SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended March 29, 1997
Commission file number 1-13656
OMNI MULTIMEDIA GROUP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-2729490
-------- ----------
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification No.)
50 Howe Avenue, Millbury, Massachusetts 01527-3298
--------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(508) 865-4451
--------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
-------------------
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.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is not contained herein, and will not be contained,
to the best of the 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. X
As of July 10, 1997, 10,119,211 shares of Common Stock, $.01 par value
per share of the registrant were issued and outstanding. The aggregate market
value of the shares of the registrant's Common Stock held by non-affiliates
based upon the closing price for such stock on July 12, 1997 was approximately $
$6,509,000.
The registrant's revenues for the fiscal year ended March 29, 1997 were
$12,873,854.
DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Statement for the Annual Meeting of Stockholders for
the fiscal year ended March 29, 1997, and to be filed pursuant to
Regulation 14A, is incorporated by reference in Part III of this Form
10-KSB.
Transitional Small Business Disclosure Format (check one):
Yes No X
--- ---
1
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
THIS REPORT CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, WHICH STATEMENTS CAN BE
IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY", "WILL",
"WOULD", "CAN", "COULD, "INTEND", "PLAN", "ANTICIPATE", "ESTIMATE" OR "CONTINUE"
OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY.
THE FOLLOWING FORWARD-LOOKING STATEMENTS INCLUDE CERTAIN RISKS AND UNCERTAINTIES
THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH
FORWARD-LOOKING STATEMENTS. POTENTIAL INVESTORS ARE URGED TO CAREFULLY CONSIDER
THE RISKS ASSOCIATED WITH AN INVESTMENT IN THE COMPANY'S SECURITIES.
GENERAL
OMNI MultiMedia Group, Inc. ("OMNI" or the "Company") provides a wide
range of CD-ROM replication and fulfillment services for major software
producing firms serving the general computer user and users within the specific
fields of music, entertainment, financial and insurance services. The CD-ROM
replication and fulfillment services of OMNI include inbound telemarketing,
packaging, printing, direct shipment and a wide array of CD-ROM replication
services for clients. In addition, OMNI has developed an extensive online
multimedia catalog featuring popular software and CD-ROM titles, as well as
related hardware peripherals, and has introduced this catalog on the Internet.
Current clients include Cheyenne Software, Inc., Expert Software, Inc.,
TVT, Microcom, Inc. ("Microcom"), John Hancock Insurance, Dragon Software, Inc.,
and others. OMNI provides a wide range of services, including CD-ROM
replication, virus testing, printing of user manuals, and packaging and shipping
of these materials. OMNI has established an inbound telemarketing function which
takes orders directly from software users purchasing products through print ads
and other advertising media. In some instances, computer peripheral hardware is
drop shipped to the Company, where it is tested and then shipped with CD-ROMs
containing software to the Company's clients or directly to the clients'
customers.
In April 1995, OMNI completed an initial public offering (the "IPO") of
1,138,500 units, each unit consisting of one share of Common Stock and one
Warrant, raising net proceeds of approximately $4,076,000 (including funds
received in connection with the Underwriters' exercise of their over-allotment
option). In March 1996, the Warrants were exercised, raising an additional
$7,450,000. In May 1996, the Company raised net proceeds of approximately
$9,200,000, through the sale of Series A Convertible Preferred Stock, all of
which was converted into Common Stock during the fiscal year ended March 29,
1997 ("Fiscal 1997"). To date, OMNI has used a portion of the proceeds from
these financings to develop and expand its CD-ROM manufacturing operation and
expand shipping and telemarketing capabilities. With respect to CD-ROM
replication, management has used the majority of the net proceeds of these
2
financings to install state-of-the-art CD-ROM manufacturing operations. These
operations have been installed in a separate, specially prepared section of the
Company's existing facility, and now enable the Company to produce CD-audio,
CD-ROM, CD-interactive and CD-video media. The five CD-ROM production lines
became operational late in the second quarter of Fiscal 1997.
OMNI has developed an online multimedia catalog that it believes will
provide consumers and businesses with a cost-effective method of purchasing
software titles and hardware peripherals. By selling over the Internet, OMNI
expects it can avoid or reduce many of the costs associated with catalogs, such
as catalog printing, mailing and telephonic order processing.
COMPANY DEVELOPMENTS DURING FISCAL 1997
During Fiscal 1997, the Company has focused on several areas, including
constructing its CD-ROM manufacturing facilities, expanding its sales and
distribution activities, as well as introducing its 4CD's multimedia catalog:
CD-ROM Manufacturing Facility. During Fiscal 1997, much of management's
focus has centered on the construction and completion of a state-of-the-art
CD-ROM manufacturing facility and marketing of the Company's capabilities to
provide these services to CD-ROM users. As part of this program, the Company
expended approximately an additional $500,000 in leasehold improvements,
including basic infrastructure improvements such as significantly expanded
electrical services and water handling and purification equipment, systems, as
well as environmental controls. Management also has purchased or leased
approximately $17,000,000 in CD-ROM and other manufacturing, mastering and
related computer equipment. Management believes that its state-of-the-art CD-ROM
mastering and replication equipment, together with its fully integrated
capabilities in printing and inbound telemarketing capabilities allow it to
provide all services needed by customers seeking CD-ROM replication services.
Sales and Marketing Activities. During Fiscal 1997, the Company rebuilt
its sales and marketing team to serve the CD-ROM marketplace, increasing the
number of sales team members from 3 to 16 (10 in the East, 5 in the West, 1 in
the Midwest) and adding customer service personnel. The salespeople were added
over the last half of the fiscal year. The complexities of selling a total
fulfillment program require at least three to four months to secure an account.
The sales effort begun in the fiscal year 1997 is beginning to show results in
the first quarter of fiscal year 1998 where sales have increased 42% over the
last quarter of fiscal year 1997.
Acquisitions. In October, the Company purchased the assets of Allenbach
Industries, a California company with manufacturing facilities in San Jose,
California and Bloomington, Minnesota. In March, the Company purchased CSTM
Corporation, a California company. Using the facilities and manufacturing
capabilities of Allenbach and the sales and marketing capability of CSTM, as
well as a customer base of approximately $8,000,000, the Company planned to
develop a strong West and Midwest market position. These entities were forecast
to achieve $18,000,000 in profitable sales for FY 1998. During the first quarter
of Fiscal 1998, the
3
companies failed to achieve breakeven sales levels forecasted by their
management. This, combined with shortage of operating funds caused by inability
to raise additional capital in a timely manner, forced the Company to close the
West Coast facility at the end of June and sell the Midwest facility effective
July 5. This activity contributed approximately $3,000,000 to FY 1997 revenues
and $3.5 M to operating losses.
4CD's Internet Catalog. Due to the tremendous popularity of the
Internet, the Company decided to provide the 4CD's catalog over the Internet
rather than through traditional mailing of paper catalogs. Management expects
that providing such services via an online catalog will significantly reduce
catalog production costs, provide better access to a worldwide market, and
provide maximum flexibility in product presentation. By comparison, the costs of
marketing via traditional print catalogs have continued to rise with the costs
of paper and mailing. The Company believes that the costs of fulfilling customer
orders will be significantly reduced by handling orders via online requests
rather than through traditional telemarketing order processing, although the
Company expects to add additional telemarketing personnel to handle telephone
inquiries as well as provide telemarketing services for its replication
fulfillment services described above. The Company spent approximately $500,000
in completing development of the 4CD's catalog, and marketing the Company's
catalog to CD-ROM developers. The Company provides the catalog online for the
purpose of solicitation of orders from the general public. 4CDs is an attractive
catalog which features specialty shops, spotlights certain products available
for purchase, including both software and computer peripherals (such as modems
and sound systems) which enhance use of Internet opportunities, and fully
computerized ordering. 4CDs has received several industry awards for the
presentation and format of its Internet catalog. 4CDs became fully operational
during the last half of Fiscal 1997.
OMNI RESOURCES CORPORATION (CD-ROM REPLICATION)
The Company was founded as a manufacturer of magnetic 5 1/4 inch disks
for sale under the Company's label to individuals and retail outlets. During the
1980's, as the use of personal computers began to expand, the Company evolved
into a software duplication company. As a result of this evolution, the Company
now provides a comprehensive array of services for software publishers. These
services include:
o Duplication/Replication o Warehousing/Inventory
o Assembly o Customized Encryption and Serialization
o Fulfillment Services o Packaging/Design/Sourcing
o In-House Printing o Inbound Telemarketing
4
The Company's customers during the past 12 months include Cheyenne
Software, Expert Software, TVT, Microcom, Inc. ("Microcom"), John Hancock
Insurance, Dragon Software and others. The Company provides its clients with
in-house duplication and replication services in which the Company reproduces
its customers' software programs onto CD-ROMs and, in certain instances, blank
diskettes and cassette tapes. The Company has the ability to copy software
programs onto CD-ROMs, 3 1/2" and 5 1/4" diskettes, tapes, and data
cartridges. During the duplication/replication process, the Company checks the
publisher's software for over 4,000 known computer viruses, duplicates, copy
protects (utilizing sophisticated encryption techniques, if required),
serializes, labels and packages the diskette/CD. The Company can also
manufacture in-house support material for software packages, including
sleeves, manuals, registration cards and promotional brochures and materials.
The Company's extensive quality assurance laboratories are designed to
minimize defect problems in floppy duplication and CD replication.
The Company also provides comprehensive design, multicolor printing,
and assembly functions for clients as well as external packaging. The Company
has recently expanded its design capabilities through the purchase of advanced
computer hardware and software. The Company believes that this technology,
together with its design team, allows it to provide a comprehensive design
facility for its customers. Often, clients make last minute changes in
software or user reference materials, which require the Company's services.
Other clients who publish rates and other sales information through diskette
(e.g., insurance agents and other sales personnel) use OMNI's services to
constantly update and distribute software to field sales personnel. OMNI's
production facilities allow for quick reconfiguration to process large or
small production runs.
OMNI's production services are available 24 hours per day seven days
per week to meet customer shipping requirements. OMNI drop ships worldwide.
The Company provides for warehousing services, which allow for shipping
directly from the Company's warehouse. OMNI maintains an extensive security
and tracking system to ensure inventory control. OMNI is also serving as a
fulfillment house for software publishers marketing software directly to end
users, which enables OMNI to take, process and ship orders directly to end
users.
During the past year, the Company has expanded its services to include
inbound telemarketing to receive and ship consumer orders. This service allows
the Company's clients to outsource the cost of a separate inbound
telemarketing group, resulting in cost efficiencies, particularly for smaller
volume software developers and for other software developers seeking to limit
overhead costs. In addition, as part of the services previously provided and
currently offered by the Company, clients will forward certain computer
hardware, to the Company for quality control testing. After the Company
performs such quality control tests, the computer hardware is bundled with
software that has been produced by the Company. The Company believes that
the expansion of its inbound telemarketing services and manufacturing and
shipping facilities, together with its broad range of duplication/replication
services, will allow it to provide enhanced outsourcing capability for
software publishers.
5
MARKETS
Markets for the Company's software duplication and CD-ROM replication
services include developers of retail software, such as music, games and
utilities, brokerage houses, insurance companies and other financial services
organizations.
Software developers utilizing the Company's services include both
large and small organizations. Brokerage firms and other financial services
organizations use the Company's services to provide pricing and other
software-based information and training programs to their field offices on an
as-needed basis.
The market for the Company's services includes organizations seeking
to augment their own CD-ROM replication capabilities, businesses seeking to
outsource their entire duplication and replication services, and organizations
which have no mass duplication or replication capabilities. OMNI's full line
of services allow the Company's customers to concentrate their efforts and
funds on development rather than having to spend additional funds and
management resources on manufacturing and shipping. This is particularly
critical for CD-ROM replication. By providing state-of-the-art replication
capabilities, and by attaining economies of scale, the Company believes it is
able to provide these services at a substantial cost reduction, with higher
quality than if the customer attempted to provide duplication or replication
and shipping services directly. Management also believes that the trend in
outsourcing will allow the Company to continue to attract major developers and
financial service organizations as clients.
COMPETITION
The Company is somewhat unique in its field in that it manufactures
in-house most major components of the typical software package. Jewel cases
and boxes are the only exceptions. In addition, the Company, through its 4CD
subsidiary, is able to provide an additional retail channel for its customers,
as well as inbound telemarketing, commercial downloading of software, and
retail incription capability.
To the Company's knowledge, there is no competitor with OMNI's scope
of services. In the CD-ROM area, KAO Information Services, Inc. with a plant
in Plymouth, Massachusetts, is the closest competitor. KAO has two other
plants in California and Washington. KAO manufactures CD's and does
fulfillment, but has no in-house printing or any software retailing
capability. CBR Printing Company in Massachusetts is a mid-size printer with
limited fulfillment and CD capability. Other CD and fulfillment competitors
are Cinram, a company that focuses heavily on the music and entertainment
field, with a large CD manufacturing capability housed in plants located in
Georgia, Canada, Ohio and California. Cinram has no in-house document printing
or retail capability. Nimbus has one large plant in the United States and is
focused on CD replication only, with no fulfillment or printing.
6
Quebecor is a large international printer with one CD plant in the
Northwest. Quebecor has no retail capability.
Due to the high capital cost of CD replication and document printing,
the small "Mom and Pop" competitors that proliferated in the floppy disk
business are non-existent in the CD-ROM field. This makes it possible for Omni
to compete over a wider geographical area against competitors with similar
costs.
The Company's strategy is to compete on the basis of its quality
(including accuracy), comprehensive services and price. The Company's success
will depend on its ability to obtain business from software publishers. To do
so, the Company must maintain its quality and level of service and continue to
enhance its software replication process to keep pace with any technological
changes. Many companies are capable of providing duplication and replication,
and the Company's clients could also decide to provide duplication and
replication at their facilities. Some of the Company's competitors are
well-established and have greater financial and other resources than the
Company.
