadvance was subject to an interest rate of 6.25% over prime and the
term note balance was subject to the default rate of interest at 2% over
the stated note interest rate. The Agreement also waived all prior and
existing defaults and put in place new financial covenants based on the
Company achieving forecast operating results. These covenants included a
requirement to raise $250,000 in subordinated financing to aid in the
financing of the Company. A total of $275,160 was raised, in part, from an
outside investor and from two current directors of the Company. Also, as
part of the Agreement, and as part of the Company's restructuring plan, the
Company entered into Modification Agreements and, in some cases,
Subordination and Standstill agreements with eight unsecured creditors.
These agreements place the note holder into a subordinate position with
Finova and extends payoff of any obligation over a five-year period.
<PAGE>
(7) Long-term Debt
Long-term debt is comprised of the following at April 30, 1999 and 1998:
1999 1998
----------- -----------
Note payable to Capital Consultants in
monthly installments of $13,631, including
interest at 10%, payable in full in
December 1999, secured by real estate. $ 162,825 866,458
Mortgage payable to financial institution in
monthly installments of $12,750, including
interest at 11.375%, payable in full in
December 1999, secured by real estate. 1,201,279 1,216,668
Secured convertible subordinated notes,
interest payable monthly at 8%. Due
October 2003 and January 2004, with put
option for payout in twelve monthly
payments after second anniversary date.
Convertible into common stock at $0.1932
per share. Subject to Subordination and
Standstill Agreement with Finova. 275,160 --
Subordinated notes payable to various
individuals and entity, interest paid
quarterly beginning October 15, 1999 at 7%
interest and principal paid quarterly
beginning October 15, 2000, with final
payment due July 15, 2003. Subject to
Subordination and Standstill Agreement
with Finova. 1,077,114 575,592
Other note and capitalized lease with
interest of 10% 60,149 --
----------- -----------
2,776,527 2,658,718
Less current portion 1,373,412 2,136,376
----------- -----------
Long-term debt $ 1,403,115 522,342
=========== ===========
The aggregate principal repayments and reductions required in each of the
years ending April 30, 2000 through April 30, 2004 for the Company's
long-term debt is as follows:
2000 $1,373,412
2001 405,805
2002 540,198
2003 366,227
2004 90,885
----------
$2,776,527
==========
<PAGE>
(8) Income Taxes
The income tax (benefit) expense consists of the following:
1999 1998 1997
---- ---- ----
Current:
Federal $ -- -- --
State -- 1,894 --
------- ------- -------
-- 1,894 --
------- ------- -------
Deferred:
Federal -- -- (46,039)
State -- -- (9,568)
------- ------- -------
-- -- (55,607)
------- ------- -------
Total income tax (benefit) expense $ -- 1,894 (55,607)
======= ======= =======
The tax effects of temporary differences and net operating loss
carryforwards which give rise to significant portions of deferred tax
assets and deferred tax liabilities at April 30, 1999 and 1998 are as
follows:
1999 1998
---------- ----------
Deferred tax assets:
Restructuring costs $ 42,567 143,895
Warranty reserve 135,654 91,028
Legal settlement payable 123,390 123,390
Inventory write down 9,590 369,307
Bad debt reserve 21,833 26,380
Self-insurance reserve 9,313 22,490
Other 14,825 27,879
Capital loss carryforward 273,043 273,043
Net operating loss carryforwards:
Federal 852,724 767,970
State 177,203 98,391
---------- ----------
1,660,142 1,943,773
Less valuation allowance 1,246,759 1,657,570
---------- ----------
Net deferred tax asset 413,383 286,203
---------- ----------
Deferred tax liability:
Property, plant and equipment, due to
differences in depreciation 221,603 94,423
Real estate held for sale 191,780 191,780
---------- ----------
Net deferred tax liability 413,383 286,203
---------- ----------
Net deferred tax assets and liabilities $ -- --
========== ==========
<PAGE>
The provision (benefit) for income taxes differs from the amount of income
tax determined by applying the applicable Federal statutory income tax rate
to earnings (loss) before income taxes as a result of the following
differences:
1999 1998 1997
---- ---- ----
Statutory federal income tax rate 34.0% (34.0)% (34.0)%
State income taxes, net of federal
income tax benefit 4.4 (4.3) (4.4)
Change in valuation allowance (35.7) 40.5 36.2
Other (2.7) (2.1) (2.1)
------ ------ ------
Effective tax rates 0.0% .1% (4.3)%
====== ====== ======
The Company has a valuation allowance of $1,246,759, $1,657,570 and
$490,416, as of April 30, 1999, 1998 and 1997, respectively. The change in
the valuation allowance was ($410,811), $1,167,154 and $490,416, in 1999,
1998 and 1997, respectively.
