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, 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.
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 August 11,1997
Common Stock, $.01 par value 8,664,150
<PAGE>
Part I. Financial Information
Item 1.
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
June 30, 1997 December 31, 1996
------------- -----------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 6,913 $ 6,950
Accounts receivable - less
allowance for doubtful
accounts of $291 and $577 9,431 6,454
Inventory 3,740 4,214
Prepaid expenses 168 95
Other current assets 234 240
------- -------
Total current assets 20,486 17,953
Property and equipment - net 3,370 3,349
Excess of cost over fair
market value of assets acquired,
less accumulated amortization
of $1,411 and $1,207 6,748 6,952
Other assets 411 501
------- -------
$31,015 $28,755
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of
long-term obligations $12,053 $ 9,439
Note payable 67 338
Accounts payable 6,300 5,803
Accrued employee compensation
and benefits 1,235 1,033
Deferred revenue 1,794 1,835
Accrued expenses 739 1,566
Other current liabilities 810 1,175
------- -------
Total current liabilities 22,998 21,189
Pension obligation 1,534 1,684
Other long-term liabilities 652 691
------- -------
25,184 23,564
------- -------
Stockholders' equity:
Common stock, par value $.01;
50,000,000 shares authorized;
8,664,150 and 8,129,589 issued
and outstanding 87 81
Additional paid-in capital 34,409 33,903
Accumulated deficit (28,665) (28,793)
------- -------
5,831 5,191
------- -------
$31,015 $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 Six Months Ended
June 30, June 30,
1997 1996 1997 1996
----- ----- ---- ----
Net revenues $12,650 $13,862 $22,850 $24,546
Cost of revenues 9,444 10,569 16,908 19,413
------- ------- ------- -------
Gross profit 3,206 3,293 5,942 5,133
Selling, general and
administrative
expenses 2,904 3,265 5,730 6,395
------- ------- ------- -------
Income (loss)
from operations 302 28 212 (1,262)
Interest income 74 77 147 179
Interest expense (268) (187) (488) (378)
Other income 267
Income (loss) before
provision for
income taxes 108 (82) 138 (1,461)
Provision for
income taxes (5) (3) (10) (11)
------- ------- ------- -------
Net income (loss) $ 103 ($ 85) $ 128 ($1,472)
======= ======= ======= ======
Net income (loss) per
common and common
equivalent share $ 0.01 ($ 0.01) $ 0.01 ($ 0.19)
======= ======= ======= ======
Weighted average number
of common and common
equivalent shares
outstanding 8,531,183 7,567,517 8,457,469 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)
Six Months Ended June 30,
1997 1996
---- ----
Cash flows from operating activities:
Cash received from customers $19,828 $26,019
Interest received 147 179
Cash paid to suppliers (16,756) (21,135)
Cash paid to employees (5,514) (5,000)
Income taxes paid (4) (13)
Interest paid (488) (372)
------- -------
Net cash used in operating
activities (2,787) (322)
------- -------
Cash flows from investing activities:
Proceeds from the sale of
an investment 356
Capital expenditures (279) (785)
------- -------
Net cash provided by
(used in) investing
activities 77 (785)
------- -------
Cash flows from financing activities:
Net proceeds from the sale of common
stock as part of a private placement 352
Proceeds derived from a credit
agreement, net 2,614 16
Principal payments of
outstanding debt obligations (288) (253)
------- -------
Net cash provided by (used in)
financing activities 2,678 (237)
------- -------
Effect of exchange rate changes (5) (2)
------- -------
Net decrease in cash and
cash equivalents (37) (1,346)
Cash and cash equivalents
at beginning of year 6,950 8,139
------- -------
Cash and cash equivalents
at June 30 $ 6,913 $ 6,793
======= =======
See accompanying notes to consolidated financial statements.