The Company believes that a number of factors will affect its
competitive position in the future, including its ability to respond to
competitive developments and technological changes; its ability to manufacture
software packages on a cost-effective basis; and general domestic and
international economic conditions.
The CD-ROM marketplace is highly competitive. The Company competes
with regional CD-ROM manufacturers and duplicators. Certain of these
competitors, such as KAO Information Systems, Inc. and Cinram, have financial
and other resources significantly greater than those of the Company. No
assurance can be given that the Company can compete effectively against
existing competitors or new competitors that may enter the market. In
addition, price is an important competitive factor in the CD-ROM markets, and
there can be no assurance that the Company will not be subject to increased
price competition, which could have a material adverse effect on the Company's
operations and financial condition.
TECHNOLOGICAL CHANGES
At this time, all software manufacturing is primarily done through
duplication of the software program onto diskettes and replications onto CD's.
The technology exists for the computer software industry to change its
distribution techniques and deliver software programs and manuals
electronically, via modem, satellite, or fiber optic transmissions, or through
other media, such as DVD, CD-ROM. The Company can currently provide its
customers with replication services using CD-ROM technology, as well as
distribution electronically over the Internet. Significant additional
investment will be required to manufacture DVD formatted CD-ROMs. The Company
believes that DVD will develop slowly and not be a factor in the Company's
marketplace for several years.
Electronic distribution of software products has not achieved
widespread adoption, in part because of potential problems, including the
perceived increased likelihood of piracy (i.e.,
7
copying of software programs), inventory controls, and accounting controls,
such as verifiable means of determining the number of copies made and
collection of amounts due from customers. Software publishers may also be
concerned that such methods will limit their ability to track and market to
end-users. As these problems are addressed, the demand for electronic
distribution will likely increase, which could cause a reduction in the growth
in demand, or a decline, in current production and distribution methodologies.
MANUFACTURING AND SUPPLIES
The Company provides its services at its Millbury, Massachusetts
facility. The Company's facilities include clean rooms for diskette
duplication and CD-ROM replication, as well as temperature controlled
facilities to insure that changes in heat or humidity do not damage products.
The Company's packaging areas are designed to be quickly reconfigured to
address different production schedules. These operations are being installed
in a separate, specially prepared section of the Company's existing facility,
and will enable the Company to produce CD-audio, CD-ROM, CD-interactive and
CD-video media and the new DVD format. Five CD-ROM production lines, including
nine injection molders, two six-color offset printers, and two six-color
screen printers are the backbone of the Company's CD-ROM manufacturing
capability. The Company uses laser beam technology to produce its CD masters
for CD-ROM production. The Company also has in-house a comprehensive document
printing capability, including a state-of-the art, high speed Heidelberg
press, computerized free-press and up-to-date support equipment, all housed in
a recently rebuilt environmentally-controlled area of the plant.
To date, the Company has expended approximately $3,500,000 for
leasehold improvements, principally related to the development of the CD-ROM
manufacturing capability and its new printing department. Modifications
including water-handling and purification, systems, environmental controls,
clean room facilities, additional electrical generators and structural
modifications. Management believes that only minor additional leasehold
improvements will be required during the current fiscal year, primarily in the
warehouse and shipping areas. During Fiscal 1997, the Company expanded to
250,000 square feet of factory space at its Millbury facility. Facility
capital costs through Fiscal 1997 exceed $20,000,000.
The Company purchases resin and other materials in bulk from various
suppliers located in the United States. The principal supplies used include
resin, diskettes, labels, sleeves, jewel cases and boxes. The Company
endeavors to acquire resin, labels, sleeves, jewel cases and boxes on a volume
discount basis. The Company has multiple suppliers of these materials
available to it and management believes that these materials could be obtained
elsewhere if needed without a significant delay or increased cost.
SALES AND MARKETING
At the end of Fiscal 1997, the Company marketed its software
duplication/replication and fulfillment services through its sales force of 16
persons. The sales force is paid a base salary, plus commissions based on
performance. The sales force is supported by inside customer
8
service representatives ("CSR") who interface between the customer and the
factory, as well as support of the sales force in pre-sale activity.
In Fiscal 1997, the Company's largest customer was Microcom, which
accounted for 16% of sales. In Fiscal 1996 AOL and Prodigy accounted for sales
of approximately $3,000,000 and $8,000,000, respectively, totalling 63% of
sales.
PURCHASING
The Company purchases from over 300 vendors and has more than one
supplier available for all critical products and does not expect to experience
more than short term interruption of supply from loss of any vendor.
EMPLOYEES
As of March 29, 1997, the Company employed 321 employees on a
full-time basis and 50 persons on a part-time basis. In contrast, on March 30,
1996, the Company employed 125 persons on a full-time basis and 23 persons on
a part-time basis. Of these full-time employees at March 29, 1997, 248 were
employed in production, 34 in administration and 38 in sales. None of these
employees is represented by a union. The Company believes that its relations
with its employees are satisfactory.
THE 4CD 'S MULTIMEDIA CATALOG
GENERAL
The Company has developed an extensive online multimedia catalog
featuring popular software and CD-ROM titles, as well as related hardware and
accessories. OMNI has introduced this catalog on the Internet.
4CD's offers a comprehensive line of approximately 5,000 CD-ROM titles
and other multimedia products. 4CD's continually adjusts product mix on a
weekly basis. Software titles include all types of CD software, such as
software for entertainment, business and educational uses. Hardware and other
equipment include sound sound cards, video cards, speakers, tables, scanners,
cpu and meory upgrades. Management believes, based upon independent market
surveys and articles, that retail outlets carry only a few of the most popular
CD-ROM titles and multimedia products. Management also believes that
electronic catalogs offer a more comprehensive selection of products than
existing retail outlets.
Electronic catalogs are a reference source which can provide detailed
information explaining new and current product capabilities, key features and
system requirements, thereby stimulating consumer purchases. 4CD's contains
detailed descriptions of every product featured, as well as information about
applications and computing environment and reviews of specific products.
9
Online catalogs and toll-free telephone number support allow customers
to purchase CD-ROM hardware and titles from the convenience of their homes or
offices. These products are also easy to ship on an overnight basis if needed
instantaneously by the customer. The Company also plans to increase its
inbound telemarketing staff to provide technical assistance to customers. The
Company believes that this level of technical support will allow it to compete
more effectively with retailers.
MULTIMEDIA AND INTERNET MARKETS
IDG Marketing Services estimates that the installed base of CD-ROM
players in the United States increased from 9.8 million units in 1993 to 54.1
million units by 1996. Home PCs now include CD-ROM drives as standard
equipment. IDG's report also found that small businesses, consumers and the
education market account for over 70% of current PC and multimedia product
purchases. According to a Multimedia World Marketing survey, 75% of multimedia
users expect to purchase CD-ROMs from catalogs. Significant increases in
computing power at lower costs with the advent of pentium chip technologies
and the rapid cost declines in CD-ROM hardware suggest that the market might
grow at even higher rates. Link Resources reports that the average multimedia
buyer has a higher income level, spends more on hardware and software, and
looks beyond traditional retail channels for multimedia purchases. USA Today
recently reported that consumers and companies expect to buy over $22 billion
in goods and services over the Internet in the next several years.
4CD's is designed to leverage off these growing markets by providing
consumers and businesses with a cost-effective method of marketing titles. By
selling over the Internet, Omni can avoid many of the costs typically
associated with catalogs (e.g., catalog printing, mailing and order
processing). At the same time, OMNI already has developed the infrastructure,
through its in-house talent in designing, printing and fulfillment to provide
the services necessary to meet customer demands. In its start-up year, 4CD's
contributed limited revenue. Revenues are expected to be substantially
improved in FY 1998.
STRATEGY
4CD's strategy is to offer premier products to customers based on a
cost-plus methodology designed to attract buyers and establish long-term
relationships. Revenues will be derived from advertising, co-op dollars and
publishing of proprietary titles. 4CD's is expected to include over 6,000
titles. Titles are available from distributors already used by Omni with
delivery of titles on a "just-in-time" basis, thereby reducing the risk of
obsolete inventory.
The Company provides the following information through the 4CD's
online catalog:
* Weekly product specials
* Industry news, reviews and information
* Free product demos and shareware files from leading manufacturers
available for downloading
* Pre/post technical support services provided by OMNI's technical
staff
10
* Closeout specials
* Exclusive software offered only by 4CD's
* Pre-order section for announced software releases
Direct online marketing provides a convenient and cost-effective
method for individuals, businesses, and schools to purchase CD-ROM titles, as
well as drives and peripheral equipment, for the following reasons:
* BROAD PRODUCT SELECTION. Online catalogs allow customers to view
a broad range of titles as well as hardware and peripheral
products.
* DETAILED PRODUCT DESCRIPTIONS. Online catalogs serve as a
convenient reference source providing detailed information
explaining new and current product capabilities, key features and
system requirements.
* COMPETITIVE PRICING. Low overhead associated with online
marketing allows competitive pricing strategies in an
increasingly price sensitive market.
* CUSTOMER CONVENIENCE. Online catalogs and 800 telephone number
support allow customers to purchase CD-ROM hardware and titles
from the convenience of their homes or offices. CD-ROMs and
software titles are also easy to ship on an overnight basis if
needed immediately by the customer.
OMNI has also developed a plan to provide "one stop shopping" for
developers through a comprehensive advertising package for CD-ROM publishers
and peripheral manufacturers. Revenues would be derived both by advertising
charges for catalog space and by fulfillment services (including in-bound
telemarketing, order fulfillment and warehousing). Also, by offering CD-ROM
replication services, OMNI will be able to provide smaller developers with the
capability to correct bugs in programs or end user manuals quickly and provide
for immediate shipment to the consumer.
COMPETITION
In the 4CDs area, there are numerous catalogs on the Internet. The
Company considers its major competitors to be Once, Cyber Outpost, ISN,
Software Net, Cyber Source, and NECX. The Company expects to compete
effectively in the electronic catalog field using its manufacturing and
fulfillment capabilities to allow the offering of niche market software at a
profit. Manufacturing and fulfillment capabilities also add to the
profitability of the "Try before you buy" incripted software program underway
at 4CDs.
The software and CD-ROM marketplaces are highly competitive. The
Company expects to compete with consumer electronic and computer retail
stores, including superstores, and other direct marketers of software, CD-ROM
and computer related products. Certain hardware and software vendors are
selling their products directly through their own catalogs. Certain
competitors of the Company which now sell or which may in the future sell
CD-ROM
11
products through catalogs, have financial and other resources significantly
greater than those of the Company. No assurance can be given that the Company
can compete effectively against existing competitors or new competitors that
may enter these markets. In addition, price is an important competitive factor
in these markets, and there can be no assurance that the Company will not be
subject to increased price competition, which could have a material adverse
effect on the Company's operations and financial condition.
PURCHASING
4CD's purchases multimedia products from approximately 15 suppliers.
Approximately 20% of these products are purchased directly from software
manufacturers and the balance from distributors. There are no supply
agreements between the Company and any of its distributors. The loss of any of
these distributors could have a short-term disruption in the availability of
products purchased by it, although the Company believes that it would be able
to obtain alternative sources of distribution for such products without
materially affecting product cost. Distributors provide the Company with
substantial incentives in the form of discounts, advertising allowances,
rebates and return policies. A reduction in or discontinuance of such
incentives could have a material adverse effect on the Company's operations
and financial condition. In addition, no assurance can be given that a
distributor and others will not produce and distribute their own multimedia
catalogs.
The Company anticipates that its volume purchases will enable it to
obtain more favorable product pricing than its clients could obtain. Many of
the Company's suppliers are expected to make funds available to the Company in
the form of advertising allowances and incentives to promote and increase
sales of their products. Generally, the Company has been able to return any
unsold or obsolete inventory to its vendors. In addition, the Company
typically receives price protection should a vendor subsequently lower its
price. Management believes that, based on current industry practices,
favorable return and price protection policies will continue. Any change in
these policies could have a material adverse impact on the Company's
operations and financial condition.
ITEM 2. DESCRIPTION OF PROPERTY
The Company maintains its principal executive offices and
manufacturing operations in an approximately 250,000 square foot facility in
Millbury, Massachusetts leased from AAA Turnpike, a corporation in which
Ronald Ladner, a director of the Company, is a director and stockholder. The
Company currently pays base rent in the amount of approximately $49,605 per
month plus its pro-rata portion of real estate taxes and other operational and
maintenance expenses, pursuant to a lease that expires on June 30, 2001. The
lease further provides for an option to purchase the premises, which consist
of 265,000 square feet, for $6,000,000 at any time during the term of the
lease. The option price is $10,000 per month payable at the same time as the
lease payments are due. The Company has made such additional monthly payments
on the option totaling $360,000 since April 1994, and if it decides to
exercise the option, the additional amounts paid will be credited toward the
$6,000,000. The Company believes that these arrangements are on terms at least
as favorable as could be obtained from non-affiliated third parties.
12
At year end the Company leased approximately 50,000 square feet of
factory space in Bloomington, Minnesota. The monthly rental amounted to $13,183
plus taxes and maintenance. This lease will be taken over by the company
purchasing the midwest business. There is expected to be no contingent liability
to OMNI. The Company also leased at year end approximately 110,000 square feet
of space in San Jose, California at a monthly rate of $43,760 plus taxes and
maintenance costs. The Company will leave this facility in July. The landlord
has notified the Company that with payment of July rent, the landlord will
release OMNI from further liability concerning rent on this facility. The
Company anticipates paying this rent at the end of July.
