UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1996
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number: 0-13121
HMG Worldwide Corporation
(Exact name of registrant as specified in its charter)
Delaware 13-3402432
_______________________________ ________________
(State or other jurisdiction of (I.R.S.Employer)
incorporation or organization) Identification No.)
475 Tenth Avenue, New York, NY 10018
_______________________________________ _________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212)736-2300
_____________
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
--- ---
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
--- ---
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 November 12, 1996
____________________________ ________________________________
Common Stock, $.01 par value 7,567,517
<PAGE>
Part I. Financial Information
Item 1.
<TABLE>
<CAPTION>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 30, 1996 December 31, 1995
__________________ _________________
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,444 $ 8,139
Accounts receivable - less
allowance for doubtful
accounts of $516 and $596 9,963 8,681
Inventory 3,995 5,254
Prepaid expenses 133 440
Other current assets 395 225
______ ______
Total current assets 20,930 22,739
Property and equipment - net 2,887 2,143
Excess of cost over fair
market value of assets acquired,
less accumulated amortization
of $1,105 and $799 7,054 7,360
Other assets 506 406
_______ _______
$31,377 $32,648
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of
long-term obligations $ 8,128 $ 7,557
Note payable 461 714
Accounts payable 6,639 4,331
Accrued employee compensation
and benefits 1,295 1,571
Deferred revenue 1,202 696
Accrued expenses 1,150 1,533
Restructuring costs 1,207 1,973
Other current liabilities 1,033 1,740
_______ _______
Total current liabilities 21,115 20,115
Pension obligation 1,730 1,965
Other long-term liabilities 413 492
_______ _______
23,258 22,572
_______ _______
Stockholders' equity:
Common stock, par value $.01;
50,000,000 shares authorized;
7,567,517 shares issued
and outstanding 76 76
Additional paid-in capital 33,258 33,258
Accumulated deficit (25,215) (23,258)
_______ _______
8,119 10,076
_______ _______
$31,377 $32,648
======= =======
</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 Nine Months Ended
September 30, September 30,
__________________ _________________
1996 1995 1996 1995
____ ____ ____ ____
<S> <C> <C> <C> <C>
Net revenues $13,927 $13,662 $38,473 $35,697
Cost of revenues 11,218 10,483 30,631 28,149
_______ _______ _______ _______
Gross profit 2,709 3,179 7,842 7,548
Selling, general and
administrative expenses 3,075 3,632 9,470 12,421
_______ _______ _______ _______
Loss from operations (366) (453) (1,628) (4,873)
Interest income 88 132 267 449
Interest expense (206) (232) (584) (588)
Other income 30 30
_______ _______ _______ ______
Loss before provision
for income taxes (484) (523) (1,945) (4,982)
Provision (benefit) for
income taxes 1 (8) 12 9
_______ _______ _______ ______
Net loss ($ 485) ($ 515) ($ 1,957) ($ 4,991)
======= ======= ======= =======
Net loss per common
and common equivalent share ($ 0.06) ($ 0.07) ($ 0.26) ($ 0.66)
======= ======= ======= =======
Weighted average number
of common and common
equivalent shares
outstanding 7,567,517 7,567,517 7,567,517 7,567,517
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended September 30,
_______________________________
1996 1995
____ ____
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $37,716 $30,494
Interest received 267 449
Cash paid to suppliers (31,182) (29,702)
Cash paid to employees (7,126) (8,871)
Income taxes paid (12) (9)
Interest paid (590) (588)
_______ _______
Net cash used in
operating activities (927) (8,227)
_______ _______
Cash flows from investing activities:
Proceeds from redemption
of marketable securities 6,828
Capital expenditures (1,084) (361)
________ _______
Net cash provided by
(used in) investing
activities (1,084) 6,467
________ _______
Cash flows from financing activities:
Net proceeds from exercise
of stock options 10
Proceeds derived from a credit
agreement 571 4,936
Principal payments of
outstanding debt obligations (253) (488)
________ _______
Net cash provided by
financing activities 318 4,458
________ _______
Effect of exchange rate changes (2) 75
________ _______
Net increase (decrease) in
cash and cash equivalents (1,695) 2,773
Cash and cash equivalents
at beginning of year 8,139 6,469
________ ________
Cash and cash equivalents
at September 30 $ 6,444 $ 9,242
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
(in thousands)
(unaudited)
Nine Months Ended September 30,
_______________________________
1996 1995
____ ____
<S> <C> <C>
Reconciliation of net loss
to net cash used in
operating activities:
Net loss ($1,957) ($4,991)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and amortization 646 1,021
Loss on foreign currency translation
Decrease (increase) in assets:
Accounts receivable (1,290) (5,058)
Inventory 1,259 (479)
Prepaid expenses 306 518
Other assets (270) (38)
Increase (decrease) in liabilities:
Accounts payable 2,311 1,946
Deferred revenue 506 (226)
Accrued expenses (1,437) (920)
Restructuring costs (766)
Pension obligation (235)
________ _______
Net cash used in operating
activities ($ 927) ($8,227)
====== ======
</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 six operating
wholly-owned subsidiaries being, respectively, HMG Worldwide In-Store Marketing,
Inc. ("HMG"), Intermark Corp. ("Intermark"), Creative Displays, Inc. ("CDI"),
HMG Europe B.V. ("HMGBV"), Electronic Voting System, Inc. ("EVS") and HMG
Intermark Worldwide Manufacturing, Inc. ("HMG Intermark") with facilities in
New York, New Jersey, Pennsylvania, Illinois and Texas. HMG Intermark was
acquired pursuant to a purchase agreement dated September 30, 1995 whereby
the Company acquired the merchandising display operations of Benson Eyecare
Corporation.
