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, 1997
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.
No Yes X
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.
No Yes
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 12, 1997
Common Stock, $.01 par value 8,504,589
<PAGE>
Part I. Financial Information
Item 1.
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
March 31, 1997 December 31, 1996
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 6,626 $ 6,950
Accounts receivable - less
allowance for doubtful
accounts of $448 and $577 6,911 6,454
Inventory 3,898 4,214
Prepaid expenses 127 95
Other current assets 229 240
Total current assets 17,791 17,953
------ ------
Property and equipment - net 3,329 3,349
Excess of cost over fair
market value of assets acquired,
less accumulated amortization
of $1,309 and $1,207 6,850 6,952
Other assets 412 501
--- ---
$28,382 $28,755
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of
long-term obligations $10,324 $ 9,439
Note payable 258 338
Accounts payable 5,658 5,803
Accrued employee compensation
and benefits 1,260 1,033
Deferred revenue 1,068 1,835
Accrued expenses 1,000 1,566
Other current liabilities 912 1,175
--- -----
Total current liabilities 20,480 21,189
Pension obligation 1,642 1,684
Other long-term liabilities 672 691
--- ---
22,794 23,564
------ ------
Stockholders' equity:
Common stock, par value $.01;
50,000,000 shares authorized;
8,504,589 and 8,129,589 issued
and outstanding 85 81
Additional paid-in capital 34,271 33,903
Accumulated deficit (28,768) (28,793)
------- -------
5,588 5,191
----- -----
$28,382 $28,755
======= =======
See accompanying notes to consolidated financial statements.
2
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
(unaudited)
Three Months Ended March 31,
1997 1996
Net revenues $10,200 $10,684
Cost of revenues 7,464 8,844
----- -----
Gross profit 2,736 1,840
Selling, general and
administrative expenses 2,826 3,130
Loss from operations (90) (1,290)
Interest income 73 102
Interest expense (220) (191)
Other income 267
---
Income (loss) before provision
for income taxes 30 (1,379)
Provision for income taxes (5) (8)
-- --
Net income (loss) $ 25 ($ 1,387)
======= ========
Net income (loss) per common and
common equivalent share $ - ($ 0.18)
==== ========
Weighted average number of
common and common equivalent
shares outstanding 8,383,755 7,567,517
========= =========
See accompanying notes to consolidated financial statements.
3
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended March 31,
1997 1996
Cash flows from operating activities:
Cash received from customers $8,973 $11,206
Interest received 73 102
Cash paid to suppliers (8,341) (9,573)
Cash paid to employees (2,215) (2,509)
Income taxes paid (4)
Interest paid (220) (189)
---- ----
Net cash used in operating
activities (1,734) (963)
Cash flows from investing activities:
Proceeds from the sale of
an investment 356
Capital expenditures (103) (308)
---- ----
Net cash provided by
(used in) investing
activities 253 (308)
--- ----
Cash flows from financing activities:
Net proceeds from the sale of common
stock as part of a private placement 372
Proceeds derived from a credit
agreement, net 885 2,168
Principal payments of
outstanding debt obligations (97) (253)
--- ----
Net cash provided by
financing activities 1,160 1,915
----- -----
Effect of exchange rate changes (3) (1)
-- --
Net increase (decrease) in cash and
cash equivalents (324) 643
Cash and cash equivalents
at beginning of year 6,950 8,139
----- -----
Cash and cash equivalents
at March 31 $6,626 $ 8,782
== ====== =======
See accompanying notes to consolidated financial statements.
4
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
(in thousands)
(unaudited)
Three Months Ended March 31,
1997 1996
Reconciliation of net income (loss)
to net cash used in
operating activities:
Net income (loss) 25 ($1,387)
Adjustments to reconcile net
income (loss) to net cash used in
operating activities:
Depreciation and amortization 225 213
Loss on foreign currency translation 7
Other income (267)
Decrease (increase) in assets:
Accounts receivable (457) 859
Inventory 316 1,182
Prepaid expenses (32) 47
Other assets 11 (188)
Increase (decrease) in liabilities:
Accounts payable (145) 157
Deferred revenue (767) (342)
Accrued expenses (601) (1,454)
Pension obligation (42) (57)
--- ---
Net cash used in operating
activities ($1,734) ($ 963)
======= =======
See accompanying notes to consolidated financial statements.
5
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 - Consolidated Financial Statements
HMG Worldwide Corporation ("the Company") conducts its operations
principally through four wholly-owned subsidiaries being, respectively, HMG
Worldwide In- Store Marketing, Inc. ("HMG"), Intermark Corp. ("Intermark"), HMG
Intermark Worldwide Manufacturing, Inc. ("HMG Intermark") and Creative Displays,
Inc. ("CDI"), with facilities in New York, Pennsylvania and Illinois.