At April 30, 1999 and 1998, the Company had approximately $2,684,000 and
$2,284,000, respectively, of net operating loss carryforwards to offset
future income for federal and state income tax purposes which will expire
2009 through 2019.
A provision of the Tax Reform Act of 1986, as amended, requires that net
operating loss and credit carryforward utilization be limited when there is
a more than 50% cumulative change in ownership of the Company in a 3 year
period. Such change in ownership may have occurred with the merger of OMNI
into CMDI. The merger affects the CMDI portion of the Company's net
operating loss carryforward or approximately $3,376,000, and as such, this
amount is not included as a deferred tax asset or in the valuation
allowance above. The date of the change and the amount of loss and credits
subject to the limitation has not yet been determined. Accordingly, the
utilization of the net operating loss and credit carryforwards to remaining
future years may be limited. Any future change in the equity structure of
the Company may further limit the utilization of the net operating loss
carryforwards.
(9) Commitments and Contingencies
Operating Lease Commitments
---------------------------
The Company leases office space, vehicles, office equipment and
manufacturing equipment, from a director of the Company, under various
operating lease agreements that are either month-to-month or that expire
during the next year. The Company's minimum monthly lease payments under
the various cancelable and non-cancelable lease agreements are $6,074.
Total future minimum lease commitments under non-cancelable leases is
$8,743. In addition, the Company, as lessor, leases all of its space at its
Grass Valley building, shown under real estate and assets held for sale. At
present, such rental revenues exceed the costs to finance and operate the
facility. Future minimum lease payments to be received on the Company's
California facility are $142,276 for fiscal 2000 and $42,046 for fiscal
2001. Lease expense was approximately $91,500, $159,000 and $108,000 for
the years ended April 30, 1999, 1998 and 1997, respectively.
<PAGE>
Royalty Agreements
------------------
The Company assumed a royalty agreement with Red Hawk Rubber Co. (Red
Hawk), from Riedel OMNI Rubber Products, Inc. The Red Hawk agreement
provides that the Company pay a 5% royalty on all net sales of products
that were being manufactured at the time the agreement was signed until
June 1999. Any new products developed and manufactured by OMNI are not
subject to the Red Hawk royalty agreement. Total royalty expense for fiscal
years ended April 30, 1999, 1998 and 1997 were $167,103, $113,725 and
$137,994, respectively.
Litigation
----------
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations or
liquidity.
(10) Stockholders' Equity
Convertible Preferred Stock Series B
------------------------------------
The Company has authorized 1,000,000 shares of Series B convertible
preferred stock, of which 195,619 are issued and outstanding. The terms of
these shares are as follows:
Voting
------
Each share of Series B convertible preferred stock, until converted or
canceled, has the right to one vote equivalent to one share of common
stock into which such preferred series could be then converted.
Conversion
----------
Each share of Series B convertible preferred stock was convertible to
a like number of common shares had the Company reported gross annual
revenues of $20,000,000 or annual pre-tax earnings of $1,500,000
during either of the fiscal years ended April 30, 1998 or 1999. These
conversion standards were not met, and therefore the Series B
preferred stock shall be canceled by the Company upon the issuance of
its fiscal year ended April 30, 1999 consolidated financial
statements.
Put Agreement
-------------
In February, 1997, two OMNI directors purchased shares in OMNI for a total
of $67,499 at $3.25 per share. Simultaneously, put agreements were executed
requiring the Company to purchase those shares at a price equivalent to
$4.00 per share 120 days following the investment. The put agreements with
these two parties were not repaid according to the put agreements and were
subsequently converted to subordinated notes as of July 1998.
