[DESCRIPTION] HMG WORLDWIDE CORPORATION
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: June 30, 1995
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or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 0-13121
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HMG Worldwide Corporation
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(Exact name of registrant as specified in its charter)
Delaware 13-3402432
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
475 Tenth Avenue, New York, NY 10018
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212)736-2300
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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
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 10, 1995
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Common Stock, $.01 par value 7,567,517
<PAGE>
<PAGE>
Part I. Financial Information
Item 1.
<TABLE>
<CAPTION>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
June 30, 1995 December 31, 1994
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(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $11,352 $ 6,469
Marketable securities 6,828
Accounts receivable - less
allowance for doubtful
accounts of $636 and $773 8,075 7,913
Inventory 5,153 4,307
Prepaid expenses 497 840
Other current assets 440 337
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Total current assets 25,517 26,694
Property and equipment - net 2,586 2,915
Excess of cost over fair
market value of assets acquired,
less accumulated amortization
of $610 and $436 6,365 6,539
Other assets 475 570
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$34,943 $36,718
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of
long-term obligations $ 8,303 $ 2,054
Accounts payable 4,966 4,084
Accrued employee compensation
and benefits 1,385 1,371
Deferred revenue 878 1,380
Accrued expenses 556 761
Other current liabilities 2,307 2,925
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Total current liabilities 18,395 12,575
Long-term obligations 3,182
Other long-term liabilities 738 738
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19,133 16,495
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Stockholders' equity:
Common stock, par value $.01;
50,000,000 shares authorized;
7,567,517 and 7,557,351 issued
and outstanding 76 76
Additional paid-in capital 33,258 33,248
Accumulated deficit (17,616) (13,140)
Foreign currency translation
adjustments 92 39
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15,810 20,223
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$34,943 $36,718
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</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1995 1994 1995 1994
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<S> <C> <C> <C> <C>
Net revenues $11,085 $15,041 $22,035 $32,667
Cost of revenues 9,050 10,370 17,666 23,130
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Gross profit 2,035 4,671 4,369 9,537
Selling, general and
administrative expenses 4,149 3,690 8,789 7,461
------- ------- ------- ------
Income (loss) from
operations (2,114) 981 (4,420) 2,076
Interest income 158 11 317 30
Interest expense (195) (171) (356) (357)
Other expense (3) (3)
------- ------- ------- -------
Income (loss) before
provision for income
taxes (2,151) 818 (4,459) 1,746
Provision for income taxes (6) (41) (17) (114)
------- ------- ------- -------
Net income (loss) ($ 2,157) $ 777 ($ 4,476) $ 1,632
======= ======= ======= =======
Net income (loss) per common
and common equivalent
share ($ 0.28) $ 0.13 ($ 0.59) $ 0.27
======= ======= ======= =======
Weighted average number
of common and common
equivalent shares
outstanding 7,567,517 6,062,409 7,567,517 6,093,602
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended June 30,
------------------------
1995 1994
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<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $21,468 $28,347
Interest received 317 30
Cash paid to suppliers (20,146) (24,952)
Cash paid to employees (6,214) (6,760)
Income taxes paid (11) (46)
Interest paid (357) (521)
Net cash used in ------- -------
operating activities (4,943) (3,902)
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Cash flows from investing activities:
Proceeds from redemption of
marketable securities 6,828
Capital expenditures (166) (246)
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Net cash provided by
(used in) investing
activities 6,662 (246)
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Cash flows from financing activities:
Principal payment of a note
payable issued in connection
with an acquisition (9,630)
Net proceeds from exercise
of stock options 10 132
Proceeds derived from a credit
agreement 3,557 3,295
Proceeds from issuance of
a note 7,000
Principal payments of
outstanding debt obligations (488) (350)
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Net cash provided by
financing activities 3,079 447
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Effect of exchange rate changes 85 93
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Net increase (decrease) in
cash and cash equivalents 4,883 (3,608)
Cash and cash equivalents
at beginning of year 6,469 5,205
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Cash and cash equivalents
at June 30 $11,352 $ 1,597
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
(in thousands)
(unaudited)
Six Months Ended June 30,
------------------------
1995 1994
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<S> <C> <C>
Reconciliation of net income (loss)
to net cash provided by (used in)
operating activities:
Net income (loss) ($4,476) $1,632
Adjustments to reconcile net
income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 670 681
Decrease (increase) in assets:
Accounts receivable (149) (4,457)
Inventory (845) 1,892
Prepaid expenses 349 (63)
Other assets (8) 285
Increase (decrease) in liabilities:
Accounts payable 875 (1,434)
Deferred revenue (502) 122
Accrued expenses (857) (2,400)
Accrued interest (160)
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Net cash used in operating
activities ($4,943) ($3,902)
====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
HMG WORLDWIDE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - CONSOLIDATED FINANCIAL STATEMENTS
HMG Worldwide Corporation ("the Company") is comprised of five wholly-
owned subsidiaries, HMG Worldwide In-Store Marketing, Inc. ("HMG"), Intermark
Corp. ("Intermark"), Creative Displays, Inc. ("CDI"), HMG Europe B.V. ("HMGBV")
and Electronic Voting Systems, Inc. ("EVS"). HMG conducts its operations
worldwide with full service offices located in New York, New Jersey, Chicago
and The Netherlands.
