found this on aol
Here's another news article that appeared in the Sun. Jan 11th issue of the
Worcester, MA, Telegram and Gazette. Here it is:
Where has all the money gone?
Creditors and shareholders demand answers from Omni
Sunday, January 11, 1998
By Chris Pope
Telegram & Gazette Staff
MILLBURY-- Robert E. Lee is looking forward to spring.
The way the chief financial officer of Omni Multimedia Group
Inc. sees it, by then the Millbury-based duplicator and distributor of
software CD-ROMs and music CDs will be back on the profit track he and
Paul F. Johnson, Omni's president and chief executive officer,
envisioned when they took the company public in April 1995.
"People laugh at me, but I believe by the end of May we'll be
out of bankruptcy," Lee said last week. "I know the inner workings of
this thing. I'm looking at it from the inside."
The way Peter J. Hurley sees it, however, what has gone on
inside Omni Multimedia during the last year is nothing to laugh about.
"This is a company that has gone through $6 million in cash in
one year," said Hurley "Our question is where has that money gone."
A managing partner at Harrison Hurley and Co., a Providence
consulting firm that specializes in turning financially troubled
companies around, Hurley is one of many asking that question these days.
Since filing for Chapter 11 bankruptcy protection two months ago, Omni
has been barraged with angry inquiries from more than 300 creditors to
whom it owes $26.5 million.
Omni's current woes are a far cry from May 1996 when the
company celebrated the opening of its $10 million state-of-the-art CD
manufacturing plant in space that once housed New England High Carbon
Wire Co.
"People like Paul Johnson are driving this state's economy,"
said then-Gov. William F. Weld, who attended the event. "Omni is a
company every town dreams of having."
The dream evaporated later in 1996 when sales from Omni's
floppy diskette-making business fell far faster than they could be
replaced with its new CD-ROM line. The revenue decline occurred at a
time when the company was spending heavily to retool its plant to make
CD-ROMs and was busy acquiring two California companies that it hoped
would provide an entree to new markets.
As the sales drought continued, the newly acquired companies
were shut down after they failed to produce profits, while Omni burned
its way through some $20 million raised in common and preferred stock
offerings before finally seeking haven in U.S. Bankruptcy Court on Nov.
14. The company has continued operating since then over the protests of
its largest secured lender, Coast Business Credit of California, to
which it owes $4.2 million.
According to Johnson and Lee, the bankruptcy was the result of
miscalculating how much money and time the company needed to gear up its
new CD-ROM replication business.
"Our mistake was we were in what amounted to a start-up
situation, and we didn't have enough cash to sustain it to the end,"
said Lee.
"We misjudged what it would take to ramp up sales," added
Johnson, who founded Omni in the basement of his Millbury home in 1980.
"The funds just ran out."
According to Hurley, however, Omni's empty coffers may be as
much a result of its top managers' taste for high salaries and lavish
perks as poor execution of the company's business plan.
"The single point of why this company is in its current state
is mismanagement," said Hurley. "Spending was rampant. Too much is being
paid for a lot of things."
As point man for what he describes as a Rhode Island-based
syndicate of Omni's major shareholders, Hurley has proposed that his
firm be retained to examine the company's financial condition and come
up with a turnaround plan. For openers, he said, Omni would be shrunk
back to its core operations and its current top managers replaced. The
proposal also calls for the shareholders' group to place $1 million in
legal escrow as a demonstration of good faith.
According to Hurley, the bid to remove Omni's management comes
only after earlier efforts to work with the company's top officers were
rebuffed. As recently as August, he said, Johnson agreed to meet with
Hurley and Rhode Island investor Harold Schein, a large Omni
stockholder, to begin an assessment of the company's position. But
Hurley said the meeting was canceled at the last minute and subsequent
efforts to reschedule were put off.
Hurley said the shareholder group's repeated requests that Omni
schedule an annual stockholders' meeting have also met with no response.
While acknowledging that Omni has yet to schedule a
stockholders' meeting for the fiscal year ended March 31, 1997, Lee said
the delay was caused by difficulties the company has had in filing
financial reports required by the Securities and Exchange Commission.
With the company now under the protection of bankruptcy court and
trading of its stock on the American Stock Exchange suspended, he
wonders what would be the point of scheduling a meeting.
"Holding a stockholders' meeting, what are you going to do with
it?" Lee asked. "The stockholders are not running the company right now.
The court is."
As far as meeting with the Hurley group, Johnson said he
canceled the meeting after the company's legal counsel advised him that
giving the shareholder group carte blanche access to Omni's operations
would amount to providing some stockholders with information not
available to others, a clear violation of securities laws.
But as Hurley sees it, the refusal to let the shareholder group
inside the company was the result of fear on the part of Omni's top
managers of what the group might discover about how the company was
managed.
"We can't really be sure what has happened until we get
inside," Hurley said. "There's no conclusion that we can draw except
that overall there are indications that the company is being
mismanaged."
Hurley said required filings made by Omni in its bankruptcy
petition raise a number of questions about Omni's management practices.
Among the areas the stockholder group has questions about, he said, are
the high number of Johnson family members and relatives who work for the
company and Omni's relationship to other companies in which Omni
insiders are principals. Also of concern, he said, is the amount of
compensation and perks provided to the company's top officers.
According to documents filed with U.S. Bankruptcy Court, in the
year preceding Omni's bankruptcy petition, 11 Johnson family members,
relatives and in-laws drew a total of $746,201 in pay from the company.