4
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
(in thousands)
(unaudited)
Six Months Ended June 30,
1997 1996
---- ----
Reconciliation of net income (loss)
to net cash used in
operating activities:
Net income (loss) $ 128 ($1,472)
Adjustments to reconcile net
income (loss) to net cash used in
operating activities:
Depreciation and amortization 460 433
Loss on foreign currency translation 2
Other income (267)
Decrease (increase) in assets:
Accounts receivable (2,977) 987
Inventory 474 773
Prepaid expenses (73) 198
Other assets 7 (232)
Increase (decrease) in liabilities:
Accounts payable 497 924
Deferred revenue (41) 451
Accrued expenses (845) (2,292)
Pension obligation (150) (94)
------ ------
Net cash used in operating
activities ($2,787) ($ 322)
====== ======
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 Display Depot,
Inc. ("DDI"), with facilities in New York, Pennsylvania and Illinois.
The Consolidated Balance Sheet as of June 30, 1997, and the Consolidated
Statements of Operations and Cash Flows for the six months ended June 30, 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 June 30, 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 June 30, 1997 are
not necessarily indicative of the operating results for the full year.
Note 2 - Inventory
Inventories at June 30, 1997 and December 31, 1996 consisted of the following:
June 30, December 31,
1997 1996
(in thousands)
Finished goods $ 745 $1,312
Work in process 874 653
Raw materials 2,121 2,249
------ ------
$3,740 $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 June 30, 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 six months ended June 30,1997 and
1996 are as follows:
Six Months Ended June 30,
1997 1996
(in thousands)
State and local
income taxes $10 $11
=== ===
6
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
Note 4 - Stockholder's Equity
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 six months ended June 30, 1997, the company sold an additional
375,000 shares of common stock and derived net proceeds of approximately
$352,000. 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.
During the three months ended June 30, 1997, the Company contributed an
aggregate of 159,561 shares of common stock to the HMG Worldwide Corporation
Capital Accumulation Plan maintained for the benefit of the Company's employees.
The fair market value of the common stock was $1.00 per share. The shares were
contributed without registration in reliance upon the exemption provided by
Section 4(2) of the Securities Act.
7
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended June 30, 1997 as Compared to the
Three Months Ended June 30, 1996
Net revenues were $12.7 million for the three months ended June 30, 1997 as
compared to $13.9 million for the three months ended June 30, 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
$3.2 million, offset by, the increase in marketing expenditures of another
significant client of approximately $1.8 million. 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 a national
rollout that occurred in 1996.
Gross profit for the three months ended June 30, 1997 was $3.2 million as
compared to $3.3 million for the three months ended June 30, 1996. The decrease
in gross profit of $87,000 was principally a result of the decrease in net
sales, offset by an increase in gross margin. For the three months ended June
30, 1997 and 1996, the Company's gross margin was 25.3% and 23.8%, respectively.
The gross margin increase was due principally to a favorable production revenue
mix resulting in a 4.5% increase, offset by the underabsorption of fixed
overhead expenses as a percentage of net revenues of 3.0%. 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
June 30, 1997 was $2.9 million as compared to $3.3 million for the comparable
period in 1996. The decrease of $361,000 from period to period was principally
due to (i) a reduction in personnel costs of $52,000 and (ii) decreased spending
in other general expenses.
For the three months ended June 30, 1997, the Company generated interest
income of $74,000 as compared to $77,000 for the three months ended June 30,
1996. This decrease was principally 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 $268,000 for the three months ended June 30, 1997
as compared to $187,000 for the three months ended June 30, 1996. 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 net income
of $103,000, or $0.01 per share for the three months ended June 30, 1997 as
compared to a net loss of $85,000, or $0.01 per share, for the three months
ended June 30, 1996.
8
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Six Months Ended June 30, 1997 as Compared to the
Six Months Ended June 30, 1996
Net revenues were $22.9 million for the six months ended June 30, 1997
as compared to $24.5 million for the six months ended June 30, 1996. The
decrease in net revenues from period to period was due principally to a
reduction in capital and marketing expenditures of two significant clients of
approximately $1.6 million and $3.5 million, offset by, the increase in
marketing expenditures of another significant client of $2.7 million. 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.
The decrease in net revenues from another significant client was principally the
result of a national rollout that occurred in 1996.
