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: March 31, 1996
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
- ------------------------------ ---------------
(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
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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 May 14, 1996
- ---------------------------- ---------------------------
Common Stock, $.01 par value 7,567,517
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<TABLE>
Part I. Financial Information
Item 1.
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
March 31, 1996 December 31, 1995
-------------- -----------------
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,782 $ 8,139
Accounts receivable - less
allowance for doubtful
accounts of $579 and $596 7,818 8,681
Inventory 4,072 5,254
Prepaid expenses 393 440
Other current assets 413 225
------- -------
Total current assets 21,478 22,739
Property and equipment - net 2,340 2,143
Excess of cost over fair
market value of assets acquired,
less accumulated amortization
of $901 and $799 7,258 7,360
Other assets 406 406
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$31,482 $32,648
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of
long-term obligations $ 9,725 $ 7,557
Note payable 461 714
Accounts payable 4,486 4,331
Accrued employee compensation
and benefits 1,043 1,571
Deferred revenue 354 696
Accrued expenses 1,213 1,533
Restructuring costs 1,635 1,973
Other current liabilities 1,525 1,740
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Total current liabilities 20,442 20,115
Pension obligation 1,908 1,965
Other long-term liabilities 443 492
------- -------
22,793 22,572
Stockholders' equity:
Common stock, par value $.01;
50,000,000 shares authorized;
7,567,517 issued
and outstanding 76 76
Additional paid-in capital 33,258 33,258
Accumulated deficit (24,645) (23,258)
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8,689 10,076
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$31,482 $32,648
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
[CAPTION]
<TABLE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
(unaudited)
Three Months Ended March 31,
----------------------------
1996 1995
---- ----
<S> <C> <C>
Net revenues $10,684 $10,950
Cost of revenues 8,844 8,616
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Gross profit 1,840 2,334
Selling, general and
administrative expenses 3,130 4,640
------- -------
Loss from operations (1,290) (2,306)
Interest income 102 159
Interest expense (191) (161)
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Loss before provision
for income taxes (1,379) (2,308)
Provision for income taxes (8) (11)
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Net loss ($ 1,387) ($ 2,319)
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Net loss per common and
common equivalent share ($0.18) ($ 0.31)
===== ======
Weighted average number of
common and common equivalent
shares outstanding 7,567,517 7,567,517
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
[CAPTION]
<TABLE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended March 31,
----------------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $11,206 $ 8,985
Interest received 102 159
Cash paid to suppliers (9,573) (9,180)
Cash paid to employees (2,509) (3,076)
Income taxes paid (11)
Interest paid (189) (161)
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Net cash used in operating
activities (963) (3,284)
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Cash flows from investing activities:
Proceeds from redemption of marketable
securities 6,828
Capital expenditures (308) (129)
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Net cash provided by
(used in) investing
activities (308) 6,699
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Cash flows from financing activities:
Net proceeds from exercise
of stock options 10
Proceeds derived from a credit
agreement 2,168 1,819
Principal payments of
outstanding debt obligations (253) (245)
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Net cash provided by
financing activities 1,915 1,584
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Effect of exchange rate changes (1) 94
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Net increase in cash and
cash equivalents 643 5,093
Cash and cash equivalents
at beginning of year 8,139 6,469
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Cash and cash equivalents
at March 31 $ 8,782 $11,562
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
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[CAPTION]
<TABLE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
(in thousands)
(unaudited)
Three Months Ended March 31,
----------------------------
1996 1995
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<S> <C> <C>
Reconciliation of net loss
to net cash used in
operating activities:
Net loss ($1,387) ($2,319)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and amortization 213 335
Loss on foreign currency translation 7
Decrease (increase) in assets:
Accounts receivable 859 (1,413)
Inventory 1,182 215
Prepaid expenses 47 215
Other assets (188) 165
Increase (decrease) in liabilities:
Accounts payable 157 914
Deferred revenue (342) (634)
Accrued expenses (906) (762)
Restructuring costs (548)
Pension obligation (57)
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Net cash used in operating
activities ($ 963) ($3,284)
====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
[CAPTION]
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 Systems, 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 March 31, 1996, and the Consolidated
Statements of Operations and Cash Flows for the three months ended March 31,
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 March 31, 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 consolidated financial
statements and notes thereto included in the Company's December 31, 1995
annual report to shareholders. The results of operations for the period ended
March 31, 1996 are not necessarily indicative of the operating results for the
full year.
Note 2 - Inventory
Inventories at March 31, 1996 and December 31, 1995 consisted of the
following:
<TABLE>
March 31, December 31,
1996 1995
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(in thousands)
<S> <C> <C>
Finished goods $ 523 $1,000
Work in process 920 1,353
Raw materials 2,629 2,901
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$4,072 $5,254
====== ======
</TABLE>
<PAGE>
[CAPTION]
HMG WORLDWIDE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
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 March 31, 1996 and 1995, a valuation allowance of approximately
$10.0 million and $5.9 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 three months ended March 31,
1996 and 1995 are as follows:
Three Months Ended March
------------------------
1996 1995
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(in thousands)
Income tax provision $8 $11
== ===
<PAGE>
[CAPTION]
HMG WORLDWIDE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended March 31, 1996 as Compared to the
Three Months Ended March 31, 1995
Net revenues were $10.7 million for the three months ended March 31,
1996 as compared to $11.0 million for the three months ended March 31, 1995.
The decrease in net revenues from period to period was due principally to a
reduction in capital and marketing expenditures of a significant client of
approximately $925,000, offset by the increase of net revenues of $1.2 million
derived from the operations of HMG Intermark, acquired as of September 30,
1995. The decrease in net revenues realized by the Company from one
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 this client will resume at historical levels.