The Company believes that its remaining Millbury, Massachusetts
facility is adequate for its current needs. The Company has no present plans
to acquire additional manufacturing facilities.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not currently involved in any litigation of a material
nature. The Company is in arrears in several lease payments and owes
approximately $800,000 in payables more than 60 days past due. The Company is
also in dispute with a third party vendor regarding a cancelled purchase order
totalling $900,000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company submitted no matters to a vote of security holders during
the fourth quarter of the fiscal year ended March 29, 1997, through the
solicitation of proxies or otherwise.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the American Stock Exchange
("AMEX") under the symbol "OMG." On July 12, 1997, the closing price of the
Company's Common Stock as reported on the AMEX was $ .69.
As of June 30, 1997, there were approximately 100 holders of record of
the Company's Common Stock. Management believes that there are over 700
beneficial owners of the Company's Common Stock.
For the periods indicated, the following table set forth the range of
high and low bid prices for the Company's Common Stock as reported by AMEX.
FISCAL YEAR ENDING MARCH 28, 1998 HIGH LOW
--------------------------------- ---- ---
First Quarter $1.25 $.625
Second Quarter (through July 12, 1997) $0.875 $.50
FISCAL YEAR ENDING MARCH 29, 1997 HIGH LOW
--------------------------------- ---- ---
First Quarter $10.375 $6.25
Second Quarter $7.25 $3.00
Third Quarter $3.25 $1.50
Fourth Quarter $1.75 $1.25
FISCAL YEAR ENDING MARCH 30, 1996 HIGH LOW
--------------------------------- ---- ---
First Quarter (from April 20, 1995) $8.13 $4.50
Second Quarter $8.25 $5.75
Third Quarter $8.50 $7.00
Fourth Quarter $12.50 $7.25
The Company has not paid cash dividends on its Common Stock since its
inception and does not anticipate paying any cash dividends on its Common
Stock in the foreseeable future. The Company currently intends to reinvest
earnings, if any, in the development and expansion of its business. Any future
determination with respect to the payment of dividends will be subject to the
discretion of the Company's Board of Directors and will depend upon the
earnings, capital requirements, and financial position of the Company, general
economic conditions, and other pertinent factors. In addition, the Company's
agreement with its primary lender prohibits the payment of dividends, other
than a Common Stock dividend of the Company's own capital stock, without such
lender's prior written consent.
14
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
The following discussion and analysis should be read in conjunction
with the consolidated Financial Statements of the Company (including the Notes
thereto) appearing elsewhere in this Annual Report.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED MARCH 29, 1997 COMPARED TO FISCAL YEAR ENDED MARCH 30, 1996.
During the year ended March 29, 1997 ("Fiscal 1997"), management
decided to transition the Company from providing software replication on 3 1/2
inch diskettes to CD-ROM based on shifting customer needs arising from advances
in technology within the computer industry. The Company completed the
construction of a state-of-the-art CD-ROM manufacturing facility which commenced
full operations late in the second quarter of Fiscal 1997. During Fiscal 1997,
the Company's net sales and operating results decreased significantly due to the
faster than expected decline in demand for software duplication services for 3
1/2 inch diskettes. This decline was combined with high fixed costs inherent in
a CD-ROM facility as well as high costs associated with the acceleration of the
completion of the CD-ROM facility. In addition, lower than anticipated sales
performance from the West Coast and Mid West facilities acquired during the
second half of Fiscal 1997 added to the operating losses during Fiscal 1997. As
a result of the failure to achieve expected break-even operating results during
the first quarter of the year ending March 28, 1998 ("Fiscal 1998") combined
with the cash shortages at the Company, management decided to close down the
West Coast facility and wind down the operations of the Mid West facility in the
first quarter of Fiscal 1998. The decision to exit these facilities has resulted
in an asset impairment charge of $1,686,487, which was recorded in the fourth
quarter of Fiscal 1997. Primarily as a result of these factors, the Company
generated a loss totaling $15,759,175 for the year ended March 29, 1997.
The consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. The Company has an accumulated
deficit, a net working capital deficiency, has suffered a loss from operations,
and is in default of payment on substantially all of its loans and capital lease
obligations. Accordingly, the Company's independent accountants have expressed
in their report on the Company's consolidated financial statements substantial
doubt about the Company's ability to continue as a going concern. The future
viability of the Company is dependent on its ability to obtain necessary
additional financing and to generate cash from operations primarily from sales
of its new CD-ROM replication services. No assurance can be given that the
Company can successfully manufacture and market its CD-ROM replication services
or if the Company is successful, that the Company will generate revenues or be
profitable from its CD-ROM replication services, thereby recovering expenditures
made on related equipment and leasehold improvements. In addition, the Company
is in default under the payment terms of several secured loan and lease
agreements. If management is not able to negotiate the restructuring of the
payment terms of these agreements or cure the defaults, the secured parties have
the right to proceed with lien procedures. Management believes the Company has
the ability to generate cash flows from operations and to reduce operating
costs, and is in the process of attempting to obtain additional financing, to
ensure the future viability of the Company.
For Fiscal 1997, net sales were $12,873,854, as compared to net sales
of $18,929,165 for the fiscal year ended March 30, 1996 ("Fiscal 1996"), a
decrease in net sales of approximately 32%. In Fiscal 1996, net sales were
derived almost entirely from the duplication services for floppy diskettes.
Although the Company had anticipated that customers would start to switch to
CD-ROMs in Fiscal 1997, the switch occurred more rapidly than anticipated. As
mentioned in last year's annual report, the Company commenced Fiscal 1997 with
plans to build a significant CD-ROM manufacturing facility. This facility was
completed in the second quarter of Fiscal 1997 and became fully operational at
the very end of the second quarter of Fiscal 1997. During the summer of 1996,
due to the Company's inability to manufacture CD-ROMs, the Company lost business
from its two largest customers, America OnLine and Prodigy, which together
accounted for 63% of the Company's revenues in Fiscal 1996. The Company had
anticipated that 3 1/2 inch diskette sales would drop in Fiscal 1997. However,
as previously reported in each of the Company's quarterly reports during Fiscal
1997, the decline was more rapid than either the Company or the industry itself
anticipated.
Due to high fixed costs inherent in a CD-ROM facility as well as high
costs associated with the acceleration of the completion of the CD-ROM facility,
combined with low sales volumes and lower than projected sales prices, cost of
goods sold as a percentage of revenues increased significantly, with cost of
goods sold in Fiscal 1997 of $16,168,684, or approximately 126% of net sales, as
compared to costs of good sold in Fiscal 1996 of $14,236,153, or approximately
75%. As a result, the Company incurred a gross loss of $3,294,830 in Fiscal
1997, as compared to a gross profit of $4,693,012 in Fiscal 1996. Material costs
amounted to approximately 38% and 50% of sales in Fiscal 1996 and 1997,
respectively, or $4,958,000 in Fiscal 1997 and $9,642,000 in Fiscal 1996.
Operating overhead was approximately $11,211,000 in Fiscal 1997 and $4,594,000
in Fiscal 1996. The $6,617,000 increase
15
in Fiscal 1997 was primarily due to depreciation of approximately $1,960,000,
rent and utilities of approximately $981,000 and labor of approximately
$2,455,000. The increase in depreciation relates to the CD-ROM facility. The
increase in rent reflects a 65% increase in plant space from 150,000 square feet
to 410,000 square feet. The increase in labor is the result of higher wage rates
for technology qualified workers as well as the more labor intensive aspect of
CD fulfillment operations. Management believes that anticipated increased sales
volume of CD-ROM replication services at the Massachusetts facility in Fiscal
1998 will allow the Company to manufacture at levels sufficient to realize
acceptable gross margins.
Selling expenses in Fiscal 1997 were $4,421,087, or 34% of net sales in
Fiscal 1997, as compared to selling expenses of $2,014,117, or 11% of net sales
in Fiscal 1996. This increase was due to a number of factors, primarily the
increase in the staffing level of salespeople from 3 in Fiscal 1996 to 16 in
late Fiscal 1997, as well as increases in customer service and related
infrastructure, and increased promotional costs. Management believes that many
of these salespeople, most of whom were hired towards the end of the fiscal
year, are just now beginning to contribute to revenues.
General and administrative expenses increased to $4,955,110, or
approximately 38% of net sales in Fiscal 1997, from $1,925,448, or approximately
10% of net sales in Fiscal 1996. The Company incurred approximately $861,000 in
additional general and administrative expenses associated with the Company's
West Coast and Mid West facilities which were discontinued at the end of the
first quarter of Fiscal 1998. The Company also expensed $230,000, representing a
contested deposit on equipment which was never delivered as well as $271,000 in
other investment advisory services and related expenses associated with the
purchase of the Series A Preferred Stock by the Company and a group of private
investors. The Company also incurred additional travel and professional fee
expenses associated with the acquisition of the West Coast and Mid West
facilities and increases in personnel costs associated with the increase in the
staff and start-up costs at 4CDs of approximately $250,000. The upgrade of the
Company's operating software increased costs by approximately $300,000.
In Fiscal 1997, the Company recorded an impairment loss on long-lived
assets of $2,261,611. As discussed above, $1,686,487 relates to certain assets
of the West and Midwest facilities (comprised of $940,000 in goodwill and
$746,000 in diskette duplication equipment). In addition, the Company wrote-off
$575,000 of 3.5 inch floppy disk replication equipment in its Millbury facility
as management does not expect to recover the carrying amount of such assets with
estimated future cash flows. Revenues from floppy disk replication have declined
sharply, from $18,000,000 in Fiscal 1996, to approximately $2,000,000 in Fiscal
1997 (most of which revenues were realized in the first quarter) and less than
$400,000 resulting in a loss in the first quarter of Fiscal 1998. The impairment
loss was recorded as an operating expense during Fiscal 1997.
16
As a result of these factors, the Company incurred a loss from
operations of $14,932,638 in Fiscal 1997, as contrasted to income from
operations of $753,447 in Fiscal 1996.
In Fiscal 1997, the Company incurred interest expense of $1,352,266, an
increase from $205,254 in Fiscal 1996. This increase was due to increases in the
Company's line of credit, long-term debt and equipment lease facilities in
Fiscal 1997. This increase was offset by interest income of $401,230 in Fiscal
1997, as compared to interest income of $54,419 in Fiscal 1996. Net other
expense in Fiscal 1997 was $66,224, as compared to other expense of $55,949 in
Fiscal 1996.
As a result of these factors, net loss for Fiscal 1997 was
$15,759,175, as compared to net income in Fiscal 1996 of $324,200. Due to the
exercise of the public warrants at the end of Fiscal 1996, and the sale of $10.5
million of 1,050 Series A Convertible Preferred Stock in May 1997, of which 995
shares were subsequently converted to 6,015,039 of shares of Common Stock during
Fiscal 1997, weighted average shares outstanding in Fiscal 1997 was 6,364,228
and 8,928,322 for primary and fully diluted net loss per share, respectively,
contrasted to 2,926,400 shares outstanding for both primary and fully diluted
net income per share for Fiscal 1996. At March 29, 1997, and March 30, 1996,
10,119,211 and 3,889,950 common shares were outstanding respectively. As a
result, net loss per share in Fiscal 1997 was $2.77 and $1.97 for primary and
fully diluted net loss per share, respectively, as compared to net income of
$.11 per share for both primary and fully diluted net income per share in Fiscal
1996. As disclosed in Note 18 of the consolidated financial statements, the
Company has restated the net loss per share data in its unaudited quarterly
financial statements included in its previously filed Form 10-QSB for the
quarterly periods ended June 29, 1996, September 28, 1996 and December 28, 1996.
LIQUIDITY AND CAPITAL RESOURCES
At March 29, 1997, the Company had total current assets of $6,293,158,
and total current liabilities of $21,904,628 including approximately 11.6
million of its long term debt and equiptment leases which have been reclassified
as current liabilites. Cash used in operating activities in Fiscal 1997 was
$10,445,659. Cash used in investing activities was $5,273,052, almost all of
which was for property and equipment expenditures, as compared to $4,961,493 in
Fiscal 1996, all of which was for expenditures for property and equipment. Net
cash provided by financing activities in Fiscal 1997 was $11,051,553, virtually
all of which was from the sale of Series A Convertible Preferred Stock in May
1996 and the receipt of certain subscription receivables from the exercise of
the public warrant redeemed at the very end of Fiscal 1996.
The Company has a $5,000,000 credit facility with a lending institution
consisting of a term loan, an equipment expenditure facility and a revolving
line of credit, all of which are secured by substantially all of the assets of
the Company. At March 29, 1997, the amounts due under the credit facility were
$1,484,000, with no further sums available to borrow against under the formula
for borrowing. At March 29, 1997, the Company also had other long-term debt of
$4,754,500, outstanding, used to fund equipment purchases and secured by such
equipment. At March 29, 1997, the Company
17
had capital lease obligations totaling $10,237,685, as compared to
capital lease obligations of $2,235,619 at the beginning of Fiscal 1997. This
increase was due to increased leasing activity in connection with the CD-ROM
facility. Due to the Company's constrained cash position, the Company is in
default of payment on virtually all of its loans and capital lease obligations
and has received notices of default from two lessors. The Company has been
successful in obtaining agreements with virtually all of these lenders and
equipment lessors to defer payments for a short term and is negotiating with the
few remaining lenders who have not entered into written extension agreements.
Approximately $11,661,000 of debt and capital lease obligation have been
reclassified from noncurrent to current liabilities as a result of the defaults.
If the Company is unable to renegotiate the terms of their borrowings and
capital lease obligations or to obtain additional financing, the Company might
be forced to seek protection under federal bankruptcy laws.