The Consolidated Balance Sheet as of March 31, 1997, and the Consolidated
Statements of Operations and Cash Flows for the three months ended March 31,
1997 and 1996, 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, 1997 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, 1996 annual report to
shareholders. The results of operations for the period ended March 31, 1997 are
not necessarily indicative of the operating results for the full year. Note 2 -
Inventory
Inventories at March 31, 1997 and December 31, 1996 consisted of the
following:
March 31, December 31,
1997 1996
(in thousands)
Finished goods $ 887 $1,312
Work in process 645 653
Raw materials 2,366 2,249
----- -----
$3,898 $4,214
====== ======
Note 3 - Income Taxes
At December 31, 1996, the Company had net operating loss carryforwards of
approximately $27.5 million which expire during the years 2001 through 2011. As
of March 31, 1997, a valuation allowance of approximately $11.7 million, 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, 1997
and 1996 are as follows:
Three Months Ended March 31,
1997 1996
(in thousands)
State and local
income taxes $ 5 $ 8
=== ===
6
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
Note 4 - Private Placement
In December 1996, the Company initiated a private placement ("HMG Private
Placement") whereby the Company offered for sale up to 2 million shares of
common stock at $1.00 per share. Pursuant to the terms of the HMG Private
Placement, as of December 31, 1996 the Company sold 377,500 shares of its common
stock at $1.00 per share from which it derived net proceeds of approximately
$377,000. For the three months ended March 31, 1997, the company sold an
additional 375,000 shares of common stock pursuant to the terms of the HMG
Private Placement and derived net proceeds of approximately $372,000. All stock
issued pursuant to the terms of the HMG Private Placement is restricted stock
which has not been registered under the Securities Act of 1933, as amended ("the
Securities Act"), and may not be resold by the respective purchasers thereof
absent registration under the Securities Act or the availability of an
applicable exemption from such registration statement.
7
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended March 31, 1997 as Compared to the
Three Months Ended March 31, 1996
Net revenues were $10.2 million for the three months ended March 31, 1997
as compared to $10.7 million for the three months ended March 31, 1996. The
decrease in net revenues from period to period was due principally to a
reduction in capital and marketing expenditures of one significant client of
approximately $1.3 million, offset by, the increase in marketing expenditures of
another significant client of approximately $957,000. The increase in marketing
expenditures of one significant client was principally the result of a national
rollout of a new merchandising program. 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, 1997 was $2.7 million as compared to
$1.8 million for the three months ended March 31, 1996. The increase in gross
profit of $896,000 was principally a result of the increase in gross margin. For
the three months ended March 31, 1997 and 1996, the Company's gross margin was
26.8% and 17.2%, respectively. The gross margin increase was due principally to
a favorable production revenue mix resulting in a 10.6% increase, offset by the
underabsorption of fixed overhead expenses as a percentage of net revenues of
1.0%. The favorable production revenue mix was principally the result of an
increase in the number of programs manufactured and assembled at the Company's
Pennsylvania facilities and the increased operational efficiencies on the
specific programs shipped. Selling, general and administrative expense for the
three months ended March 31, 1997 was $2.8 million as compared to $3.1 million
for the comparable period in 1996. The decrease of $304,000 from period to
period was principally due to (i) a reduction in personnel costs of $124,000,
(ii) the discontinued European operations of $90,000 and (iii) decreased
spending in other general expenses. For the three months ended March 31, 1997,
the Company generated interest income of $73,000 as compared to $102,000 for the
three months ended March 31, 1996. 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 $220,000 for
the three months ended March 31, 1997 as compared to $191,000 for the three
months ended March 31, 1996. The increase in interest expense was principally
due to the increased average borrowings from period to period. In 1994, the
Company received shares of common stock of a client in lieu of payment for
services rendered to such client. In March 1997, the Company sold the shares of
common stock and derived net proceeds from the sale of $356,000 and generated a
net gain of $267,000 which was recorded as other income. As a result of the
foregoing factors, the Company generated net income of $25,000, for the three
months ended March 31, 1997 as compared to a net loss of $1.4 million, or $0.18
per share, for the three months ended March 31, 1996. Stockholders' Equity
Stockholders' equity increased approximately $397,000 to $5.6 million at March
31, 1997 from $5.2 million at December 31, 1996. The increase in stockholder's
equity was principally due to net proceeds derived from the HMG Private
Placement of $372,000 and net income of $25,000. 8
<PAGE>
HMG WORLDWIDE CORPORATION
AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -continued
Income Taxes
At December 31, 1996, the Company has available approximately $27.5 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,
1997 was $5,000 as compared to $8,000 for the three months ended March 31, 1996.
The income tax provision for the three months ended March 31, 1997 and 1996 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, 1997, the Company's aggregate backlog was approximately $15.2
million as compared to $15.6 million and $20.0 million at December 31, 1996 and
March 31, 1996, respectively. Of such aggregate backlog at March 31, 1997, 40.7%
was attributable to three clients. The Company anticipates that substantially
all such backlog at March 31, 1997 will be filled during the next twelve months.