The Consolidated Balance Sheet as of June 30, 1995, and the Consolidated
Statements of Operations and Cash Flows for the three months and six months
ended June 30, 1995 and 1994, have been prepared by the Company without audit.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position,
results of operations and cash flows at June 30, 1995 and for all periods
presented have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These consolidated financial
statements should be read in conjunction with the financial statements and
notes thereto included in the Company's December 31, 1994 annual report to
stockholders. The results of operations for the period ended June 30, 1995
are not necessarily indicative of the operating results for the full year.
NOTE 2 - INVENTORY
Inventories at June 30, 1995 and December 31, 1994 consisted of the
following:
June 30, December 31,
1995 1994
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(in thousands)
Finished goods $1,291 $ 698
Work in process 791 604
Raw materials 3,071 3,005
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$5,153 $4,307
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NOTE 3 - INCOME TAXES
At December 31, 1994, the Company had net operating loss carryforwards
of approximately $10.9 million which expire during the years 2001 through 2010.
As of June 30, 1995 and 1994, a valuation allowance of approximately $6.1
million and $3.9 million, respectively, which is equal to the entire amount
of the deferred tax asset arising from the net operating loss carryforwards
and other temporary differences, has been established until realizability is
certain.
Components of income tax expense for the six months ended June 30, 1995
and 1994 are as follows:
Six Months Ended June 30,
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1995 1994
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(in thousands)
Income tax provision $ 17 $ 731
Income tax benefit of net
operating loss carryforwards (617)
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$ 17 $ 114
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NOTE 4 - SUBSEQUENT EVENT: REVOLVING CREDIT AGREEMENT
On July 28, 1995, the Company amended and restated its revolving credit
agreement ("Credit Agreement") and prepaid and retired its secured, five-year
term loan ("Term Loan") with a bank. The Credit Agreement provides for a
secured revolving credit facility which advances up to the lesser of 80% of
eligible accounts receivable, and the Company's cash and marketable securities
or $10.0 million. The Company used funds available under the Credit
Agreement to prepay the Term Loan. The Credit Agreement expires December 31,
1996 and is secured by a pledge of all the capital stock of the Company's
wholly-owned subsidiaries, a guarantee by the Company and a lien on and a
security interest in the Company's cash, cash equivalents, marketable
securities and accounts receivable.
Borrowings under the Credit Agreement bear interest at either the
lending institution's prime rate plus 1% per annum or the Eurodollar rate
plus 2% per annum. The Company is required to pay a quarterly commitment fee
at a rate of 1/2 of 1% per annum on the average daily unused amount of funds
available. Additionally, the Credit Agreement contains certain customary
affirmative and negative covenants which require the Company to maintain
certain financial ratios, and, among other things, restrict (i) declaration
or payment of dividends, (ii) the incurrence of any additional indebtedness,
(iii) capital expenditures and (iv) aggregated lease payments.
<PAGE>
Item 2.
HMG WORLDWIDE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1995 AS COMPARED TO THE
THREE MONTHS ENDED JUNE 30, 1994
Net revenues were $11.1 million for the three months ended June 30,
1995 as compared to $15.0 million for the three months ended June 30, 1994.
The decrease in net revenues from period to period was due principally
to the effects of (i) reductions in capital and marketing expenditures of
two significant clients of $2.2 million, and (ii) a decline in net revenues
from international operations of $668,000.
Gross profit for the three months ended June 30, 1995 was $2.0 million
as compared to $4.7 million for the three months ended June 30, 1994. The
decrease in gross profit of $2.7 million was a result of the decline in net
revenues and a decrease in gross margin. For the three months ended June 30,
1995 and 1994, the Company's gross margin was 18.4% and 31%, respectively.
The gross margin decrease was due principally to (i) an unfavorable
production revenue mix which resulted in a 8.4% decrease, (ii) the Company's
acceptance and shipment of a new program valued at $807,000 with a new client
at a negligible margin in order for the Company to demonstrate its
capabilities which resulted in a 2% decrease and (iii) the underabsorption of
fixed overhead expenses as a percent of net revenues of 2.2%.
Selling, general and administrative ("SG&A") expense for the three
months ended June 30, 1995 was $4.1 million as compared to $3.7 million for
the comparable period in 1994. The increase in SG&A was due principally to
(i) the addition of new senior marketing personnel from period to period
and (ii) the opening of a new marketing office in Detroit.