In May 1996, the Company received net proceeds of $9,352,982 from the
sale of the Series A Convertible Preferred Stock. The proceeds of this stock
sale were used to fund operating costs and for certain improvements to the
Company's manufacturing operations and for the purchase of equipment. Due in
part to lower than anticipated operating results in Fiscal 1997, each of the 995
shares of the Series A Preferred Stock, which was convertible at a price equal
to the original purchase price of $10,000.00 per share plus accrued dividends
divided by 85% of the fair market value of the Company's Common Stock at the
time of conversion, were converted into 6,015,039 shares of Common Stock.
In June 1997, the Company ceased operations at its West Coast
facilities. The Company also negotiated to sell the Mid West business to a
competitor. The sale was completed on July 5, 1997. Based on current
negotiations with landlords at both the West Coast and Mid West facilities, the
Company expects to be relieved of all long-term guarantees. However, if the
Company is unsuccessful in its negotiations with the landlords, management
estimates that the remaining lease obligations would be approximately
$1,978,000, in the aggregate, as of June 28, 1997, in accordance with the lease
agreements.
FORWARD LOOKING STATMENTS
The consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. The Company has an accumulated
deficit, a net working capital deficiency, has suffered a loss from operations,
and is in arrears in payment of a number of its loans and capital lease
obligations. Accordingly, the Company's independent accountants have expressed
in their report on the Company's consolidated financial statements substantial
doubt about the Company's ability to continue as a going concern. The Company
has been actively addressing this concern and has taken a number of steps to
reduce operating losses and raise capital. The Company believes it is now
approaching profitability and is pursuing the following actions to achieve
stability:
18
* Achieve break-even levels of revenues. Management intends to grow revenues
by continuing to focus on building its customer base for CD-ROM replication
services through its sales force of 16 people. In addition, revenues from
the Company's 4CD's electronic distribution services are now beginning to
be realized. In April 1997, the Company began its "Try Before You Buy"
(TBYB) program in which encrypted CD-ROMs are distributed in computer and
other trade magazines. Management expects revenues from the TBYB program to
increase 4CD's sales significantly in Fiscal 1998.
* Expand cost reduction program. Management has implemented a stringent cost
reduction program, which includes reductions in workforce (e.g.
non-essential employees in the print shop, packout and assembly areas) and
salary decreases for all key employees and further reductions in general
and administrative expenses. Management has also ceased operations in both
the West and Mid West facilities, which is expected to further help to
reduce losses.
* Renegotiate capital equipment loans and leases. Management is currently
renegotiating with its various lenders to work out acceptable arrangements
for the continuance of its loan and lease agreements.
* Plan to raise additional capital. The Company is seeking to obtain a new
credit facility which will allow it to restructure much of its debt and
several equipment leases. The Company is also seeking to raise additional
equity capital. The Company is currently negotiating with both lenders and
sources of equity financing.
* Work out extended payment plans with trade creditors. As the Company
achieves break-even operating levels, it expects to be able to resume
normal terms with its vendors and arrange an extended plan to pay down over
60 day payables.
19
Although the Company continues to receive support from its customers,
as evidenced by growing sales, and believes that these goals can be achieved,
there is no guarantee that this will happen. Should sales fall off or the
operating line of credit be suspended, or the capital equipment be repossessed,
the Company might be forced to seek protection under federal bankruptcy laws.
INFLATION
To date, inflation has not had a material impact on the Company's
results of operations or financial condition.
POTENTIAL QUARTERLY FLUCTUATIONS AND SEASONALITY OF BUSINESS
The Company has experienced variability in its net sales and net income
on a quarterly basis as a result of many factors, including the condition of the
CD-ROM and multimedia products industry in general, shifts in demand for
software and hardware products and industry announcements of new products or
upgrades. The Company's planned operating expenditures are based on sales
forecasts. If revenues do not meet expectations in any given quarter, operating
results may be materially adversely affected.
Management believes that demand for duplication services for consumer
products is seasonal, with increases in the fall reflecting increased demand
relative to the new school year and holiday gift purchases. To date, the Company
has derived only very limited sales from direct consumer sales. Management
believes that seasonality may intensify as activity increases at 4CD's.
Increased seasonality would likely be reflected in a slowdown in buying in the
summer months from consumers, schools and universities. This seasonality in
business could also result in significant quarterly variations in financial
results. The products featured in 4CD's are expected to be sold to users of
CD-ROM titles and multimedia products. Any decline in the sales of or decrease
in demand for CD-ROM titles and software products could have a material adverse
effect on the Company's operations and financial condition.
20
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following consolidated financial statements are filed as part of this
report:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants ...................................................... F-3
Consolidated Balance Sheets as of March 29, 1997 and March 30, 1996 ...................... F-4
Consolidated Statements of Income
for the years ended March 29, 1997 and March 30, 1996................................. F-5
Consolidated Statements of Stockholders' Equity
for the years ended March 29, 1997 and March 30, 1996.................................. F-6
Consolidated Statements of Cash Flows
for the years ended March 29, 1997 and March 30, 1996................................. F-7
Notes to Consolidated Financial Statements ............................................. F-8
</TABLE>
ITEM 8.
CHANGE IN REGISTRANT'S INDEPENDENT CERTIFYING ACCOUNTANTS
There were no "reportable events" as described in Item 304(a)(1)(iv)
of Regulation S-B with respect to the Company within the two most recent
fiscal years.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(A) OF THE EXCHANGE ACT.
The Company intends to file a Definitive Proxy Statement within 120
days of the completion of the Company's fiscal year ended March 29, 1997. The
information required by this item is incorporated by reference from the Proxy
Statement.
ITEM 10.EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference
from the Proxy Statement.
ITEM 11.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated by reference
from the Proxy Statement.
21
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference from
the Proxy Statement.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS.
(1) The following exhibits are filed herewith:
Exhibit
No. Title
--- -----
11 Computation of Per Share Earnings.
21 List of Subsidiaries.
(2) The following exhibit was filed as part of the Company's
Current Report on Form 8-K, filed with the Commission on June 30, 1995, and is
incorporated herein by reference:
Exhibit
No. Title
--- -----
(3) The following exhibits were filed as part of the
Company's Quarterly Report on Form 10-QSB for the Fiscal Quarter ended
September 30, 1995, filed with the Commission on November 14, 1995 and are
incorporated herein by reference:
10a Form of promissory note issued to Phoenixcor, Inc.
10b Form of Security Agreement be and between the Company and
Phoenixcor, Inc.
10c Form of Loan and Security Agreement by and between the
Company and Phoenixcor, Inc.
(4) The following exhibits were filed as part of the
Company's Registration Statement on Form SB-2 (No. 33-87038-NY), declared
effective by the Commission on April 20, 1995 and are incorporated herein by
reference:
22
<TABLE>
<CAPTION>
Exhibit
No. Title
--- -----
<S> <C>
1a Form of Agreement Among Underwriters.
1b Form of Underwriting Agreement.
1c Form of Selected Dealers Agreement.
3a Certificate of Incorporation, as amended.
3b Bylaws, as amended.
4a Sections of Bylaws and Certificate of Incorporation defining the rights of
security-holders (contained in Exhibits 3a and 3b).
4b Specimen Common Stock Certificate.
4c Revised Form of Representative's Warrant Agreement.
4d Form of Advisor Stock Option Grant Letter.
4e Revised Form of Lock-Up Letter.
4f Specimen Warrant Certificate (Form attached as Exhibit A to Warrant
Agreement -- Exhibit 4g filed herewith)
4g Revised Form of Warrant Agreement between the Company and the Warrant
Agent.
10a Revised Form of Employment Agreement to be entered into by Paul F. Johnson,
Robert E. Lee and Richard A. Pilotte.
10b Forms of Promissory Notes issued pursuant to the Company's Bridge and Other Financing.
10c Form of International Distribution Agreement between 4CD's Corporation and
its International Distributors.
10d Lease Agreement between the Company and AAA Mass Turnpike
Warehouse Corporation, dated April 1, 1994.
10e Settlement and Stock Redemption Agreement between River Capital Corporation and
the Company.
10f Promissory Note issued by the Company to River Capital Corporation.
23
Exhibit
No. Title
--- -----
10g Escrow Agreement among River Capital Corporation, the Company and The Business Bank.
10h Pledge and Security Agreement between the Company and River Capital Corporation.
10i Loan and Security Agreement between the Company and Shawmut Bank, N.A.,
dated October 5, 1994.
10j Guarantees of Messrs. Johnson, Lee, Pilotte and Anand to Shawmut Bank, N.A.,
dated October 5, 1994.
10k Revised Form of 1994 Stock Option Plan.
10l Form of 1994 Director Formula Stock Option Plan.
10m Consulting Agreement between the Company and the Schneider Securities, Inc.
10n Form of Shareholders' Exchange Agreements among the Company and all
Shareholders of Omni Resources Corporation and 4CD's Corporation.
10o Promissory Notes issued to the Company by Messrs. Johnson, Lee, Pilotte and Anand.
10p Form of Agreement by and between the Company and Citizens Savings Bank.
10q Promissory Notes issued to Messrs. Johnson, Pilotte and Anand by Omni Resources Corporation.
10r Secured promissory note issued to Coast Business Credit in connection with Equipment Loan.
10s Secured promissory note issued to Coast Business Credit in connection with Capex Loan.
10t Loan and Security Agreement by and between the Company and Coast Business Credit.
16 Letter from Ernest C. Ricci, Jr., C.P.A. regarding change in certifying accountant.
21 Revised List of Subsidiaries.
24
Exhibit
No. Title
--- -----
99a Consent of Richard Wise, Nominee Director.
99b Consent of Bernard Bruso, Nominee Director.
(5) The following exhibits were filed as exhibits to Form 8-K
as filed with the Commission on October 18, 1996:
Exhibit
No. Title
--- -----
10(u) Form of Asset Purchase Agreement, dated as of August 1, 1996, by and among
Allenbach Industries, Inc., A.I. Acquisition Corporation, Kathleen Allenbach and
Phillip H. Kessler.
10(v) Form of Employment Agreement, dated as of October 1, 1996, between
the Company and Phillip H. Kessler.
10(w) Form of Registration Rights Agreement, dated as of October 1,
1996, between the Company and Kathleen Allenbach.
(5) The following exhibit was filed as an exhibit to Form
10-Q as filed with the Commission on November 18, 1996:
Exhibit
No. Title
--- -----
10 (x) Employment Agreements between Paul F. Johnson, Robert E. Lee,
Richard A. Pilotte, and the Company.
(6) The following exhibit was filed as an exhibit to Form 8-K
with the Commission on March 21, 1997:
Exhibit
No. Title
--- -----
10 (y) Form of Agreement and Plan of Merger, dated as of February
28, 1997, by and among OMNI MultiMedia Group, Inc., CSTM
Acquisition Corporation and Custom Software Turnkey
Manufacturing, Inc.
</TABLE>
25
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, as amended, the registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
OMNI MULTIMEDIA GROUP, INC.
Date: July 28, 1997 By:/s/ Paul F. Johnson
----------------------------------
Paul F. Johnson
Chief Executive Officer and President
In accordance with the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Name Capacity Date
---- -------- ----
<S> <C> <C>
/s/ Paul F. Johnson President, Chief Executive Officer, July 28, 1997
----------------------------
Paul F. Johnson Chairman of the Board of
Directors and Secretary
(Principal Executive Officer)
/s/ Robert E. Lee Executive Vice President, Chief July 28, 1997
-----------------------------
Robert E. Lee Financial Officer, Director
and Treasurer
(Principal Financial and
Principal Accounting Officer)
/s/ Richard A. Pilotte Vice President of Operations and July 28, 1997
----------------------------
Richard A. Pilotte Director
/s/ Ronald F. Ladner Director July 28, 1997
---------------------------
Ronald F. Ladner
</TABLE>
26
OMNI MULTIMEDIA GROUP, INC. AND SUBSIDIARIES
Consolidated Financial Statements
March 29, 1997 and March 30, 1996
(with Independent Accountants' Report Thereon)
F-1
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants F-3
Consolidated Balance Sheets as of March 29, 1997 and March 30, 1996 F-4
Consolidated Statements of Income
for the years ended March 29, 1997 and March 30, 1996 F-5
Consolidated Statements of Stockholders' Equity
for the years ended March 29, 1997 and March 30, 1996 F-6
Consolidated Statements of Cash Flows
for the years ended March 29, 1997 and March 30, 1996 F-7
Notes to Consolidated Financial Statements F-8
F-2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
OMNI MultiMedia Group, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of OMNI
MultiMedia Group, Inc. and its subsidiaries at March 29, 1997 and March 30,
1996, and the results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has an accumulated deficit and a
net working capital deficiency, has suffered a loss from operations, and is in
default of payment on substantially all of its loans and capital lease
obligations that raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
PRICE WATERHOUSE LLP
Boston, Massachusetts
July 18, 1997
F-3
OMNI MultiMedia Group, Inc.
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARCH 29, 1997 MARCH 30, 1996
ASSETS
<S> <C> <C>
Current assets:
Cash and Cash Equivalents $ 1,039,664 $ 5,706,822
Accounts receivable, net of allowance for doubtful accounts of
$550,000 at March 29, 1997 and $25,000 at March 30, 1996 3,232,047 1,306,212
Stock subscriptions receivable - 1,790,374
Inventories 1,310,970 966,665
Prepaid expenses and other current assets 710,477 812,103
Deferred tax assets, net - 101,844
--------------- ---------------
Total current assets 6,293,158 10,684,020
Property and equipment, net 20,102,698 8,427,275
Notes receivable from stockholders 482,807 532,761
Other assets 1,376,395 954,230
--------------- ---------------
$ 28,255,058 $ 20,598,286
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES:
Line of credit $ 1,797,321 $ 1,068,967
Current portion of long-term debt and capital lease obligations 14,797,900 1,025,600
Accounts payable 3,697,552 1,775,225
Accrued expenses 1,611,855 332,561
Income taxes payable - 190,063
--------------- ---------------
Total current liabilities 21,904,628 4,392,416
--------------- ---------------
Other long-term debt 497,901 2,207,479
--------------- ---------------
Capital lease obligations 267,685 1,760,919
--------------- ---------------
Deferred income taxes - 141,761
--------------- ---------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 1,000,000 shares authorized;
1,050 shares of Series A issued and 6 shares outstanding
at March 29, 1997 - -
Common stock, $.01 par value; 14,000,000 shares authorized;
10,119,211 shares issued and outstanding at March 29,
1997 and 3,889,950 shares issued and outstanding at
March 30, 1996 101,191 38,899
Additional paid in capital 20,821,691 11,635,675
Retained earnings (accumulated deficit) (15,338,038) 421,137
---------------- ---------------
5,584,844 12,095,711
--------------- ---------------
Commitments (Notes 8 and 14) - -
--------------- ---------------
$ 28,255,058 $ 20,598,286
=============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
OMNI MultiMedia Group, Inc.