Gross profit for the six months ended June 30, 1997 was $5.9 million as
compared to $5.1 million for the six months ended June 30, 1996. The increase in
gross profit of $809,000 was principally a result of the increase in gross
margin. For the six months ended June 30, 1997 and 1996, the Company's gross
margin was 26.0% and 20.9%, respectively. The gross margin increase was due
principally to a favorable production revenue mix resulting in a 7.2% increase,
offset by the underabsorption of fixed overhead expenses as a percentage of net
revenues of 2.1%. 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 six months ended
June 30, 1997 was $5.7 million as compared to $6.4 million for the comparable
period in 1996. The decrease of $665,000 from period to period was principally
due to (i) a reduction in personnel costs of $176,000, (ii) the discontinued
European operations of $99,000 and (iii) decreased spending in other general
expenses.
For the six months ended June 30, 1997, the Company generated interest
income of $147,000 as compared to $179,000 for the six months ended June 30,
1996. This decrease was principally 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 $488,000 for the six months ended June 30, 1997 as
compared to $378,000 for the six months ended June 30, 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
$128,000, or $0.01 per share, for the six months ended June 30, 1997 as compared
to a net loss of $1.5 million, or $0.19 per share, for the six months ended June
30, 1996.
Stockholders' Equity
Stockholders' equity increased approximately $640,000 to $5.8 million at
June 30, 1997 from $5.2 million at December 31, 1996. The increase in
stockholder's equity was principally due to (i)net proceeds derived from the HMG
Private Placement of $352,000, (ii) the contribution of 159,561 shares of common
stock, valued at $1.00 per share, to the HMG Worldwide Capital Accumulation Plan
and (iii) net income of $128,000.
9
<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 six months ended June 30, 1997
was $10,000 as compared to $11,000 for the six months ended June 30, 1996. The
income tax provision for the six months ended June 30, 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 June 30, 1997, the Company's aggregate backlog was approximately $13.3
million as compared to $15.6 million and $17.0 million at December 31, 1996 and
June 30, 1996, respectively. Of such aggregate backlog at June 30, 1997, 21.4%
was attributable to two clients. The Company anticipates that substantially all
such backlog at June 30, 1997 will be filled during the next twelve months. In
addition to the $13.3 million backlog at June 30, 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 June 30, 1997 was $27.4 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 June 30, 1997 and December 31, 1996 aggregated
$6.9 million and $6.9 million, respectively. The Company's decrease in cash and
cash equivalents of approximately $37,000 for the three months ended June 30,
1997 was due principally to the net effect of (i) net cash used in operations of
$2.8 million (ii) capital expenditures of $279,000 and (iii) reduction of debt
obligations of $288,000, offset by (iv) proceeds from borrowings under the
Company's revolving line of credit with its bank lender of $2.6 million, (v)
proceeds from the sale of an investment of $356,000 and (vi) net proceeds
derived from the HMG Private Placement of $352,000. The Company's negative cash
flows from operations for the three months ended June 30, 1997 resulted
principally from (i) an increase in assets of $2.6 million and (ii)a decrease in
general liabilities of $539,000.
The Company has secured a $12.0 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.
10
<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 June 30, 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 June 30, 1997, the balance
outstanding on the term loan component of the Credit Agreement was approximately
$300,000.
The Company's working capital at June 30,1997 was a deficit of $2.5
million, inclusive of borrowings of $12.1 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 six months ended June
30, 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 eighteen 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 significant cost savings will be realized 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. 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.
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.
11
<PAGE>
Part II. Other Information
Item 2. Changes in Securities
During the three months ended June 30, 1997, the Company contributed an
aggregate of 159,561 shares of common stock to the HMG Worldwide Corporation
Capital Accumulation Plan maintained for the benefit of the Company's employees.
The fair market value of the common stock was $1.00 per share. The shares were
contributed without registration in reliance upon the exemption provided by
Section 4(2) of the Securities Act.
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: August 11, 1997 /S/ Robert V. Cuddihy, Jr.
--------------- ------------------------------
Robert V. Cuddihy, Jr.
Chief Operating Officer and
Chief Financial Officer
13
<PAGE>
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<COMMON> 87
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