In addition to the $15.2 million backlog at March 31, 1997, 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 $2.5 million. The aggregate value of the Foster Grant
supply contract at March 31, 1997 was $28.2 million, of which the Company
anticipates that $2.5 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, 1997 and December 31, 1996 aggregated $6.6 million and $6.9 million,
respectively. The Company's decrease in cash and cash equivalents of
approximately $324,000 for the three months ended March 31, 1997 was due
principally to the net effects of (i) net cash used in operations of $1.7
million (ii) capital expenditures of $103,000 and (iii) reductions of debt
obligations of $97,000, offset by (iv)proceeds from borrowings under the
Company's revolving line of credit with its bank lender of $885,000, (v)proceeds
from the sale of an investment of $356,000 and (vi) net proceeds derived from
the HMG Private Placement of $372,000. The Company's negative cash flows from
operations for the three months ended March 31, 1997 resulted principally from
(i) a decrease in general liabilities of $1.6 million and (ii)a decrease in
assets of $162,000. The Company has secured a $11.0 million Credit Agreement
with a financial institution in the form of a revolving credit and term loan
facility. The Credit Agreement provides for a secured revolving credit facility
which advances up to the sum of (i) 85% of eligible accounts receivable, (ii)
the lesser of 60% of eligible finished goods inventory or $750,000 and (iii) the
Company's cash, cash equivalents and marketable securities. The Credit Agreement
is secured by a lien on and a security interest in the Company's cash, cash
equivalents, marketable securities, accounts receivable, inventory, and
equipment and all other tangible and intangible assets and a pledge of the
common stock of each of the Company's wholly-owned subsidiaries.
9
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
Borrowings under the Credit Agreement bear interest at the institution's
prime rate plus 1% per annum. The Company is required to pay a quarterly
commitment fee at the rate of one half of 1% per annum of 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) the
declaration or payment of dividends,(ii) the incurrence of additional
indebtedness and (iii) the sale of certain assets. As of March 31, 1997, the
Company was in compliance with all financial covenants of the Credit Agreement,
as amended. Pursuant to the terms of the Credit Agreement, the lender can
advance up to $1.6 million in the form of a term loan collateralized by the
Company's current and future real estate and equipment. The term loan portion of
the Credit Agreement is amortized on a sixty month basis with a final payment
due upon the termination of the Credit Agreement and bears interest at the
institution's prime rate plus 1% per annum. At March 31, 1997, the balance
outstanding on the term loan component of the Credit Agreement was $317,000. The
Company's working capital at March 31,1997 was a deficit of $2.7 million,
inclusive of borrowings of $10.3 million pursuant to the three year Credit
Agreement. The working capital deficit was due principally to (i) negative cash
flows from operations during 1996 and the first quarter of 1997 and (ii)
increased borrowing under the Company's credit facilities whereby such proceeds
were used in part to finance capital expenditures of $1.7 million, inclusive of
$1.1 million in one-time facility renovations and equipment upgrades at the
Company's Pennsylvania production facility during the past fifteen months. Due
to the working capital deficit, the Company experiences temporary liquidity
problems from time to time due to the timing of cash flows while the Company is
in production and building inventory. However management believes that through
the implementation of its 1996 strategic plan whereby the Company moved and
consolidated its manufacturing facilities in Reading, Pennsylvania, restructured
the Company's New York and Chicago offices, upgraded the Company's injection
molding division and closed its European office, significant cost savings will
be realized. Furthermore, management believes that its current cash and cash
equivalents, its backlog, anticipated future cash flows from operations,
availability under its Credit Agreement and the proceeds derived from the HMG
Private Placement will be sufficient to support its debt service requirements
and its other capital and operating needs for the next fiscal year. In January
1997, the Company agreed to engage an investment banker to act as a placement
agent on a "best efforts" basis in a proposed private offering ("1997 Private
Offering"). In May 1997, the decision was made not to proceed with the 1997
Private Offering and for the Company to continue to investigate other sources of
financing, including the continuation and/or expansion of the HMG Private
Placement. Management believes that each of the above cost reduction components,
expanded client base, future cash flows from operations and the HMG Private
Placement developed and/or implemented by the Company provide an important basis
for future profitability and liquidity, 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. The above statements and certain other statements
contained in this quarterly report on Form 10-Q are based on current
expectations. Such statements are forward looking statements that involve a
number of risks and uncertainties. Factors that could cause actual results to
differ materially include the following (i) general economic conditions at
retail, (ii) competitive market influences, (iii) client budgetary restrictions
(iv) delays in shipment of scheduled programs to clients (v) delay in or
inability to expand the Company's client base and/or (vi) the loss of or
reduction in spending of existing clients.
10
<PAGE>
Part II. Other Information
Item 2. Changes in Securities
During the three months ended March 31, 1997, the Company sold an aggregate
of 375,000 shares of common stock to Benjamin Shabtai, Great Court Analysis LLC,
John Calvert-Jones and Stephen Spira in the HMG Private Placement. The purchase
price per share was $1.00. The shares were sold without registration in reliance
upon the exemption provided by Section 4(2) of the Securities Act.
11
<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: May 14, 1997 /S/ Robert V. Cuddihy, Jr
Robert V. Cuddihy, Jr.
Chief Operating Officer and
Chief Financial Officer
12
<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: May 14, 1997
Robert V. Cuddihy, Jr.
Chief Operating Officer and
Chief Financial Officer
13
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 6626
<SECURITIES> 0
<RECEIVABLES> 7359
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<COMMON> 85
<OTHER-SE> 5503
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