Consolidated Statements of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 29, MARCH 30,
1997 1996
----------- ---------
<S> <C> <C>
Net sales $ 12,873,854 $ 18,929,165
Cost of goods sold 16,168,684 14,236,153
---------------- -----------------
Gross profit (loss) (3,294,830) 4,693,012
----------------- -----------------
Expenses:
Selling 4,421,087 2,014,117
General and administrative 4,955,110 1,925,448
Impairment loss on long-lived assets 2,261,611 -
---------------- -----------------
11,637,808 3,939,565
---------------- -----------------
Income (loss) from operations (14,932,638) 753,447
Interest expense (1,352,266) (205,254)
Interest income 401,230 54,419
Other expense, net (66,224) (55,949)
----------------- ------------------
(1,017,260) (206,784)
----------------- ------------------
Income (loss) before income taxes (15,949,898) 546,663
Income tax provision (benefit) (190,723) 222,463
----------------- -----------------
Net income (loss) $ (15,759,175) $ 324,200
================= =================
Calculation of net income (loss) per common share
and equivalents
Net income (loss) $ (15,759,175) $ 324,200
Preferred stock preferences (Notes 2 and 10) (1,853,000) -
----------------- -----------------
Net income (loss) available to common shareholders $ (17,612,175) $ 324,200
Net income (loss) per common share and equivalents
Primary $ (2.77) $ 0.11
Fully diluted $ (1.97) $ 0.11
----------------- -----------------
Weighted average common shares and
equivalents outstanding
Primary 6,364,228 2,926,400
Fully diluted 8,928,322 2,926,400
----------------- -----------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
OMNI MultiMedia Group, Inc.
Consolidated Statements of Stockholders' Equity
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL RETAINED
PAID IN EARNINGS
CAPITAL (ACCUMULATED DEFICIT)
- ------------------------------------ ----------- ----------- -------------- ----------- --------------- -------------- -
SHARES SHARES
<S> <C> <C> <C> <C> <C> <C>
Balance at April 1, 1995 1,613,000 $16,302 $345,890 $96,937
Issuance of common stock
stock in Initial Public
Offering, net of
expenses of$1,724,856 and
elimination of treasury stock 1,138,500 11,213 4,064,783
Issuance of shares of common
stock upon exercise of
warrants, net
of expenses of $ 310,557 1,138,450 11,384 7,225,002
Net Income for the year ended 324,200
March 30, 1996
--------- -------- ---------- -------- ----------- ------------
Balance at March 30, 1996 -- -- 3,889,950 38,899 11,635,675 421,137
Issuance of Series A Preferred
Stock, net of expenses of $1,147,028 1,050 $11 9,352,972
Redemption of Series A Preferred
Stock (55) -- (686,971)
Issuance of common stock warrants 200,000
Issuance of shares of common stock -- -- 40,100 401 77,246
Conversion of Series A Preferred (995) (11) 6,015,039 60,150 (60,140)
Stock to common stock
Issuance of shares of common stock 100,000 1,000 130,250
upon acquisition of Custom
Software Turnkey Manufacturing, Inc.
Issuance of shares of common stock 74,122 741 172,659
upon acquisition of Allenbach
Industries, Inc.
Net loss for the year ended (15,759,175)
March 29, 1997 --------- -------- ---------- -------- ----------- ------------
Balance at March 29, 1997 -- $ -- 10,119,211 $101,191 $20,821,691 (15,338,038)
========= ======== ========== ======== =========== ============
TREASURY STOCK TOTAL
----------- ----------- -----------
SHARES
Balance at April 1, 1995 17,241 $(5,500) $453,629
Issuance of common stock
stock in Initial Public
Offering, net of
expenses of$1,724,856 and
elimination of treasury stock (17,241) 5,500 4,081,496
Issuance of shares of common
stock upon exercise of
warrants, net
of expenses of $ 310,557 7,236,386
Net Income for the year ended 324,200
March 30, 1996
---------- ---------- ------------
Balance at March 30, 1996 -- -- 12,095,711
Issuance of Series A Preferred
Stock, net of expenses of $1,147,028 9,352,982
Redemption of Series A Preferred
Stock (686,971)
Issuance of common stock warrants 200,000
Issuance of shares of common stock 77,647
Conversion of Series A Preferred
Stock to common stock --
Issuance of shares of common stock 131,250
upon acquisition of Custom
Software Turnkey Manufacturing, Inc
Issuance of shares of common stock 173,400
upon acquisition of Allenbach
Industries, Inc.
Net loss for the year ended
March 29, 1997 (15,759,175)
---------- ---------- ------------
Balance at March 29, 1997 -- $ -- $5,584,844
========== ========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
OMNI MultiMedia Group, Inc.
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 29, MARCH 30,
1997 1996
----------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (15,759,175) $ 324,200
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization 2,702,120 533,596
Compensation from issuance of common stock and
common stock warrants 270,920 -
Impairment loss on long-lived assets 2,261,611 -
Write off of deferred financing costs - 91,777
Provision for losses on accounts receivable 624,306 46,511
Provision for inventory obsolescence 275,000 -
Gain (loss) on disposal of fixed assets (3,090) 26,265
Increase in accounts receivable (809,677) (152,162)
Increase in inventories (224,140) (499,279)
(Increase) decrease in prepaid expenses and other
current assets 218,248 (401,611)
Increase (decrease) in deferred income taxes (39,917) 35,560
Increase in other assets (500,492) (736,732)
Increase in accounts payable 631,560 732,267
Increase in accrued expenses 97,130 144,555
Increase (decrease) in income taxes payable (190,063) 105,602
---------------- ---------------
Net cash provided (used) by operating activities (10,445,659) 250,549
---------------- ---------------
Cash flows from investing activities:
Expenditures for property and equipment (5,296,153) (4,961,493)
Proceeds from sale of fixed assets 20,600 -
Purchase of Allenbach Industries, Inc., net of cash acquired 125,971 -
Purchase of Customer Software Turnkey Manufacturing, Inc.,
net of cash acquired (123,470) -
---------------- ---------------
Net cash used by investing activities (5,273,052) (4,961,493)
---------------- ---------------
Cash flows from financing activities:
Repayments on long-term borrowings and capital lease
obligations (2,130,460) (861,157)
Repayments on notes payable - redeemable
Common Stock - (346,000)
Repayment on notes payable - redeemable
Preferred Stock - (307,000)
Repayment on Interim Financing - (325,000)
Proceeds from long-term borrowings 3,380,420 2,791,868
Repayments on revolving line of credit, net (701,608) (107,577)
Repayments on loans from stockholders - (39,737)
(Increase) decrease in subscription receivable 1,790,374 (1,790,374)
Proceeds from issuance of Series A Preferred Stock 9,352,982 -
Proceeds from issuance of Common Stock 5,112 11,317,882
(Increase) decrease in due from related parties 49,954 (43,342)
Increase in debt issue costs (8,250) (138,471)
Purchase of treasury stock (686,971) -
---------------- ---------------
Net cash provided (used) by financing activities 11,051,553 10,151,092
---------------- ---------------
Increase (decrease) in cash and cash equivalents (4,667,158) 5,440,148
Cash and cash equivalents, beginning of period 5,706,822 266,674
--------------- ---------------
Cash and cash equivalents, end of period $ 1,039,664 $ 5,706,822
=============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
OMNI MULTIMEDIA GROUP, INC.
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND ORGANIZATION
OMNI MultiMedia Group, Inc. (the "Company") was incorporated as a
Delaware corporation on November 29, 1994. Upon completion of the
Company's initial public offering on April 20, 1995 (Note 11), all of
the stockholders of Omni Resources Corporation and 4CD's Corporation
exchanged each of their shares of Common Stock, no par value, for
6.7979521 shares and 640 shares, respectively, of the Company's Common
Stock. The stockholders of Omni Resources and 4CD's Corporation are
virtually identical, accordingly, the combination of the companies has
been accounted for as a transfer or exchange at historical cost,
similar to a pooling of interests. All common share and per share
amounts included in the accompanying consolidated financial statements
have been adjusted to give retroactive effect to these transactions.
Omni Resources Corporation was incorporated in 1981 in the Commonwealth
of Massachusetts. Allenbach Industries, Inc. and Custom Software
Turnkey Manufacturing, Inc. were acquired and became Omni Resources
Corporation - West in fiscal 1997 (Note 15). Omni Resources Corporation
together with its wholly owned subsidiary, Campbell Products
Corporation, and Omni Resources Corporation - West, provide a full
range of services to the software industry including CD-ROM
replication, disk duplication, packaging design, printing and shipping
fulfillment services.
4CD's Corporation was incorporated in 1993 in the Commonwealth of
Massachusetts. 4CD's Corporation distributes multimedia software and
hardware products through direct catalog sales.
The accompanying financial statements have been prepared on a basis
which contemplates the realization of assets and the satisfaction of
liabilities and commitments in the normal course of business. The
Company has an accumulated deficit and a net working capital
deficiency, has suffered a loss from operations, and is in defaults of
payment on substantially all of its loans and capital lease
obligations. Accordingly, the Company's independent accountants have
expressed in their report on the Company's consolidated financial
statements substantial doubt about the Company's ability to continue as
a going concern. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
During the year ended March 29, 1997 ("fiscal 1997"), the Company's net
sales and operating results decreased significantly due to the faster
than expected decline in demand for software duplication services for 3
1/2 diskettes. This decline was combined with the high fixed costs
inherent in a CD-ROM facility as well as high costs associated with the
acceleration of the completion of the CD-ROM facility which did not
become fully operational until the end of the second fiscal quarter. In
addition, lower than anticipated sales performance from the West Coast
and Mid West facilities acquired during the second half of fiscal 1997
added to the operating losses during fiscal 1997. As a result of the
failure to achieve expected break-even operating results during the
first quarter of the year ending March 28, 1998 ("fiscal 1998")
combined with the cash shortages at the Company, management decided to
close down the West Coast facility and wind down the operations of the
Midwest facility in the first quarter of fiscal 1998. The decision to
exit these facilities has resulted in an asset impairment charge of
$1,686,487, which was recorded in the fourth quarter of fiscal 1997.
Primarily as a result of these factors, the Company generated a loss
totaling $15,759,175 for the year ended March 29, 1997. In addition,
the Company has a net working capital deficiency of $15,611,470 and an
accumulated deficit of $15,338,038 at March 29, 1997.
The future viability of the Company is dependent on its ability to
obtain necessary additional financing and to generate cash from
operations primarily from sales of its new CD-ROM replication services.
It is uncertain whether the Company can successfully manufacture and
market its CD-ROM replication services or if the Company is successful,
that the Company will generate revenues or be profitable from its
CD-ROM replication services, thereby recovering expenditures made on
related equipment and leasehold improvements. In addition, the Company
is in default under the payment terms of various secured loan and lease
agreements. If management is not able to negotiate the restructuring of
the payment terms of these agreements or cure the default, the secured
parties have the right to proceed with lien procedures. Management
believes the Company has the ability to generate cash flows from
operations and to reduce operating costs, and is in the process of
attempting to obtain additional financing to ensure the future
viability of the Company. Management is currently pursuing the
following action items to achieve stability:
* Achieve break-even levels of revenues. Management intends to
grow revenues by continuing to focus on building its customer
base for CD-ROM replication services through its sales force of
16 people. In addition, revenues from the Company's 4CD's
electronic distribution services are now beginning to be
realized. In April 1997, the Company began its "Try Before You
Buy" (TBYB) program in which encrypted CD-ROMs are distributed
in computer and other trade magazines.
* Expand cost reduction program. Management has implemented a
stringent cost reduction program, which includes reductions in
workforce (e.g. non-essential employees in the print shop,
packout and assembly areas) and salary decreases for all key
employees and further reductions in general and administrative
expenses. Management has also ceased operations in both the West
and Mid West facilities, which is expected to further help to
reduce losses.
* Renegotiate capital equipment loans and leases. Management is
currently renegotiating with their various lenders to work out
acceptable arrangements for the continuance of its loan and
lease agreements.
* Plan to raise additional capital. The Company is seeking to
obtain a new credit facility which will allow it to restructure
much of its debt and several equipment leases. The Company is
also seeking to raise additional equity capital. The Company is
currently negotiating with both lenders and sources of equity
financing.
* Work out extended payment plans with trade creditors. As the
Company achieves break-even operating levels, it hopes to be
able to resume normal terms with its vendors and arrange an
extended plan to pay down over 60 day payables.
F-8
OMNI MULTIMEDIA GROUP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements for fiscal 1997 and 1996 include
the Company and its wholly owned subsidiaries, Omni Resources
Corporation, Campbell Products Corporation, 4CD's Corporation and OMNI
Resources Corporation-West. All significant intercompany transactions
and balances have been eliminated.