The total included $243,150 for Paul Johnson; $92,656, for his wife,
Elaine; $47,463 for his son, Brian; $206,772 for Richard A. Pilotte,
Paul Johnson's brother-in-law; and $27,816 for Pilotte's wife, Judith.
Also on the Omni payroll during that period was Al Johnson, Paul
Johnson's father, now deceased, who was paid $50,964. According to the
company's proxy statement to shareholders for the company's 1996 annual
meeting, the corporation also pays for country club dues, club
memberships and for automobiles for each of its three executive
officers.
"Do I think it's out of line? Add it all up and yes, it is out
of line, especially considering the losses this company has had," said
Hurley. "It's a travesty."
Not so, respond Johnson and Lee. If the company payroll
includes family members, what of it? Everyone on the payroll, relatives
included, is paid appropriately for duties they performed. No one was
paid for anything they didn't do.
"The family members are key to this business," said Johnson,
who maintains that family members employed by the company share a strong
work ethic and typically spend 60 to 70 hours a week on the job.
"I would say family members have to work harder than outsiders
because they are being looked at more closely," Johnson said.
"There was no phantom payroll," said Lee. "In my opinion the
family is the reason this company is on the verge of breaking out to be
a $30 million to $50 million in annual sales company."
Lee said any carping about compensation for company executives
is equally unjustified. He said he, Johnson and Pilotte took voluntary
15 percent pay cuts effective Dec. 27 as well as the elimination of
company-paid cars -- a Mercedes-Benz for Johnson, a Lincoln Town Car for
Lee -- and club memberships, including Lee's membership at well-known
Oak Hill Country Club in Rochester, N.Y., where he lives.
"These were all part of their employment contracts. They are
not uncommon in business," said Alan Shine, who is representing Omni in
bankruptcy court.
Also not unlike executives at other businesses, said Shine,
Johnson, Pilotte and Lee owe a total of $496,647 in loans provided by
Omni. The loans, which were made in 1992, when the company was
profitable and well before it went public, are all on Omni's books and
are noted in the company's last proxy statement.
"We are obligated to pay the company back, and we intend to,"
said Lee. Payment of the principal and 6.32 percent annual interest on
the loans is not due until Dec. 30, 1999.
Johnson also stressed that no money he has borrowed from Omni
has gone toward a 6,400-square-foot, custom-built home he is
constructing in Shrewsbury. He said construction on the house began
before Omni experienced financial difficulties. Johnson said when the
company's problems did surface he was advised to cut back on some
amenities and finish building it rather than halt construction and
attempt to sell an incomplete shell. At the time he began construction
of the house, Johnson said Omni's stock was selling at about $8 per
share. The stock, which was initially offered at $5 per share and rose
as high as $12.87/4 in February 1996, sank to 37/4 cents before trading
was halted.
"The worst thing you can say about that was it was poor
judgment," said Lee. "When he started the house he was worth $4 million.
What was he supposed to do, stop building it halfway through? The main
thing is he didn't funnel any corporate money into that house."
Omni officials respond similarly to suggestions that they may
have improperly profited from Omni's dealings with a charter aircraft
company that they own. According to documents filed as part of Omni's
bankruptcy filings, the company, Enterprises LLC, controlled by Paul
Johnson, Richard Pilotte and Lee, received $124,020 for air transport
services provided to Omni in the 12 months before the company filed for
protection against its creditors. The payments include almost $22,000
Enterprises received from Omni in the month preceding Omni's bankruptcy
filing, including a $3,603 payment made on Nov. 14, the day the company
filed its petition.
According to Johnson, Enterprises LLC charters an airplane to
Omni primarily to bring company customers into Worcester Regional
Airport and transport Omni staffers on sales calls. Lee said the plane,
a twin-engine Cheyenne, was also used to ferry Omni products to the
company's customers, and was chartered to the company at $400 per hour
compared to the company's usual $750 per hour rate.
"All billings were at a substantial discount to what these
services could be purchased for on the open market," said Shine. "All
trips billed to the company were for legitimate business purposes.
Everything is documented and itemized and available."
Also documented, said Lee, are Omni's dealings with East Beach,
a consulting company controlled by Lee to which Omni paid $42,752 in the
year before its bankruptcy filing. Lee said the payments were
reimbursements for business expenses he is entitled to under the terms
of his employment contract. According to Shine, the payments were made
to East Beach rather than to Lee as an individual at Lee's request.
"It made no difference to the company as long as they were
legitimate business expenses, which they were," Shine said.
And in contrast to Hurley's contention that Omni has kept its
shareholders in the dark concerning the company's affairs, Shine said
the company has gone out of its way in recent months to make its records
available to its creditors and the bankruptcy court. In addition, he
said, Omni has recently hired the crisis management consulting firm
Ronald Lang & Associates of Sharon to assist management in its efforts
to get back on track.
"I'm very optimistic about the company's future, but I'll know
more in the next few weeks," said Ron Lang, the firm's principal. Lang
referred further questions to Shine.
As far as the Hurley group is concerned, however, if Omni is to
be saved its managers need replacement rather than assistance.
"I believe Lang is a good turnaround man, but we want to be
sure he has full control," Hurley said. "What needs to be done now is to
get new management in and run the company with new money. We won't let
this lie."
"This company has been examined by everybody and his brother in
the last eight weeks," responded Lee. "They haven't found anything.
There has been no criminal activity, no funneling of money from the
company into our pockets. I don't think we deserve to be thrown out for
anything we've done, but if they've got the votes, they can call a
special meeting and throw us out. The problem for them is I'm not sure
(they) have the votes to do it."
c 1997 Worcester Telegram & Gazette |