For the three months ended June 30, 1995 the Company generated interest
income of $158,000 as compared to $11,000 for the three months ended June 30,
1994. The increase was attributable to that portion of the net proceeds of the
Company's public offering, not immediately required for the Company's
operations, that were invested in interest bearing marketable securities and
commercial paper.
As a result of the foregoing factors, the Company generated a net loss
of $2.2 million, or $0.28 per share, for the three months ended June 30, 1995
as compared to net income of $777,000, or $0.13 per share, for the three
months ended June 30, 1994.
SIX MONTHS ENDED JUNE 30, 1995 AS COMPARED TO THE
SIX MONTHS ENDED JUNE 30, 1994
Net revenues were $22 million for the six months ended June 30, 1995 as
compared to $32.7 million for the six months ended June 30, 1994. The
decrease in revenues from period to period of $10.7 million was due
principally to the effects of (i) reductions in capital and marketing
expenditures of two significant clients of $6.4 million and (ii) a decline
in net revenues from international operations of $1.6 million.
Gross profit for the six months ended June 30, 1995 was $4.4 million as
compared to $9.5 million for the comparable 1994 period. The decrease in
gross profit of $5.1 million was due principally to the decline in net
revenues and a decrease in gross margin. For the six months ended June 30,
1995 and 1994, the Company's gross margin was 19.8% and 29.2%, respectively.
The decrease of 9.4% was due principally to (i) an unfavorable production
revenue mix which resulted in a 5.7% decrease, (ii) the Company's acceptance
and shipment of a new program valued at $807,000 with a new client at a
negligible margin in order for the Company to demonstrate its capabilities
which resulted in a 1% decrease and (iii) the underabsorption of fixed
overhead expenses as a percent of net revenues of 2.7%.
SG&A expense for the six months ended June 30, 1995, was $8.8 million
as compared to $7.5 million for the comparable period in 1994. The $1.3
million increase was principally due to (i) the addition of new senior
marketing personnel from period to period and (ii) the opening of a new
marketing office in Detroit.
Interest income was $317,000 for the six months ended June 30, 1995 as
compared to $30,000 for the six months ended June 30, 1994. The increase was
attributable to that portion of the net proceeds of the Company's public
offering, not immediately required for the Company's operations, that were
invested in interest bearing marketable securities and commercial paper.
As a result of the foregoing factors, the Company generated a net loss
of $4.5 million, or $0.59 per share, for the six months ended June 30, 1995 as
compared to net income of $1.6 million, or $0.27 per share, for the six months
ended June 30, 1994.
STOCKHOLDERS' EQUITY
Stockholders' equity decreased $4.4 million to $15.8 million at June 30,
1995 from $20.2 million at December 31, 1994. The decrease in stockholders'
equity is due principally to the net loss of $4.5 million.
INCOME TAXES
At December 31, 1994, the Company had net operating loss carryforwards of
approximately $10.9 million which expire during the years 2001 through 2010.
The Company's income tax provision for the six months ended June 30,
1995 was $17,000 as compared to $731,000 for the six months ended June 30, 1994.
The income tax provision for the six months ended June 30, 1995 was comprised
principally of state and local taxes and for the six months ended June 30, 1994,
state and local alternative minimum taxes. The income tax provision for the
six months ended June 30, 1994 represents an effective rate of 45.9%
comprised of 30% relating to Federal taxes and 15.9% for state and local
taxes. The Federal statutory rate of 34% is greater than the above Federal
effective rate due to the effect of the deduction for state and local income
taxes. The income tax provision for the six months ended June 30, 1994
is offset to the extent of $617,000 resulting from the income tax benefit of
utilizing the net operating loss carryforward available to the Company. The
net income tax provision of $114,000 for the six months ended June 30, 1994
results principally from Federal, state and local alternative minimum taxes.
INFLATION
The effect of inflation on the Company's operations has not been
significant to date.
BACKLOG
At June 30, 1995, the Company's aggregate backlog was approximately
$25.9 million as compared to $19.5 million and $28.1 million at December 31,
1994 and June 30, 1994, respectively. Approximately 55% of such backlog was
attributable to three customers. The Company anticipates that substantially
all such backlog at June 30, 1995 will be filled during the next twelve
months. Due to quarter to quarter fluctuations in the Company's backlog
levels due to the timing, nature, and size of its merchandising system
programs for its clients, such backlog levels are not necessarily an
indicator of future net revenue levels.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at June 30, 1995 and December 31, 1994
aggregated $11.4 million and $6.5 million, respectively. In addition, at
December 31, 1994 the Company had investments of $6.8 million in highly
liquid marketable securities. The Company's increase in cash and cash
equivalents of $4.9 million for the six months ended June 30, 1995 was due
principally to the net effects of (i) net cash used in operations of $4.9
million, (ii) capital expenditures of $166,000, (iii) the addition of
marketable securities as a component of cash and cash equivalents of $6.8
million, (iv) proceeds from borrowings under the Company's line of credit with
its bank lender of $3.6 million and (v) principal debt payments of $488,000.