FISCAL YEAR
The Company's fiscal year ends the Saturday closest to March 31.
CASH AND CASH EQUIVALENTS
The company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. Cash and cash
equivalents include funds on deposit in a money market account.
ACCOUNTS RECEIVABLE AND CONCENTRATION OF CREDIT RISK
Financial instruments which expose the Company to concentrations of
credit risk consist of accounts receivable. The Company performs
ongoing credit evaluations of customers' financial condition and
establishes credit limits on customers' accounts. The Company generally
does not require collateral. The Company maintains reserves for
potential credit losses, and such losses, in the aggregate, have not
exceeded management's expectations.
FINANCIAL INSTRUMENTS
The carrying amount of the Company's financial instruments, which
include cash, cash equivalents, accounts receivable, accounts payable,
revolving credit facility, notes payable, long-term debt and capital
lease obligations approximate their fair value at the balance sheet
date.
INVENTORIES
Inventories are stated at the lower of cost or market with cost being
determined by the first-in, first-out method.
LONG-LIVED ASSETS
Property and equipment is stated at cost. Depreciation of fixed assets
is provided using the straight-line method over the estimated useful
life of the related asset ranging from 5 to 10 years. Leasehold
improvements are amortized over the shorter of the estimated useful
life of the related asset or the term of the lease. Equipment held
under capital lease is stated at the lower of the fair market value of
the equipment or the present value of the minimum lease payments at the
inception of the lease and is amortized on the straight line basis over
the shorter of the life of the related asset or the term of the lease.
Expenditures for maintenance, repairs and renewals of minor items are
generally charged to expense as incurred.
Goodwill is the excess of the cost of net assets acquired in business
combinations over their fair value. The amortization period is
established on the date of each acquisition, which was 5 years in
fiscal 1997, amortized on a straight-line basis.
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" in fiscal 1997. For long-lived
assets as to which actual operating cash results or forecasted cash
flows indicate that the recoverability of the carrying amount of such
assets may be impaired, the Company compares estimated expected future
cash flows (undiscounted and without interest charges) identified with
each group of long-lived assets, as appropriate, to the carrying amount
of such group of assets. If the expected cash flows are less than the
carrying amount of the assets, an impairment charge is taken at that
time equal to the difference between the carrying amount and the fair
value of such assets.
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Advertising costs which have been incurred for other than direct
response advertising are deferred and expensed at the time the
advertising first takes place. At March 30, 1996, $103,224 of deferred
advertising costs were included in prepaid expenses and other current
assets in the accompanying consolidated balance sheet and expensed
during the year ended March 29, 1997. At March 29, 1997, there were no
deferred advertising costs. In addition, at March 30, 1996, $450,000
was included in prepaid assets and other current assets, which
represents a deposit on a fixed asset acquisition.
F-9
OMNI MULTIMEDIA GROUP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
PREOPERATING COSTS
Preoperating costs relating to preparing a new production facility for
its intended use are deferred and amortized on a straight line basis
over five years. At March 29, 1997 and March 30, 1996, $396,984 and
$417,839, respectively, of deferred preoperating costs, net of
amortization, are included in other assets in the accompanying
consolidated balance sheet.
REVENUE RECOGNITION
Product revenue is recognized upon shipment of goods. Service revenue
is recognized when services have been provided.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income
Taxes". SFAS No. 109 is an asset and liability approach that requires
the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the
company's financial statements or tax returns. Deferred tax expense
(benefit), represents the change in the net deferred tax asset or
liability balance. In estimating future tax consequences, SFAS No. 109
generally considers all expected future events other than enactments of
changes in the tax law or rates.
NET INCOME (LOSS) PER SHARE
Primary net income (loss) per share is determined by dividing net
income (loss), after deducting certain amounts associated with the
Company's preferred stock, by the weighted average number of common
shares and dilutive common share equivalents outstanding during the
year. Fully diluted earnings per share is calculated the same as
primary net income (loss) per share except that all conversions of
preferred stock are considered to be converted as of the date of
issuance whether or not the effect is anti-dilutive. Any discounts
implicit in the conversion terms upon issuance of preferred stock (Note
10) are deducted from (added to) net income (loss) to determine the
amount of net income (loss) available for common stockholders.
Common share equivalents consist of common stock which may be issuable
upon exercise of outstanding stock options and warrants and the
conversion of preferred stock (Notes 10 and 12). In fiscal 1997, the
assumed exercise of stock options and warrants is anti-dilutive and
accordingly has not been reflected in primary and fully diluted net
income (loss) per share. The assumed conversion of preferred stock is
anti-dilutive, and accordingly, has not been reflected in primary net
income (loss) per share.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to its employees using the
intrinsic value method as prescribed by Accounting Principles board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations and has adopted the provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," through disclosure only.
F-10
OMNI MULTIMEDIA GROUP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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.
RECENTLY ENACTED ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB")
issued statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share." In June 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The Company will
implement SFAS No. 128 as required in its next fiscal year and, at this
time, the future adoption is not expected to have a material effect on
earnings per share. The Company will implement SFAS No. 130 and No. 131
as required in fiscal 1999 which require the Company to report and
display certain information related to comprehensive income and
operating segments.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 29, MARCH 30,
1997 1996
---- ----
<S> <C> <C>
Raw materials $ 1,053,241 $ 932,341
Work-in-process 155,899 20,164
Finished goods 101,830 14,160
------------------ ---------------
$ 1,310,970 $ 966,665
------------------ ---------------
In the fourth quarter of Fiscal 1997, the Company reduced the value of
certain inventory held by the West Coast and Mid West operations by
$275,000 to its salvage value, which management estimates to be the net
realizable value.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
MARCH 29, MARCH 30,
1997 1996
---- ----
Machinery, vehicles, furniture and office equipment $ 21,191,993 $ 7,650,924
Leasehold improvements 3,569,069 2,967,017
------------------ ---------------
24,761,062 10,617,941
Less: accumulated depreciation 4,658,364 2,190,666
------------------ ---------------
$ 20,102,698 $ 8,427,275
------------------ ---------------
Included in property and equipment are the following amounts acquired
under capital leases:
MARCH 29, MARCH 30,
1997 1996
---- ----
Machinery, furniture and office equipment $ 11,404,717 $ 3,231,285
Less: Accumulated amortization 1,739,524 630,415
------------------ ---------------
$ 9,665,193 $ 2,600,870
------------------ ---------------
</TABLE>
F-11
OMNI MULTIMEDIA GROUP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Depreciation and amortization expense for the years ended March 29,
1997 and March 30, 1996 totaled $2,702,120 and $533,596, respectively,
including $1,109,109 and $219,571, respectively, related to capital
leases. Capital lease obligations of $8,173,432 were incurred when the
Company entered into leases for new equipment during 1997.
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
MARCH 29, MARCH 30,
1997 1996
---- ----
<S> <C> <C>
Accrued employee compensation and benefits $ 535,502 $ 275,423
Accrued interest 153,289 46,648
Accrued purchase consideration (Note 15) 468,750 -
Other accrued expenses 454,314 10,490
------------------ ---------------
$ 1,611,855 $ 332,561
------------------ ---------------
</TABLE>
6. CREDIT FACILITY AND LINE OF CREDIT
In November 1995, the Company entered into a $5,000,000 credit facility
("Credit Facility") with a lending institution. The agreement consists
of a term loan, an equipment expenditure facility and a revolving line
of credit. The term loan agreement allows for maximum borrowings of
$610,000. Borrowings under the term loan agreement bear interest at the
prime rate plus 2.25% (10.75% and 10.5% at March 29, 1997 and March 30,
1996, respectively). The capital expenditures facility provides up to
$1,000,000 to finance 80% of the purchase price of new equipment and is
payable in monthly installments of $25,000, plus interest at the prime
rate plus 2.25% (10.75% at March 29, 1997).
The revolving line of credit is for the remaining balance of the
$5,000,000 facility which is not used for the term loan and capital
expenditure facility. The revolving line of credit agreement requires
monthly payments of interest on the outstanding balance with the
outstanding balance due at maturity, November 16, 1998. Borrowings
under the revolving line of credit agreement bear interest at the prime
rate plus 2.0% (10.5% at March 29, 1997). The terms of the Credit
Facility agreement restrict certain transactions, including the
declaration of cash dividends by the Company. Borrowings under the
Credit Facility are secured by substantially all of the Company's
assets.
In addition, Omni Resources Corporation - West has a $2,500,000
revolving line of credit. Borrowings under this revolving line of
credit agreement bear interest at the prime rate plus 4.0% (12.5% at
March 29, 1997).
At April 1, 1995, the Company borrowed $1,176,544 under a revolving
line of credit agreement ("Line of Credit") with a lending institution.
The Line of Credit allowed for a maximum borrowings of $1,500,000,
subject to adjustment, and required monthly payments of interest on the
outstanding balance with the outstanding balance due at maturity, June
1, 1996. During the year ended March 30, 1996 borrowings under the Line
of Credit were repaid with the net proceeds of the Credit Facility.
F-12
OMNI MULTIMEDIA GROUP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
7. LONG-TERM DEBT
Long-term debt under the original terms of each agreement consists of:
<TABLE>
<CAPTION>
MARCH 29, MARCH 30,
1997 1996
---- ----
<S> <C> <C>
Term note payable to a finance company in monthly installments of $40,755,
including interest at 12.35% to June 2001, secured by
certain equipment $ 1,634,768 $ 1,637,730
Payable to Vendor - 175,000
Note payable to bank in monthly installments of $10,921 plus interest at
prime plus 2.25% (10.75% at March 29, 1997) to October
2002 371,300 491,426
Notes payable to banks in monthly installments aggregating $3,106,
including interest, to December 1999, net rates ranging from 8% to
11%, secured by automobiles 74,829 57,802
Note payable to finance company in monthly installments aggregating $7,400
and escalating to $11,992, including interest at 13.0%, to
September 2002 360,363 396,421
Note payable to a finance company in monthly installments
aggregating $34,237, including interest, to July 2001, net rates
ranging from 10.2% to 10.8%, secured by equipment 1,568,782 -
Note payable to a finance company in monthly installment of $ 42,773,
including interest at 12.5%, to October 1999, secured by
equipment 1,052,430 -
Note payable to vendor in monthly installments of $1,474 including
interest at 14% to February 2002, secured by equipment 63,329 -
Note payable to bank in monthly installments of $25,000 plus interest
payable monthly at prime plus 2.25% (10.75% at March 29,
1997) 200,000 -
------------------ -----------------
5,325,801 2,758,379
Less current portion 4,827,900 550,900
$ 497,901 $ 2,207,479
---------------- ----------------
</TABLE>
During the year ended March 30, 1996, the Company entered into a
financing agreement with a finance company which permits the company to
borrow up to $1,812,730 for the purpose of financing the acquisition
and reimbursing the purchase of certain equipment. At March 30, 1996,
$175,000 of the related equipment had been purchased, and the Company
financed this amount under the financing agreement during the year
ended March 29, 1997.
F-13
OMNI MULTIMEDIA GROUP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
In connection with the issuance of certain debt the Company has a
balance of capitalized net costs of $308,563 and $207,620 at March 29,
1997 and March 30, 1996, respectively. Amortization is provided using
the interest method over the term of the related borrowings. Upon
repayment of one term note payable and Line of Credit, during the year
ended March 30, 1996, the related capitalized costs were written off.
Maturities of long-term debt, excluding capital lease obligations (Note
8), for years subsequent to March 29, 1997 are as follows:
1998 $ 4,827,900
1999 236,300
2000 243,600
2001 17,000
2002 1,001
-----------
$ 5,325,801
===========
The Company is in default under the payment terms of several loan
agreements, consequently $3,579,000 of debt payments (excluding capital
lease obligations, Note 8) have been reclassified as currently payable
at March 29, 1997. Management is currently negotiating to restructure
the payment terms of these loan agreements.
Interest paid for current and long-term debt in the aggregate was
$1,342,025 and $351,133 during the years ended March 29, 1997 and March
30, 1996, respectively. During the years ended March 29, 1997 and March
30, 1996, the Company incurred interest cost in the amount of
$1,448,666 and $357,418, respectively, of which $96,400 and $148,702
had been capitalized primarily to fixed assets at March 29, 1997 and
March 30, 1996, respectively.
8. LEASES
The Company leases its operating facility in Millbury, Massachusetts,
Bloomington, Minnesota and San Jose, California and various machinery
and equipment. The facility leases, which expires in 2001, are
classified as operating leases. The equipment leases, which are for
three to five year periods expiring at various dates through 2006 , are
classified as operating or capital leases, as appropriate. The facility
lease and the equipment leases require the Company to pay all
maintenance, insurance and property tax costs.
The facility lease in Millbury, Massachusetts provides the Company the
option to purchase the facility for $6,000,000 ("Purchase Option"),
which approximated fair value at the inception of the lease, at any
time during the term of the lease. The Purchase Option price is $10,000
per month which is applied to the purchase price. At March 29, 1997,
$360,000 had been paid under the Purchase Option which is classified as
other assets in the accompanying consolidated balance sheet (Note 12).
Future minimum payments under the original terms of the capital leases
and noncancelable operating leases with terms of one year or more,
consist of the following at March 30, 1997:
F-14
OMNI MULTIMEDIA GROUP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING LEASES LEASES
<S> <C> <C>
1998 $ 2,895,430 $ 1,664,200
1999 2,706,966 1,661,100
2000 2,705,504 1,461,000
2001 2,406,845 326,300
2002 1,565,547 -
Thereafter 955,167 -
--------------- ---------------
Total minimum lease payments 13,235,459 $ 5,112,600
===============
Less: Amount representing interest 2,997,774
---------------
Present value of net minimum lease payments
(including $9,970,000 classified as current) $ 10,237,685
===============
</TABLE>
The Company is in default under the payment terms of the majority of its
lease agreements, consequently $8,082,000 of lease payments have been
reclassified as currently payable at March 29,1997. Management is currently
negotiating to restructure the payment terms of these lease agreements.