The Consolidated Balance Sheet as of September 30, 1996, the Consolidated
Statements of Operations for the three months and nine months ended September
30, 1996 and 1995, and the Consolidated Statements of Cash Flows for the nine
months ended September 30, 1996 and 1995, 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 September 30, 1996 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, 1995 annual report to stockholders. The
results of operations for the period ended September 30, 1996 are not
necessarily indicative of the operating results for the full year.
Note 2 - Inventory
Inventories at September 30, 1996 and December 31, 1995 consisted of the
following:
September 30, December 31,
1996 1995
____ ____
(in thousands)
Finished goods $ 803 $1,000
Work in process 938 1,353
Raw materials 2,254 2,901
______ ______
$3,995 $5,254
====== ======
Note 3 - Income Taxes
At December 31, 1995, the Company had net operating loss carryforwards of
approximately $19.3 million which expire during the years 2001 through 2011.
As of September 30, 1996 and 1995, a valuation allowance of approximately
$10.1 million and $6.7 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.
<PAGE>
HMG WORLDWIDE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
Components of income tax expense for the nine months ended September 30, 1996
and 1995 are as follows:
Nine Months Ended September 30,
______________________________
1996 1995
____ ____
(in thousands)
Income tax provision $12 $9
___ __
$12 $9
=== ==
<PAGE>
HMG WORLDWIDE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended September 30, 1996 as Compared to the
Three Months Ended September 30, 1995
Net revenues were $13.9 million for the three months ended September 30,
1996 as compared to $13.7 million for the three months ended September 30,
1995. The increase in net revenues of approximately $265,000 was due
principally to (i) revenues of $806,000 derived from the operations of HMG
Intermark, acquired as of September 30, 1995, and (ii) an increase in marketing
expenditures of several significant clients of $1.4 million, offset by a
reduction in marketing expenditures of one significant client of approximately
$2.0 million. The decrease in net revenues from one client was principally the
result of the client's reduction in its capital and marketing expenditures for
budgetary and other reasons. Reduced shipments to this client may continue if
it continues such budgetary reductions and deferrals. There can be no
assurance that net revenues and shipments to these clients will continue at the
current levels or resume at historical levels.
Gross profit for the three months ended September 30, 1996 was $2.7
million as compared to $3.2 million for the three months ended September 30,
1995. The decrease in gross profit of approximately $470,000 was the result of
a decrease in gross margin. For the three months ended September 30, 1996 and
1995, the Company's gross margin was 19.5% and 23.3%, respectively. The gross
margin decrease was due principally to an unfavorable production mix resulting
in a 2.1% decrease, and the under-absorption of fixed overhead expenses as a
percentage of net revenues of 1.7%, which includes the net effect of (i) an
increase in fixed overhead expense relating to HMG Intermark's operations of
4.3% and (ii) a decrease in fixed overhead expenses at the Company's New Jersey
plant of 2.6%.
Selling, general and administrative expense ("SG&A") for the three months
ended September 30, 1996 was $3.1 million as compared to $3.6 million for the
comparable period in 1995. The decrease in SG&A of approximately $557,000 from
period to period was principally a result of the Company's efforts to decrease
its overhead expenses and restructure its operations, including the
consolidation of its manufacturing facilities, resulting in (i) a reduction of
personnel costs of approximately $395,000 and (ii) decreased spending in other
general expenses.
For the three months ended September 30, 1996, the Company generated
interest income of $88,000 as compared to $132,000 for the three months ended
September 30, 1995. This decrease in interest income was attributable
principally to a reduction in cash and cash equivalents invested in interest
bearing marketable securities and commercial paper from period to period.
Interest expense was $206,000 for the three months ended September 30, 1996
as compared to $232,000 for the three months ended September 30, 1995. The
decrease in interest expense was principally due to the decreased average
borrowings from period to period.