The Company's negative cash flows from operations for the six months ended
June 30, 1995 resulted principally from the aggregate reduction of $490,000
of the Company's general liabilities, increases in current and other assets
of $653,000, and a net loss from operations before non-cash charges of
$3.8 million.
On July 28, 1995, the Company amended and restated the Credit Agreement
and prepaid and retired its Term Loan with a bank. The Credit Agreement
provides for a secured revolving credit facility which advances up to the
lesser of 80% of eligible accounts receivable, and the Company's cash and
marketable securities or $10.0 million. The Company used funds available under
the Credit Agreement to prepay the Term Loan. The Credit Agreement expires
December 31, 1996 and is secured by a pledge of all the capital stock of the
Company's wholly-owned subsidiaries, a guarantee by the Company and a lien
on and a security interest in the Company's cash, cash equivalents, marketable
securities and accounts receivable.
Borrowings under the Credit Agreement bear interest at either the lending
institution's prime rate plus 1% per annum or the Eurodollar rate plus 2% per
annum. The Company is required to pay a quarterly commitment fee at a rate
of 1/2 of 1% per annum on the average daily unused amount of funds available.
Additionally, the Credit Agreement contains certain customary affirmative and
negative covenants which require the Company to maintain certain financial
ratios, and, among other things, restrict (i) declaration or payment of
dividends, (ii) the incurrence of any additional indebtedness, (iii) capital
expenditures and (iv) aggregated lease payments. At June 30, 1995, the
Company had an aggregate of $8.3 million in borrowings with its bank.
Additionally, the Company was in compliance with all financial covenants under
the Credit Agreement, as amended and restated.
Consistent with the Company's growth strategy, the Company is actively
seeking new clients and developing new products to augment its current revenue
shortfalls. Over the past twelve months, the Company added to its staff 8
senior marketing personnel, each with extensive experience in in-store
marketing. No assurances can be given that these efforts will result in any
new clients or new commercially viable products.
Due to developmental lead time of between 6 and 18 months from initial
concept to national roll-out of a merchandising display system, revenues that
may be generated by the new personnel will not begin to be realized until the
second half of 1995 or early 1996. The Company is reassessing certain
components of its cost structure. To date, the Company has identified and
begun implementing a cost reduction program, with the anticipation that such
actions will generate estimated annual cost savings of $3.0 million, in order
to mitigate the impact of the current reduction in net revenues experienced
by the Company. There can be no assurance that such actions will be
successful in these regards.
As a result of the budgetary restraints of certain of the Company's
clients and consequent reduced shipments to such clients discussed above, the
Company believes that it may continue to experience revenue shortfalls during
1995 while it seeks to diversify its client base and improve its cost and
expense structures. Due to the size of the merchandising display system
programs and the underlining timing of the shipment of the orders thereof,
the potential ranges of revenue shortfalls cannot be estimated with adequate
certainty at this time. However, the Company believes its current cash and
short-term investments, backlog, future cash flows from operations, continued
management of working capital requirements and availability under its
revolving credit facility will be sufficient to support its debt service
requirements and its other capital and operating needs. However, there can be
no assurance that such belief will prove to be correct, that additional
financing will not be required, or that any such financing will be available
on commercially reasonable terms or otherwise.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HMG Worldwide Corporation
(Registrant)
Date: August 12, 1995 /s/ Robert V. Cuddihy, Jr.
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Robert V. Cuddihy, Jr.
Chief Operating Officer and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 11,352
<SECURITIES> 0
<RECEIVABLES> 8,711
<ALLOWANCES> 636
<INVENTORY> 5,153
<CURRENT-ASSETS> 25,517
<PP&E> 4,529
<DEPRECIATION> 1,943
<TOTAL-ASSETS> 34,943
<CURRENT-LIABILITIES> 18,395
<BONDS> 3,671
<COMMON> 76
0
0
<OTHER-SE> 15,734
<TOTAL-LIABILITY-AND-EQUITY> 34,943
<SALES> 22,035
<TOTAL-REVENUES> 22,035
<CGS> 17,666
<TOTAL-COSTS> 17,666
<OTHER-EXPENSES> 8,789
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 356
<INCOME-PRETAX> (4,459)
<INCOME-TAX> 17
<INCOME-CONTINUING> (4,476)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,476)
<EPS-PRIMARY> (.59)
<EPS-DILUTED> (.59)
</TABLE>