Gross profit for the three months ended March 31, 1996 was $1.8 million
as compared to $2.3 million for the three months ended March 31, 1995. The
decrease in gross profit of approximately $494,000 was principally a result of
the decline in both net revenues and gross margin. For the three months ended
March 31, 1996 and 1995, the Company's gross margin was 17.2% and 21.3%,
respectively. The gross margin decrease was due principally to an unfavorable
production revenue mix resulting in a 2.3% decrease, and the underabsorption
of fixed overhead expenses as a percentage of net revenues of 1.8%, which
includes the net effect of (i) an increase in fixed overhead expense relating
to HMG Intermark's operations of 3.7% and (ii) a decrease in fixed overhead
expenses at the Company's New Jersey plant of 1.9%.
Selling, general and administrative expense for the three months ended
March 31, 1996 was $3.1 million as compared to $4.6 million for the comparable
period in 1995. The $1.5 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 $789,000, (ii) a reduction of commission expense of
approximately $376,000 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 three months ended March 31, 1996, the Company generated
interest income of $102,000 as compared to $159,000 for the three months ended
March 31, 1995. This decrease was attributable to a reduction in cash and
cash equivalents invested in interest bearing marketable securities and
commercial paper from period to period.
Interest expense was $191,000 for the three months ended March 31, 1996
as compared to $161,000 for the three months ended March 31, 1995. The
increase in interest expense was principally due to the increased average
borrowings from period to period.
As a result of the foregoing factors, the Company generated a net loss
of $1.4 million, or $0.18 per share, for the three months ended March 31, 1996
as compared to a net loss of $2.3 million, or $0.31 per share, for the three
months ended March 31, 1995.
<PAGE>
[CAPTION]
HMG WORLDWIDE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -continued
Stockholders' Equity
Stockholders' equity decreased $1.4 million to $8.7 million at March
31, 1996 from $10.1 million at December 31, 1995, due to the net loss from
operations of $1.4 million.
Income Taxes
At December 31, 1995, the Company has 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 three months ended March 31,
1996 was $8,000 as compared to $11,000 for the three months ended March 31,
1995. The income tax provision for the three months ended March 31, 1996 and
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 March 31, 1996, the Company's aggregate backlog was approximately
$20.0 million as compared to $23.8 million and $19.1 million at December 31,
1995 and March 31, 1995, respectively. Of such aggregate backlog at March 31,
1996, 47.9% was attributable to two clients. The Company anticipates that
substantially all such backlog at March 31, 1996 will be filled during the
next twelve months. In addition to the $20.0 million backlog at March 31,
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 March 31, 1996 was $30.5 million, of
which the Company anticipates that $4.5 million will be shipped within the
next twelve months. 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 March 31, 1996 and December 31, 1995
aggregated $8.8 million and $8.1 million, respectively. The Company's
increase in cash and cash equivalents of approximately $643,000 for the three
months ended March 31, 1996 was due principally to the net effects of (i) net
cash used in operations of $963,000, (ii) capital expenditures of $308,000 and
(iii) reductions of a note payable of $253,000, offset by proceeds from
borrowings under the Company's revolving line of credit with its bank lender
of $2.2 million. The Company's negative cash flows from operations for the
three months ended March 31, 1996 resulted principally from (i) a decrease in
assets of $1.9 million, offset by (ii) a decrease in general liabilities of
$1.7 million and (iii) a net loss from operations before non-cash charges of
$1.2 million.
<PAGE>
[CAPTION]
HMG WORLDWIDE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS - continued
The Company has a secured revolving credit facility ("Credit
Agreement") with its bank lender which advances up to the lessor 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. At March 31, 1996 there was $9.7 million outstanding. 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. As of March 31, 1996, the Company was in compliance with all
financial covenants of the Credit Agreement, as amended. The Company is
actively pursuing an extension of the Credit Agreement with its bank lender
under terms similar to its existing arrangement. However, there can be no
assurance that the Company will receive an extension of the Credit Agreement
or that the terms will be comparable to its existing arrangement.
Consistent with the Company's growth strategy, the Company is actively
seeking new clients and is developing new products to augment its current
revenue shortfalls. 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 quarter of 1996. The Company is continuing to adjust its cost structure
as it continues to consolidate its operations in order to reduce the impact of
the current reduction in net revenues experienced by the Company.
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 its 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 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>
[CAPTION]
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: May 14, 1996 /s/ Robert V. Cuddihy, Jr.
------------ --------------------------
Robert V. Cuddihy, Jr.
Chief Operating Officer and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 8782
<SECURITIES> 0
<RECEIVABLES> 8397
<ALLOWANCES> 579
<INVENTORY> 4072
<CURRENT-ASSETS> 21478
<PP&E> 3535
<DEPRECIATION> 1195
<TOTAL-ASSETS> 31482
<CURRENT-LIABILITIES> 20442
<BONDS> 0
0
0
<COMMON> 76
<OTHER-SE> 10000
<TOTAL-LIABILITY-AND-EQUITY> 31482
<SALES> 10684
<TOTAL-REVENUES> 10684
<CGS> 8844
<TOTAL-COSTS> 8844
<OTHER-EXPENSES> 3130
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 191
<INCOME-PRETAX> (1379)
<INCOME-TAX> 8
<INCOME-CONTINUING> (1387)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1387)
<EPS-PRIMARY> (0.18)
<EPS-DILUTED> (0.18)
</TABLE>