As a result of the foregoing factors, the Company incurred a net loss of
$485,000, or $0.06 per share, for the three months ended September 30, 1996 as
compared to a net loss of $515,000, or $0.07 per share, for the three months
ended September 30, 1995.
<PAGE>
HMG WORLDWIDE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
Nine Months Ended September 30, 1996 as Compared to the
Nine Months Ended September 30, 1995
Net revenues were $38.5 million for the nine months ended September 30, 1996
as compared to $35.7 million for the nine months ended September 30, 1995. The
increase in net revenues of $2.8 million was due principally to (i) $3.2
million derived from the operations of HMG Intermark and (ii) an increase in
marketing expenditures of one significant client of $4.0 million, offset by a
reduction in marketing expenditures of another significant client of
approximately $5.2 million. The increase in marketing expenditures for one
significant client was principally the result of the shipment of a national
roll-out of a new merchandising program of $2.3 million and an increase in
shipments of $1.7 million due to an increase in the marketing budget from
period to period. The decrease in net revenues from another significant client
was principally the result of the client's reduction in its capital and
marketing expenditures for budgetary and other reasons. Reduced shipments to
this client may continue if it continues such budgetary reductions and
deferrals. There can be no assurance that net revenues and shipments to these
clients will continue at the current levels or resume at historical levels.
Gross profit for the nine months ended September 30, 1996 was $7.8 million
as compared to $7.5 million for the nine months ended September 30, 1995. The
increase in gross profit of approximately $294,000 was the result of the net
effect of (i) an increase in net revenues and (ii) a decrease in gross margin.
For the nine months ended September 30, 1996 and 1995, the Company's gross
margin was 20.4% and 21.1%, respectively. The gross margin decrease of 0.7%
was due principally to the under-absorption of fixed overhead expenses as a
percentage of net revenues of 0.7%, which includes the net effect of (i) an
increase in fixed overhead expense relating to HMG Intermark's operations of
3.6% and (ii) a decrease in fixed overhead expenses at the Company's New Jersey
plant of 2.9%.
SG&A for the nine months ended September 30, 1996 was $9.5 million as
compared to $12.4 million for the comparable period in 1995. The $2.9 million
decrease from period to period was principally a result of the Company's
efforts to decrease its overhead expenses and restructure its operations,
including the consolidation of its manufacturing facilities, resulting in (i) a
reduction of personnel costs of approximately $1.9 million, (ii) a reduction of
commission expense of approximately $225,000 due principally to
period-to-period commission rate variances based upon a mix of net revenues
and (iii) decreased spending in other general expenses.
For the nine months ended September 30, 1996, the Company generated interest
income of $267,000 as compared to $449,000 for the nine months ended September
30, 1995. This decrease in interest income was attributable principally to a
reduction in cash and cash equivalents invested in interest-bearing marketable
securities and commercial paper from period to period.
Interest expense was $584,000 for the nine months ended September 30, 1996
as compared to $588,000 for the nine months ended September 30, 1995. Average
borrowings from period to period were comparable, resulting in comparable
interest expense.
<PAGE>
HMG WORLDWIDE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
As a result of the foregoing factors, the Company incurred a net loss of
$2.0 million, or $0.26 per share, for the nine months ended September 30, 1996
as compared to a net loss of $5.0 million, or $0.66 per share, for the nine
months ended September 30, 1995.
Stockholders' Equity
Stockholders' equity decreased $2.0 million to $8.1 million at September 30,
1996 from $10.1 million at December 31, 1995. The decrease in stockholders'
equity is due to the net loss of $2.0 million.
Income Taxes
At December 31, 1995, the Company had available approximately $19.3 million
in net operating loss carryforwards which expire during the years 2001 through
2011.
The Company's income tax provision for the nine months ended September 30,
1996 was $12,000 as compared to $9,000 for the nine months ended September 30,
1995. The income tax provision for the nine months ended September 30, 1996 and
September 30, 1995 was comprised principally of state and local taxes.
Inflation
The effect of inflation on the Company's operations has not been significant
to date.
Backlog
At September 30, 1996, the Company's aggregate backlog was approximately
$14.8 million as compared to $23.8 million and $21.4 million at December 31,
1995 and September 30, 1995, respectively. Of such aggregate backlog at
September 30, 1996, 37.1% was attributable to two clients. The decrease in
aggregate backlog from September 30, 1995 to September 30, 1996 of $6.6 million
was principally the result of one significant client's change in policy
regarding issuing its purchase commitments to the Company. Historically, this
client issued one purchase order covering 12 months of forecasted production
requirements from July to June each year. Due to budget restrictions and other
reasons, effective July 1996, this client is forecasting production on a
quarterly basis only and issuing purchase commitments to the Company based upon
these three month production projections. No assurance can be given that this
client's capital and marketing budget will continue at the current levels or
resume at historical levels. The Company anticipates that substantially all
such backlog at September 30, 1996 will be filled during the next twelve
months.