Cancellation of Merger Shares in Escrow
---------------------------------------
As part of the merger between CMD and OMNI ten percent of the CMD common
shares and series B preferred shares exchanged for OMNI shares in the
transaction, were placed in escrow ("Escrow Shares") pending final
valuation and settlement. The final ownership ratio was adjusted pursuant
to the Merger Agreement to reflect differences that resulted from changes
in assets of both companies between the date of acquisition and the
settlement date of April 30, 1998. The determination of final asset values
was not resolved until August 1, 1998, at which time 111,147 common and
11,736 series B preferred Escrowed Shares were canceled to reflect the
final ownership ratio.
<PAGE>
Stock Options
-------------
The Company's 1994 Amended and Restated Stock Option Plan (the plan)
provides for granting to employees and consultants of either incentive
stock options or non-qualified stock options. Incentive stock options must
be granted at an exercise price not less than 100% of the fair market value
per share at the grant date. Non-qualified stock options generally must be
granted at an exercise price of not less than 100% of the fair market value
per share at the grant date, although, in certain cases may be granted at
85% of fair market value. The term of options granted under the plan is
generally ten years, but in certain cases may be five years. The right to
exercise options granted is generally fully vested on the grant date.
The following table presents historic stock option activity under the plan:
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Number Exercise Number Exercise Number Exercise
of shares Price of shares Price of shares Price
--------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 711,835 $ 2.67 689,199 $ 2.66 302,123 $ 2.90
Granted 206,668 0.42 13,636 3.00 412,096 2.49
Exercised -- -- -- -- -- --
Forfeited (588,763) (2.33) -- -- (16,020) (2.07)
Expired -- -- -- -- -- --
-------- ------ -------- ------ -------- ------
Options outstanding
at April 30 329,740 2.67 711,835 2.67 698,199 2.66
======== ====== ======== ====== ======== ======
Exercisable at April 30 206,407 2.63 711,835 2.67 698,199 2.66
======== ====== ======== ====== ======== ======
</TABLE>
The following table summarizes information about stock options outstanding
at April 30, 1999:
<TABLE>
<CAPTION>
Outstanding Exercisable
----------------------------------------------- -------------------------
Range of Weighted Average Weighted Weighted
exercise Number of remaining years of average Number of average
price options contractual life exercise price Options exercise price
----- ------- ---------------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C>
$0.27 - 0.75 224,170 9.3 $ 0.45 100,837 $ 0.48
$2.16 - 2.70 58,794 5.9 $ 2.38 58,794 $ 2.38
$3.00 - 3.51 29,274 8.1 $ 3.16 29,274 $ 3.16
$15.00 17,502 4.7 $ 15.00 17,502 $ 15.00
------- -------
329,740 206,407
======= =======
</TABLE>
<PAGE>
The Company adopted SFAS 123 in 1997, and pursuant to its provision elected
to continue using the intrinsic-value method of accounting for stock-based
awards granted to employees in accordance with APB 25. Accordingly, the
Company has not recognized compensation expense for its stock-based awards
to employees. The pro forma effects on net earnings (loss) of applying SFAS
No. 123 for fiscal year ended 1999 was an expense of approximately $37,000
and pro forma effect on basic and diluted earnings per share of $0.02.
There is no effect on pro forma net loss from applying SFAS No. 123 to
fiscal years ended 1998 and 1997. The pro forma amounts may not be
representative of future disclosures since the estimated fair value of
stock options is amortized to expense over the vesting period, and
additional options may be granted in future years.
The weighted average fair values of options at their grant date during
1999, 1998 and 1997, where the exercise price equaled the market price on
the grant date, were $0.45, $0.41 and $0.41, respectively. The estimated
fair value of each option grant is estimated on the date of grant using the
Black-Sholes option-pricing model with the following assumptions used for
grants in 1999: dividend yield of 0.0%; expected volatility of 86%;
risk-free interest rate of 6.35%; and expected life of 10 years.
The Company reserved 1,000,000 shares of common stock for issuance under
the plan. At April 30, 1999, there were 670,260 shares available for grant
under the plan. At April 30, 1999, the range of exercise prices and
weighted average remaining contractual life of outstanding options under
the plan was $0.27 - $5.00 and 7 years, respectively.
