Omega Holdings (Omega), incorporated on 14 Aug 1989, was principally engaged as a stockbroker. It was listed on the KLSE Main Board on 6 May 1991. Operations from 1993 to 1997 were strong, buoyed by the sustained bullish conditions on the KLSE. Omega proceeded to expand its operations, increasing its staff strength and margin financing capacity in anticipation of the next bull run and seem to be gathering strength. However, from mid to end-1997, Omega was allegedly involved in the purchase of Uniphoenix Corporation Bhd (Uniphoenix) shares using margin financing. When the stock market crashed in 1997 and 1998, Omega breached the KLSE's minimum liquid funds requirement (MLFR) and was suspended from operating. Massive provision for doubtful debts and diminution in investment resulted in a deficit in shareholders' funds of RM22.8 mln as at 1998, compared to a very healthy shareholders' funds of RM497.9 mln as at 1997. Thus, Omega was deemed an affected issuer pursuant to PN4/2001 on 26 Feb 2001.

Acquisition of Omega Securities and WK Securities

In 1991, Omega acquired a 100% interest in Omega Securities S/B (OS) and WK Securities S/B (WK) by issuing 22.61 mln shares at RM4.52 per share and 6.98 mln shares at RM3.48 per share, respectively. Both OS and WK were stock broking companies and also provided margin financing to clients. OS, the larger of the two companies, was the only stock broking firm based in Shah Alam while WK was the sole stock broking firm in Pahang. OS and WK mainly catered to the retail business. Omega's market share as at June 1990, based on turnover, amounted to 8%. After the acquisitions of OS and WK, Omega undertook a rights issue to increase its paid-up capital to RM62.6 mln. On 25 Mar 1991, as part of its listing, the shareholders of Omega made an offer for sale of 15.7 mln shares at RM1.20 per share, representing 25% of the paid-up capital. The purpose of this offer was to increase Bumiputera participation in the group.

Strong Bull, Weak Expansion

In 1993, KLSE experienced a strong but short bull run. As a stock broking group, Omega naturally benefited from the surge in the share market. Turnover and profit escalated to record levels. In order to fully capitalize on this event, and to prepare the group for future bull runs, Omega embarked on an aggressive expansion of its operations, namely; [1]. It obtained a revolving facility (GRUF) for RM100 mln in May 1994, which resulted in cheaper financing costs and longer-term working capital. The GRUF was accorded by Ratings Agency Malaysia as having a strong degree of safety in debt repayment; [2]. Construction of a new headquarters in Shah Alam, built on a piece of leasehold land measuring 84,768 square feet and [3]. Made rights issues in 1994 and 1997, raising a total of RM268.5 mln. The proceeds from the rights issue were used to reduce borrowings and to finance the working capital needs of the group. The increase in working capital was used to increase the group's margin financing capacity, enabling Omega to generate a higher level of business.

Warning Signs

Table 1 shows key financial information which revealed signs of Omega's increasingly risky position. Interest income, which consisted mainly of interest receivable from clients using margin accounts, was much higher from 1994 to 1997, compared with the early-1990s. This signified Omega's strategy of increasing its revenue through an aggressive expansion in its margin financing capacity. The result of this was a massive increase in trade debtors, which Omega was subsequently unable to collect. Total borrowings, which were all short-term, and Omega's lack of cash, showed an upward trend, indicating the group's tight liquidity position. This was despite Omega's exercise of raising new capital through its rights issues in 1994 & 1997. The contingent liabilities of Omega also increased every year from 1991-1997, arising from corporate guarantees given to financial institutions in respect of credit facilities granted to subsidiaries. Omega's market share in the mid-1990s dropped to around 2.5%, due to the emergence of other stock broking companies in the locations that Omega operated in.

Table 1 : Key financial information (RM mln unless otherwise stated)

Entry Of Datuk Soh Chee Wen

Between Jun and Nov 1997, Datuk Soh Chee Wen apparently agreed to buy a controlling block of Omega shares for RM6.45 each (according to Omega's annual report, as at 25 Mar 1999, Datuk Soh and his associates controlled 61.342 mln shares, or about 20.5% of Omega's paid-up capital). On 18 Aug 1997, OS and WK allegedly purchased 39.19 mln Uniphoenix Corp Bhd (Uniphoenix) shares for RM462.3 mln using margin accounts, on behalf of Datuk Soh. That translated to RM11.80 per share, when the prevailing market price was RM8.00. For those who have good memories, Datuk Soh held large stakes in numerous listed companies in the mid-Nineties. One can only speculate on the possible reasons why a premium of RM3.80 was paid. What was important for Omega was when the share price of Uniphoenix plunged (figure 1), Omega suffered heavy losses, and this was supposedly one of the main reasons why Omega was unable to meet KLSE's MLFR. As a result, WK was placed under trading restrictions by the KLSE and Pengurusan Danaharta S/B was appointed as Special Administrator on Feb 1999. In July 2000, WK was sold to Kuala Lumpur City Securities S/B for RM55 mln by way of tender. OS ceased all trading activities on May 1998 and its dealer's license was revoked on June 1998. In Mar 1999, KLSE filed a petition to wind up OS.

Figure 1: Share price of Uniphoenix

Table 2 shows a summary of the major items which contributed to a massive after tax loss of RM688.5 mln in 1998. A possible reason the provision for doubtful debts arose could be linked to OS and WK's inability to collect the shortfall from their buyers after the share price of Uniphoenix plunged. The reversal of profits on de-consolidation of subsidiary was related to OS, due to its trading activities being suspended.

Table 2 : Summary of items contributing to loss in 1998 (RM mln)

Changes In Board & Shareholders

On 24 Dec 1997, the old board of directors resigned, and disposed a substantial portion of their shareholdings in Omega at RM6.45 per share to Coronation Mark Industry S/B, which became a new substantial shareholder. The share price at 19 Dec 1997, the last date the shares were traded before suspension, was RM6.35 per share. When the shares of Omega resumed trading in Feb 1998, it plunged to the region of RM2.00.

Failed Restructuring

After the collapse of OS and WK, Omega commenced legal proceedings against TA Securities S/B and former directors and shareholders of Omega for at least RM391 mln in damages, alleging the said parties had caused or contributed to the adverse financial conditions of OS and WK. Omega was also being sued for RM12.5 mln for outstanding obligations payable arising from the construction of its head office in Shah Alam. The legal suits are still pending. Omega proposed a restructuring scheme with Broadland Garment Industries, involving a capital reduction exercise, share exchange and proposed rights issue but the plan was aborted in 2001.