Rent expense for the years ended March 29, 1997 and March 30, 1996 totalled
$1,173,884 and $438,360, respectively.
9. INCOME TAXES
The provision (benefit) for income taxes consists of the following for the
years ended:
<TABLE>
<CAPTION>
MARCH 29, MARCH 30,
1997 1996
---- ----
<S> <C> <C>
Current
Federal $ (197,768) $ 152,581
State 46,962 34,323
------------- -------------
(150,806) 186,904
Deferred
Federal (41,185) 41,413
State 1,268 (5,854)
------------- --------------
(39,917) 35,559
-------------- -------------
$ (190,723) $ 222,463
-------------- -------------
</TABLE>
The provision (benefit) for income taxes differs from an amount
computed by applying the statutory income tax rate to pretax income, as
follows, for the year ended:
<TABLE>
<CAPTION>
MARCH 29, MARCH 30,
1997 1996
---- ----
<S> <C> <C>
Tax provision (credit) at federal statutory rate (5,358,120) $ 185,865
State tax expense, net of federal benefit (1,270,741) 23,488
Change in Valuation Allowance 6,352,524 -
Other 85,614 13,110
------------- -------------
$ (190,723) $ 222,463
-------------- -------------
</TABLE>
F-15
OMNI MULTIMEDIA GROUP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Significant components of the Company's deferred tax assets and liabilities
at March 29, 1997 and March 30, 1996 are as follows:
<TABLE>
<CAPTION>
MARCH 29, MARCH 30,
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss $ 5,237,889 $ 23,944
Depreciation and amortization 219,801 0
Investment tax credits 300,817 7,740
Compensation related reserves 98,920 47,550
Accounts receivable and inventory reserves 521,097 48,610
Valuation allowance (6,378,524) (26,000)
-------------- --------------
Total deferred tax assets, net - 101,844
Deferred tax liabilities:
Depreciation and amortization - (141,761)
------------- --------------
Net deferred tax asset (liability) $ - $ (39,917)
------------- --------------
</TABLE>
The Company has provided a full valuation allowance against the
deferred tax assets since realization of these future tax benefits is
not sufficiently assured. If the Company achieves profitability in
future periods, these deferred tax assets may be available to offset
future income tax liabilities and expense.
At March 29, 1997, for Federal income tax purposes, the Company has
approximately $12,850,000 of net operating loss carryforwards that
expire at various dates through 2012, and for state income tax
purposes, the Company has approximately $13,550,000 of net operating
loss carryforwards that expire at various dates through 2002. However,
as a result of the conversion of the Series A Preferred Stock into
Common Stock in fiscal 1997 (Note 10), a change in ownership has
occurred as defined by the Internal Revenue Code which may
significantly restrict future annual utilization of the Company's
federal NOL carryforwards. Subsequent changes in ownership could
further affect the limitation in future years.
The Company made income tax payments of $221,485 and $80,444 in fiscal
1997 and 1996, respectively.
10. STOCKHOLDERS' EQUITY
COMMON STOCK
The Company has authorized 14,000,000 shares of $.01 par value common
stock ("Common Stock"). Each share entitles the holder to one vote on
all matters submitted to a vote of the Company's stockholders. Common
stockholders are entitled to receive dividends, if any, as may be
declared by the Board of Directors.
On April 20, 1995, the Company's Registration Statement filed with the
Securities and Exchange Commission to register up to 1,138,500 Units
(148,500 of which are subject to overallotment provisions) was declared
effective. Each unit consists of one share of the Company's Common
Stock and one Redeemable Warrant.
F-16
OMNI MULTIMEDIA GROUP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The Company has reserved 1,527,500 shares of common stock for issuance
under its common stock warrants and option plans (Note 11).
PREFERRED STOCK
The Company has authorized 1,000,000 shares of $.01 par value preferred
stock ("Preferred Stock"). Shares of Preferred Stock may be issued at
the discretion of the Board of Directors of the Company with such
designations, rights and preferences as the board may determine from
time to time.
On May 24, 1996, the Company designated 1,050 shares of its 1,000,000
shares of authorized Preferred Stock, $.01 par value, as Series A
Preferred Stock ("Series A Preferred Stock").
On May 28, 1996, the Company issued 1,050 shares of Series A Preferred
Stock, $.01 par value, resulting in gross proceeds of $10,500,000. In
connection with this private placement, the Company granted warrants to
purchase 108,808 shares of Common Stock to the placement agent at an
exercise price of $9.65 per share. As of March 29, 1997, 995 shares of
the Series A Preferred Stock were converted into 6,015,039 shares of
common stock.
The characteristics of the Company's Series A Preferred Stock were as
follows:
DIVIDENDS
The Series A Preferred Stock bear no dividends.
VOTING RIGHTS
The holders of the Series A Preferred Stock are entitled to the number
of votes equal to the number of shares of Common Stock into which such
stockholder's preferred shares are convertible subject to certain
restrictions as stated in the agreement.
LIQUIDATION
In the event of any liquidation, dissolution or winding up of the
Company, the holders of the Series A Preferred Stock shall be entitled
to a distribution immediately after any senior securities but prior to
any junior securities (i.e. Common Stock) at a liquidation price per
share equal to the sum of the original purchase price of $10,000 per
share plus 8% per annum.
REDEMPTION
At the Company's option, the Company may redeem any or all of the
outstanding Preferred Stock, subject to certain provisions, commencing
on May 28, 1997 through May 27, 1999, at a redemption price ranging
from 115% to 130% of the original purchase price of $10,000 per share
depending on the date of redemption as stipulated in the agreement.
In addition, at the Company's option, the Company may also redeem any
or all of the outstanding Preferred Stock, subject to certain
provisions, upon notice of conversion by the holders of the Series A
Preferred Stock at a redemption price equal to the liquidation price
divided by the conversion price multiplied by the closing bid price on
the date of conversion.
CONVERSION
The Series A Preferred Stock will automatically convert to Common Stock
at the end of the three years if not converted earlier by the holder.
The conversion rate is the liquidation price divided by the lower of
$9.65 per share or a 15% discount to the closing bid price of the
Company's Common Stock for the five trading days preceding the date of
conversion subject to certain adjustments as specified by the
agreement.
F-17
The Series A Preferred Stock may be converted into Common Stock at the
option of each preferred stockholder at the conversion rate stated
above in amounts not to exceed 33 1/2% on or after July 29, 1996, 66
2/3% on or after August 28, 1996 and all previously unconverted Series
A Preferred Stock on or after September 27, 1996.
The estimated discount of $1,853,000 implicit in the conversion terms
at the date of issuance of the Series A Preferred Stock, based upon the
average of the quoted bid price of the Company's Common Stock for the
five trading days preceding the date of issuance, has been included in
the computation of net income (loss) per share (Note 2). In the
computation of net income (loss) per share, the discount is accounted
for as a dividend to preferred stockholders and is recognized on a
pro-rata basis over the period beginning with the issuance of the
security to the date that conversion can occur.
Shares of Preferred Stock may be issued at the discretion of the Board
of Directors of the Company with such designations, rights and
preferences as the Board may determine from time to time. The Preferred
Stock may have voting rights, preferences as to dividends and
liquidation, conversion and redemption rights and sinking fund
provisions which may be more expansive than those of the Common Stock.
There were no shares of Preferred Stock issued and outstanding at March
30, 1996.
11. COMMON STOCK WARRANTS AND OPTION PLANS
COMMON STOCK WARRANTS
In connection with the initial public offering the Company issued
1,285,000 redeemable warrants which allowed the holder to purchase one
share of common stock, exercisable 90 days after the effective date of
the Company's initial public offering at 130% of the initial public
offering price of $5.10 per unit (Note 10) for a period of 5 years
("Redeemable Warrants"). Commencing January 20, 1996, the Company could
have redeemed the Redeemable Warrants at $.20 per Redeemable Warrant on
30 days written notice provided that the market price per share of
Common Stock equals or exceeds $7.65 for 20 consecutive trading days
ending within 10 days prior to the notice of redemption. All of the
redeemable warrants were exercised in fiscal 1996.
In November 1996, the Company issued 300,000 redeemable warrants to
certain of its advisors and Series A preferred Shareholders in
connection with the issuance of the Series A Preferred Stock. The
warrants are exercisable at a price per share equal to $2.00. The
Company may redeem such warrants at a redemption price of $.01 if the
average closing price of the common stock equals or exceeds $3.50 for
ten consecutive trading days. The warrants expire on December 31, 1998.
The fair value of these warrants is $200,000, which has been reflected
as non-employee compensation during the year ended March 29, 1997.
UNDERWRITER'S WARRANTS
Upon the effectiveness of its initial public offering, the Company had
agreed to sell to the Underwriter, for nominal consideration, the
Underwriter's Warrant, which conferred the right to purchase up to
99,000 units. Each unit consists of one share of the Company's Common
Stock and one Redeemable Warrant to purchase one share of the Company's
Common Stock ("Unit"). The Underwriter's Warrant is exercisable at 145%
of the initial public offering price $5.10 per Unit for a period
through April 20, 2000. The Underwriter's Warrant contains certain
F-18
OMNI MULTIMEDIA GROUP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
provisions for adjustment of the exercise price and the number of Units
issuable upon the exercise thereof upon the occurrence of certain
events.
1994 STOCK OPTION PLAN
The Company approved its 1994 Stock Option Plan (the "1994 Plan")
effective December 1, 1994. The 1994 Plan provides for the granting of
nonqualified and incentive stock options to employees and others
(excluding non employee directors). The Company has 270,000 shares of
common stock reserved for grant under the 1994 Plan. The option price
for each stock option shall be determined by the Company's Board of
Directors which, in the case of incentive stock options, shall not be
less than fair market value of the Common Stock at the date of grant
with certain provisions which increase the option price to 110% of the
fair market value of the Common Stock if the grantee owns in excess of
10% of the Company's Common Stock at the date of grant and, in the case
of nonqualified stock options, shall not be less than the par value of
the Common Stock. Options under the 1994 Plan are for a term and vest
over periods to be determined at the discretion of the Board of
Directors, however, the term of the incentive stock options may not
exceed 10 years.
On November 7, 1996, the Company's Board of Directors authorized the
granting and immediate vesting of 475,581 non-qualified options to
purchase common stock with an exercise price of $1.625, the then fair
market value of the Company's Common Stock, to certain officers of the
Company outside of the 1994 Plan. Terms are similar to those of the
1994 Plan.
On November 6, 1996 and February 11, 1997, the Compensation Committee
of the Board of Directors of the Company determined that, because
certain stock options held by officers and employees of the Company had
an exercise price significantly higher than the fair market value of
the Company's common stock, such stock options were not providing the
desired incentive to officers and employees. Accordingly, the
Compensation Committee modified the exercise price options to purchase
86,435 and 735,030 shares of common stock on November 6, 1996 and
February 11, 1997, respectively. As a result of such modification, the
average exercise price of such options was changed from $6.125 per
share to $1.69 per share on November 6, 1996 and from $2.11 per share
to $1.00 per share on February 11, 1997, respectively. The fair market
value of the Company's common stock at the close of the market was
equal to the modified exercise price on November 6, 1996 and February
11, 1997.
The following table summarizes activity in the Company's 1994 Plan and
non-qualified stock options during fiscal years 1996 and 1997:
Weighted-average
Options exercise price
Options outstanding April 2, 1995 -- $ ----
Options granted 186,435 $ 5.58
-------
Options outstanding March 30, 1996 186,435 $ 5.58
Options granted 1,371,785 $ 1.29
Options cancelled (823,190) $ 2.53
Options exercised (4,640) $ 1.45
-------
Options outstanding March 29, 1997 730,390 $ 1.00
-------
At March 29, 1997, 690,395 options to purchase Common Stock were
exercisable. The weighted average contract life of outstanding options
was 9.33 years at March 29, 1997.
F-19
OMNI MULTIMEDIA GROUP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The fair value of each option grant was estimated on the date of grant
using the Black Scholes option valuation model based upon the following
assumptions: dividend yield - 0%; risk free interest rate of 6.1% -6.3%
and 6.2% -6.9% for fiscal 1997 and 1996 option grants, respectively,
expected option term - 5 years, and weighted average expected
volatility of 65%. The weighted average fair value was $.78 and $3.38
for options granted in fiscal 1997 and 1996, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including
the expected stock price volatility. Because the Company's options have
characteristics significantly different from those of traded options,
and because changes in the subjective input assumptions can materially
affect the fair value estimate, in the opinion of management, the
existing models do not necessarily provide a reliable single measure of
the fair value of its options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows for the year ended:
MARCH 29, MARCH 30,
1997 1996
----------- ----------
Pro forma net loss ($16,562,175) ($50,800)
Pro forma net loss available to
common shareholders ($18,415,175) ($50,800)
Pro forma net loss per common share:
Primary ($2.89) ($0.02)
Fully diluted ($2.05) ($0.02)
There was no compensation expense recorded in the Company's statement
of operations related to stock based employee compensation awards for
the year ended March 29,1997 and March 30, 1996. Because additional
option grants are expected to be made each year and options vest over
several years, the pro forma impact on the years ended March 29, 1997
and March 30, 1996 are not necessarily representative of the pro forma
impact on reported net income or loss for future years.
At March 29, 1997, options to purchase 8,826 shares of common stock
were available for future grant under the 1994 Plan.
The Company has issued 48,000 options to purchase common stock to
certain of its advisors in connection with the initial public offering.
The options are exercisable at a price per share equal to 105% of the
initial public offering price per unit and expire five years from the
effectiveness of the initial public offering.