<PAGE>
Warrants Outstanding
--------------------
CMD issued warrants in conjunction with its initial public offering in
1993, prior to its merger with OMNI. These warrants were due to expire on
May 13, 1999. On May 4, 1999 the Company's board of directors extended the
exercise date of such warrants until November 15, 1999. The following table
presents warrants outstanding at April 30, 1999, all of which were issued
by CMD in consideration for service rendered, debt and debt restructuring,
or stock purchases and placements:
Number of
Common
Shares Exercise Expiration
Issuable price date
-------- ----- ----
17,500 $ 18.15 May 13, 1999
201,250 19.50 Nov. 15, 1999
16,667 30.00 April 14, 2000
(11) Earnings Per Share
The following table reconciles basic earnings per common share (EPS) to
diluted EPS:
For the year ended April 30, 1999
Weighted
Average Per share
Income Shares amount
------ ------ ------
Income available to common
Shareholders $1,151,273 1,735,473 $ 0.66
Effect of dilutive securities:
Stock options 24,166 (0.01)
Convertible notes 7,315 473,301 (0.13)
---------- ---------- --------
Diluted EPS $1,158,588 2,232,940 $ 0.52
========== ========== ========
The calculation of diluted earnings (loss) per share for fiscal years ended
April 30, 1998 and 1997, excludes any potentially dilutive shares as such
shares would have an antidilutive affect. Total common stock equivalents
not used in calculating diluted EPS were 1,504,539 shares in fiscal 1999,
and represented stock options and warrants with exercise prices greater
than market price and averaging of convertible debt. Total common stock
equivalents not used in calculating diluted EPS for both fiscal 1998 and
1997 was approximately 332,150 shares and represented stock option and
warrants with exercise prices greater than market price.
(12) Major Customers and Credit Concentration
The Company does business with and extends credit to a variety of
commercial customers, including all of the major railroads in the United
States, major cities and municipalities throughout the United States and
Canada.
<PAGE>
The Company sells products to customers primarily in the United States. On
April 30, 1999 and 1998, 88% and 71%, respectively, of the trade
receivables were concentrated within the domestic railroad industry, and
12% and 29%, respectively, of trade receivables were with companies and
distributors located in foreign countries. Although the Company does not
currently foresee a credit risk associated with its receivables, repayment
is somewhat dependent upon the financial stability of the companies with
which the Company does business.
(13) Going Concern
As reflected in the accompanying financial statements, current debt
maturities and other short-term commitments exceed the Company's liquid
assets available to repay such commitments. In addition, as discussed in
Note 1, the Company has a significant concentration of Product sales with
its top three customers. To finance debt maturities, management has and
will continue to seek both debt and equity investors to provide additional
capital. Management believes the Company will be profitable in fiscal 2000
and is expecting to refinance its debt as discussed in Note 14. However,
there can be no assurance that the Company will be profitable, will retain
its largest customers, or that it will be able to complete the refinancing
of its debt.
(14) Subsequent Event
Litigation Settlement
---------------------
Subsequent to the end of the fiscal year, the Company entered into a
settlement agreement with Transcontinental Capital Partners ("TCP") that
ends the litigation between the Company and TCP. The Company had accrued
the full amount of the settlement as of the fiscal year end.
Refinancing of the Company's Senior Debt
----------------------------------------
Subsequent to year end the Company negotiated an amendment with its senior
lender Finova that provides an extension of a reduced credit facility ($1.8
million) under similar terms and conditions that existed at year end, until
August 31, 2000, at interest of prime plus 1-1/2%. The new financing
package also provides $600,000 of new term debt at prime plus 2.25% payable
in 60 monthly installments of principal and interest. The Company had not
yet signed the new financing package prior issuing its financial
statements.
<PAGE>
SIGNATURES
In accordance with Rule 12b-15 of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
OMNI Rail Products, Inc.
(Registrant)
By /s/ Robert E. Tuzik
----------------------
(Signature and Title)
Robert E. Tuzik
President and Chief Operating Officer
Date: August 20, 1999
---------------------