In addition to the $14.8 million backlog at September 30, 1996, the
Company's supply contract with the Foster Grant Group L.P. ("Foster Grant")
requires Foster Grant, subject to certain limitations, to purchase at least 70%
of its in-store merchandising displays from the Company with average annual
purchases to aggregate no less than $4.5 million. The aggregate value of the
Foster Grant supply contract at September 30, 1996 was $28.1 million, of which
the Company anticipates that $4.5 million will be shipped within the next
twelve months.
<PAGE>
HMG WORLDWIDE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
Due to quarter-to-quarter fluctuations in the Company's backlog levels,
attributable 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 September 30, 1996 and December 31, 1995
aggregated $6.4 million and $8.1 million, respectively. The Company's decrease
in cash and cash equivalents of approximately $1.7 million for the nine months
ended September 30, 1996 was due principally to (i) net cash used in operations
of $927,000, (ii) capital expenditures of $1.1 million, and (iii) principal
payments of $253,000 made to reduce the aggregate borrowings under a short-term
note payable offset by proceeds from borrowings under the Company's revolving
line of credit with its bank lender of $571,000. The Company's negative cash
flows from operations for the nine months ended September 30, 1996 resulted
principally from (i) an increase in general liabilities of $386,000 offset by
(ii) a net loss from operations before non-cash charges of $1.3 million.
The Company has a secured revolving credit facility ("Credit Agreement")
with its bank lender 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 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. The
Credit Agreement bears interest at either the lending institution's prime rate
plus 1% per annum or the Eurodollar rate plus 2% per annum. The Credit
Agreement contains certain customary affirmative and negative covenants which,
among other matters, require the Company to maintain certain financial ratios.
At September 30, 1996 the Company was in breach of certain of these financial
ratios. The lender has waived the covenant violations as of September 30,
1996. At September 30, 1996 there was $8.1 million outstanding.
In October 1996, the Company reached an agreement in principle with a new
lender for a three year credit facility in the form of a revolving credit
agreement and a term loan. Pursuant to the proposed terms of this agreement,
the lender will advance up to the lesser of the sum of (i) 85% of eligible
accounts receivable, (ii) 60% of eligible finished goods inventory and (iii)
the Company's cash, cash equivalents and marketable securities, or $ 11.0
million under a revolving credit facility. In addition, the lender will
advance up to an additional $1.7 million as a term loan collateralized by the
Company's current real estate, future real estate to be acquired and machinery
and equipment. The proposed term loan will be amortized on a sixty month basis
with a final payment due upon the termination of the credit facility. Although
there is an agreement in principle with a new lender, a definitive agreement
has not been consummated to date and there can be no assurance that the Company
will close on this credit facility.
Consistent with the Company's growth strategy, the Company is actively
seeking new clients and is developing new products. Additionally, in 1995, the
Company implemented a cost reduction program, including a consolidation of its
manufacturing facilities, of which a portion of the effects of such reductions
were realized in the first nine months of 1996.
<PAGE>
HMG WORLDWIDE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
The Company is continuing to adjust its cost structure as it continues to
consolidate its operations.
As a result of the budgetary constraints of certain of the Company's clients
and consequent reduced shipments to such clients, the Company cannot give
assurance that net revenues and shipments to these clients will resume at
historical levels while it seeks to diversify its client base. However, the
Company believes that through the implementation of its 1995 cost reduction
program, including the consolidation of its manufacturing facilities, the
effect of the Foster Grant supply contract, its current cash and cash
equivalents, its backlog, anticipated future cash flows from operations,
continued management of working capital requirements and availability under its
current revolving credit facility and proposed new 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: November 12, 1996 /s/ Robert V. Cuddihy, Jr.
_________________ __________________________
Robert V. Cuddihy, Jr.
Chief Operating Officer and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 6444
<SECURITIES> 0
<RECEIVABLES> 10479
<ALLOWANCES> 516
<INVENTORY> 3995
<CURRENT-ASSETS> 20930
<PP&E> 4311
<DEPRECIATION> 1424
<TOTAL-ASSETS> 31377
<CURRENT-LIABILITIES> 21155
<BONDS> 0
0
0
<COMMON> 76
<OTHER-SE> 8043
<TOTAL-LIABILITY-AND-EQUITY> 31377
<SALES> 38473
<TOTAL-REVENUES> 38473
<CGS> 30631
<TOTAL-COSTS> 30631
<OTHER-EXPENSES> 9470
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 584
<INCOME-PRETAX> (1945)
<INCOME-TAX> 12
<INCOME-CONTINUING> (1957)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1957)
<EPS-PRIMARY> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