1994 DIRECTOR FORMULA STOCK OPTION PLAN
The Company approved the adoption of the 1994 Director Formula Stock
Option Plan (the "Formula Plan") effective April 1, 1995. The Formula
Plan provides for granting of options to non-employee members of the
Company's Board of Directors. The Company has reserved 20,000 shares of
common stock for grant under the Formula Plan. There are no options
issued or outstanding under the Formula Plan. The option price for each
stock option shall be not less than fair market value on the date of
grant.
F-20
OMNI MULTIMEDIA GROUP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
12. RELATED PARTY TRANSACTIONS
NOTES RECEIVABLE FROM STOCKHOLDERS
In January 1990, the principal stockholders of the Company formed North
Stratford Oil Corporation ("North Stratford") and its wholly owned
subsidiary Campbell Envelope Co., Inc. ("Campbell Envelope"). These
affiliates of the Company borrowed approximately $3.2 million from a
bank to finance the acquisition of an envelope business, land and
general working capital requirements. These loans were personally
guaranteed by the principal stockholders of the Company. In March 1992,
Campbell Envelope and North Stratford ceased doing business and sold
off their assets. The proceeds from the sale of the assets were used to
reduce the balance of the loans to $1.3 million. Campbell Envelope and
North Stratford restructured their debt agreement with the bank in
March 1992, which included, among other items, the addition of the
Company as a guarantor of the loan and payment terms of 40 quarterly
payments of $25,000 in principal and monthly payments, interest at the
lower of prime plus 1% or 8.5% (the "Scheduled Payments").
The principal stockholders have made the Scheduled Payments under this
loan through funds advanced to them by the Company. Additionally, the
Company advanced the majority stockholders $325,000 from the proceeds
of the term loan (Note 7), which was used to fully satisfy the
contingent liability outstanding. The majority stockholders issued
promissory notes to the Company for net amounts advanced to them
relating to the satisfaction of the Scheduled Payments and the
contingent liability totalling $489,419. These notes are payable on
December 31, 1999 and bear interest at 6.32% per annum. The related
interest income recognized in each of fiscal years 1997 and 1996 was
$30,400. If the principal stockholders sell any shares of Common Stock
of the Company prior to the satisfaction of these notes, the net
proceeds must first be used to satisfy any outstanding amounts due the
Company. Those shareholders owned an aggregate of 957,078 shares of
Common Stock at March 29, 1997.
FACILITY LEASE FROM DIRECTOR
The Company's facility lease is with a corporation in which a director
of the Company is a stockholder and director. The lease is for a term
of 87 months and expires in 2001. Future commitments under the lease
subsequent to March 29, 1997 are as follows:
FISCAL
1998 $ 595,260
1999 595,260
2000 595,260
2001 148,815
Rent expense on this facility for the fiscal years ended March 29, 1997
and March 30, 1996 was $560,164 and $366,554, respectively (Note 8).
LEGAL SERVICES FROM FORMER DIRECTOR
The Company received legal services from a law firm in which a former
director of the Company is a partner. In connection with the legal
services rendered to the Company during the past two years, the former
director's law firm had received legal fees of approximately $ 485,445.
13. INDUSTRY SEGMENT AND SIGNIFICANT CUSTOMERS
The Company operates in a single segment: software duplication,
packaging and fulfillment.
During the year ended March 29, 1997, one customer accounted for
approximately 16% of the Company's net sales, and during the year ended
March 30, 1996, three customers accounted for approximately 45%, 18%
and 11%, respectively, of the Company's net
F-21
OMNI MULTIMEDIA GROUP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
sales. Additionally, two customers' accounts receivable balances
accounted for 39% and 11%, respectively, of the Company's accounts
receivable balance at March 30, 1996. The Company had two product lines
within its operating segment, CD-ROM replication and diskette
duplication, which accounted for approximately 85% and 15% of net
sales, respectively, for fiscal 1997. In fiscal 1996, substantially all
of the Company's net sales related to diskette duplication services.
14. COMMITMENTS
EMPLOYMENT AGREEMENTS
As of January 1, 1995, the Company entered into employment agreements
with Paul F. Johnson, Robert E. Lee and Richard A. Pilotte. The
employment agreements provide for annual base salaries aggregating
$485,000; additionally, each of Messrs. Johnson, Lee and Pilotte is
entitled to a monthly automobile lease allowance not to exceed $1,800;
a one-time home office allowance of up to $10,000 for office machines
and furnishings; life and disability insurance and certain other
benefits as may be determined by the Compensation Committee of the
Company's Board of Directors.
Each of the above individuals is also entitled to receive three year's
base salary as severance in the event his employment is terminated
without cause. In the event of a change in control in the Company
(defined as any individual or entity not a current stockholder of the
Company or affiliated with the Company acquiring 50% or more of the
Company's outstanding shares of Common Stock), each individual will
receive certain benefits including an annual compensation of $300,000
in base salary, an equal one-third share in a performance bonus equal
to twenty percent of net income of the Company before income taxes,
amortization and depreciation, and an executive fee equal to $100,000
in exchange for a covenant not to compete.
15. ACQUISITIONS
On October 4, 1996, the Company acquired the net assets of Allenbach
Industries, Inc., a software manufacturing and fulfillment company with
operations in California and Minnesota. The aggregate purchase price of
$300,000 consisted of $150,000 in cash and $150,000 of common stock of
Omni Multimedia Group Inc. In addition on March 1, 1997 the Company
acquired the net assets of Custom Software Turnkey Manufacturing, Inc.
(CSTM), a software manufacturing and fulfillment company with
operations in Minnesota, in exchange for 100,000 shares of Omni
Multimedia Group, Inc. common stock. Allenbach Industries and CSTM
collectively comprise Omni Resources Corporation - West. The Company
guaranteed the former CSTM shareholders a minimum exchange price of
$6.00 per share, if they have not sold or transferred any of the
Company's shares by February 28, 1999. This guarantee was included as
part of the purchase price consideration in the CSTM acquisition.
The acquisitions of Allenbach Industries, Inc. and CSTM have been
recorded in accordance with the purchase method and, accordingly, the
purchase price plus the Company's direct acquisition costs of $218,968
have been allocated to the assets and liabilities based on their
estimated fair values at the date of acquisition. The fair value of
assets acquired was $4,283,497 including cash of $160,727 and the
liabilities assumed totaled $4,128,846. Goodwill of $242,368 and
$698,403 were recorded on the acquisition dates of October 4, 1996 and
March 1, 1997, respectively, to be amortized ratably over a five year
period from date of acquisition. The results of operations and cash
flows of Allenbach Industries, Inc. and CSTM are included in the
results of operations and cash flow of the company from the dates of
acquisition.
F-22
OMNI MULTIMEDIA GROUP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Unaudited pro forma data showing net sales, net loss and net loss per
share as if the acquisitions were completed at the beginning of the
periods presented is not shown as such information is not considered
meaningful given management's decision to close down or wind down the
operations of these facilities in the first quarter of fiscal 1998
(Note 1 and 17).
16. IMPAIRMENT LOSS ON LONG-LIVED ASSETS
The Company recognized an impairment loss of $2,261,611 in fiscal 1997
for those long-lived assets or groups of assets where the sum of the
estimated expected future cash flows (undiscounted and without
interest) is less than the carrying amount of such assets or groups of
assets. Of this impairment loss, $940,771 and $745,716 relates to the
write-off of goodwill and diskette duplication equipment, respectively,
in connection with management's decision in the first quarter of fiscal
1998 to close down the West Coast facility and wind down the operations
of the Mid West facility (Note 1 and 17). The remaining $575,124 of
impairment loss relates to the write-off of diskette duplication
equipment located in the Omni-East Millbury facility. The amount of the
impairment loss is the excess of the carrying amount of the impaired
asset over the fair value of the asset. The Company estimates fair
value for equipment based on estimated salvage value upon disposition
in a secondary market.
17. SUBSEQUENT EVENTS
During June 1997, management decided to close down the West Coast
facility and wind down the operations of the Mid West facility. This
decision was based on the cash shortages of the Company and failure of
Omni Resources Corporation - West management to achieve forecasts of
break even in the first quarter of fiscal 1998. Based on current
negotiations with landlords for both the West Coast and Mid West
facilities, the Company expects to be relieved of all long-term lease
guarantees. If the Company is unsuccessful in its negotiations with the
landlords, management estimates that the remaining lease obligation
would be $1,977,757, in the aggregate, as of June 28, 1997 in
accordance with the lease agreements. Any obligations arising from
management's decision to exit the West Coast and Midwest facilities
will be recorded in the first quarter of fiscal 1998. Asset impairment
charges related to these facilities were recorded during the year ended
March 29, 1997 (Note 16).
F-23
OMNI MULTIMEDIA GROUP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
18. RESTATEMENT OF UNAUDITED QUARTERLY FINANCIAL INFORMATION
On May 28, 1996, the Company issued 1,050 shares of Series A Preferred
Stock resulting in gross proceeds of $10,500,000 (Note 10). On the date
of issuance, a discount of $1,853,000 was implicit in the conversion
terms. According to generally accepted accounting principles, this
discount should be accounted for as a dividend to preferred
stockholders and should be recognized on a pro-rata basis over the
period beginning with the issuance of the security to the date that
conversion can occur. In the unaudited financial statements included in
the Company's previously filed Form 10-QSB for the quarterly periods
ended June 29, 1996, September 28, 1996 and December 28, 1996, primary
net loss per share was computed by dividing net loss by the weighted
average number of common and dilutive common share equivalents
outstanding during the period. Fully diluted net loss per share was
calculated the same as primary net loss per share except that all
conversions of preferred stock were considered to be converted as of
the date of issuance whether or not the effect is anti-dilutive.
As the discount implicit in the conversion terms of the Series A
Preferred Stock was not included in the previously reported primary and
fully diluted net loss per shares, the Company has restated its
unaudited quarterly financial statements included in Form 10-QSB for
the quarterly periods ended June 29, 1996, September 28, 1996 and
December 28, 1996 to properly record primary and fully diluted net loss
per share for each period presented. Net loss for each of the quarterly
and year to date periods in fiscal 1997 remains unchanged. The impact
of the discount adjustments on the Company's net loss per share amounts
as originally reported is summarized below:
<TABLE>
<CAPTION>
FISCAL 1997
-----------
FIRST QUARTER SECOND QUARTER THIRD QUARTER
------------- -------------- -------------
THREE MONTHS THREE MONTHS SIX MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED ENDED
JUNE 29, SEPTEMBER 28, SEPTEMBER 28, DECEMBER 28, DECEMBER 28,
1996 1996 1996 1996 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net loss available to
common stockholders:
As reported (1,820,004) (2,824,993) (4,644,997) (3,465,321) (8,110,318)
As restated (2,489,122) (4,008,817) (6,497,939) (3,465,321) (9,963,260)
Primary net loss per
share:
As reported (0.47) (0.70) (1.17) (0.44) (1.55)
As restated (0.64) (0.99) (1.63) (0.44) (1.90)
Fully diluted net loss per
share
As reported (0.47) (0.64) (1.05) (0.37) (0.95)
As restated (0.64) (0.90) (1.52) (0.37) (1.17)
</TABLE>
F-24
F-25
Sheet 1
OMNI MULTIMEDIA GROUP, INC. EXHIBIT 11
COMPUTATION OF NET INCOME (LOSS) PER SHARE
YEAR ENDED
-----------------------------------
MARCH 29, MARCH 30,
1997 1996
Net income (loss) ......................... $(15,759,175) $ 324,200
Preferred stock preferences ............... (1,853,000) -
-------------- ---------------
$(17,612,175) $ 324,200
============== ===============
Primary weighted average shares outstanding
Common Stock ................... 6,364,228 2,707,224
Stock options(1)................ - 60,956
Stock warrants(1)............... - 158,220
-------------- ---------------
6,364,228 2,926,400
============== ===============
Primary net income (loss) per share ....... $ (2.77) $ 0.11
============== ===============
Fully diluted weighted average shares
Common Stock ................... 6,364,228 2,707,224
Stock options(1)................ - 60,956
Stock warrants(1)............... - 158,220
Shares attributable to
Preferred Stock converted
using the if converted method 2,564,084 -
-------------- ---------------
8,928,312 2,926,400
============== ===============
$ (1.97) $ 0.11
============== ===============
(1) Inclusion of stock options and warrants in the weighted average share
calculation would have an anti-dilutive effect on the calculation for the
year ended March 29, 1997.
EXHIBIT 21
LIST OF SUBSIDIARIES
NAME STATE OF INCORPORATION
---- ----------------------
Omni Resources Corporation Massachusetts
4CD's Corporation Massachusetts
Omni Acquisition Corporation Massachusetts
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-29-1997
<PERIOD-START> MAR-31-1996
<PERIOD-END> MAR-29-1997
<CASH> 1,039,664
<SECURITIES> 0
<RECEIVABLES> 3,782,047
<ALLOWANCES> 550,000
<INVENTORY> 1,310,970
<CURRENT-ASSETS> 6,293,158
<PP&E> 24,761,062
<DEPRECIATION> 4,658,364
<TOTAL-ASSETS> 28,255,058
<CURRENT-LIABILITIES> 21,904,628
<BONDS> 0
0
0
<COMMON> 10,119,211
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 28,255,058
<SALES> 12,873,854
<TOTAL-REVENUES> 12,873,854
<CGS> 16,168,684
<TOTAL-COSTS> 27,806,492
<OTHER-EXPENSES> 66,224
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 951,036
<INCOME-PRETAX> (15,949,898)
<INCOME-TAX> (190,723)
<INCOME-CONTINUING> (15,759,175)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,759,175)
<EPS-PRIMARY> (2.77)
<EPS-DILUTED> (1.97)
</TABLE>
