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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One) FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from--------------------to---------------------
Commission file number 0-13121
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HMG WORLDWIDE CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3402432
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
475 Tenth Avenue, New York, New York 10018
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code(212) 736-2300
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of class)
Indicated 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......
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
APPLICABLE ONLY TO REGISTRANTS 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 Section 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.........
The number of shares outstanding of the Registrant's common stock is
8,504,589 (as of 3/19/97) The aggregate market value of the voting stock held by
non-affiliated stockholders of the Registrant is $6,088,372 (as of 3/19/97)
DOCUMENTS INCORPORATED BY REFERENCE
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PART I
Item 1. Business.
General Development of Business
HMG Worldwide Corporation ("the Company"), which was incorporated in
1984, is one of the leading companies in the in-store marketing industry. The
Company identifies the in-store marketing objectives of its clients and
integrates research, creative design, engineering, production, package design
and related services to provide point-of-purchase merchandising display systems
intended to meet such objectives. The Company's merchandising systems are
designed to increase retail sales by attracting and influencing consumers at the
point of sale. Such systems frequently incorporate interactive displays (from
basic flip-charts to touchscreen computer systems) to guide purchase decisions.
The Company's merchandising systems are also designed to improve retail space
utilization and product organization, facilitate retail inventory management and
reduce retail labor costs.
The Company's clients include national and multi-national consumer
products companies. The Company is increasingly providing its products and
services to mass merchandisers, as well as chain drugstores and supermarkets.
The Company's operations are conducted through five wholly-owned
subsidiaries being, respectively, HMG Worldwide In-Store Marketing, Inc.
("HMG"), Intermark Corp. ("Intermark"), HMG Intermark Worldwide Manufacturing,
Inc. ("HMG Intermark"), Creative Displays, Inc. ("CDI") and HMG Europe B.V.
("HMGBV") with facilities in New York, Pennsylvania and Illinois.
RecentDevelopments
During 1996, the Company implemented a three pronged strategic plan which
focused upon (i) the expansion of the Company's existing client revenue and
service base, (ii) the elimination of redundant and other overhead costs and
(iii) the consolidation of the manufacturing operations. The Company's strategic
plan included both opportunistic investment as well as the implementation of
operational cost reductions. For the year ended December 31, 1996, the Company
accomplished the following strategic objectives:
(i) renovated and expanded theCompany's 140,000 square foot manufacturing
facility in Reading, Pennsylvania("Reading") at a cost of approximately
$928,000;
(ii) closed the first of two New Jersey manufacturing facilities in May
1996 and moved its operations to Reading;
(iii) restructured the Company's New York and Chicago offices and
closed the Company's satellite sales office in Detroit, Michigan;
(iv) entered into a one year lease agreement in September 1996 for a
second facility in Reading, with an option to extend the lease for an additional
5 years or exercise an option to purchase the facility for $1.2 million. The
facility is comprised of 72,500 square feet of manufacturing and warehousing
space on approximately 5 acres of property;
(v) renovated and upgraded the Company's plastic injection molding
division in Reading, including the purchase of additional injection molding
equipment in October and November 1996 at a cost of approximately $160,000;
(vi) consummated a new Loan and Security Agreement in November 1996 with
a financial institution whereby the Company obtained a secured $11 million
revolving line of credit and term loan facility ("Credit Agreement"). This
facility, which expires in November 1999, bears interest at the lending
institution's prime rate plus 1% per annum and is secured by the Company's cash,
cash equivalents, marketable securities, accounts receivable, inventory,
equipment and all other tangible and intangible assets and a pledge of all the
common stock of the Company's wholly-owned subsidiaries;
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(vii) extended the Company's $32.2 million supply contract with the
Foster Grant Group L.P. ("Foster Grant") from seven to ten years expiring
December 2005, continued the requirement of Foster Grant to purchase a minimum
of 70% of its annual in-store merchandising display purchases from the Company
and modified the minimum annual dollar purchases required in any one given year
to be no less than $2.5 million per year;
(viii) centralized a portion of the Company's purchasing operations in
New York, New Jersey, Pennsylvania and Illinois to better utilize and leverage
the Company's new consolidated plant operating capacity in Reading;
(ix) closed the second New Jersey manufacturing facility in December 1996
and moved its operations to Reading;
(x) closed, as of December 31, 1996, its European operations, HMGBV; and
(xi) expanded its client base during 1996 to include new clients such as
Black & Decker, Inc. ("Black & Decker"), The Nestle Beverage Company ("Nestle"),
Peerless Faucet Company ("Peerless") and Target Stores, Inc. ("Target") and
expanded existing and new merchandising programs with existing clients,
including Motorola Cellular Subscriber Group ("Motorola"), Procter & Gamble Co.
("P&G") and Wal*Mart Stores, Inc. ("Wal*Mart").
Management estimates the combined effects of the above strategic plan
provides for significant cost savings to be realized in 1997 including (i)
approximately $1.6 million in savings relating to the reduction of direct
manufacturing labor, fringe, overhead and facility expenses as a consequence of
the plant consolidation in Reading, (ii) approximately $1.3 million in savings
relating to non-manufacturing personnel reductions as a consequence of office
consolidations, (iii) forecasted improvement in manufacturing gross profit as a
result of the consolidation of the manufacturing operations in Reading through
increased manufacturing efficiencies and reduced operating costs, (iv)
anticipated further improvement in selling, general and administrative expenses,
as a percentage of revenues, as the Company realizes further savings in overhead
expenses and (v) an expected favorable contribution by new clients to the
operations of the Company as these new clients establish merchandising programs
with the Company during 1997.
The above statements and certain other statements contained in this
annual report on Form 10-K 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.
In addition to the above and in conjunction with the strategic
positioning of the Company, 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 and subsequent to December 31, 1996, the Company sold an
additional 375,000 shares of common stock and derived net proceeds of
approximately $375,000 as of March 19, 1997. The aggregate net proceeds received
from the HMG Private Placement as of March 19, 1997 is $752,000. 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.
Contemporaneous with the HMG Private Placement, in December 1996 the
Company derived net proceeds of approximately $272,000 through the exercise of
stock options for which the Company issued 184,572 shares.
Pursuant to an agreement dated January 16, 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") of a minimum of
60 units and a maximum of 120 units at a price of $25,000 per unit aggregating a
minimum gross proceeds of $1.5 million and a maximum of $3.0 million, within 120
days of the issuance of the 1997 Private Offering memorandum. Each unit will
consist of 25,000 shares of the Company's common stock. The anticipated timing
for the consummation of the 1997 Private Offering is during the second quarter
1997. Upon consummation of the 1997 Private Offering, management estimates that
the net
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proceeds to be derived from this transaction will range from $1.2 million to
$2.5 million and the Company would issue between 1.5 million and 3.0 million
shares of common stock. All stock to be issued pursuant to the terms of the 1997
Private Placement will be restricted stock which will not be registered under
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.
In addition, upon consummation of the 1997 Private Offering, the Company
will issue 10% of the aggregate number of shares of common stock sold in the
form of five year warrants to the investment banker at an exercise price of
$1.10 per share. Furthermore, as part of the 1997 Private Offering, the Company
also agreed to engage its investment banker to provide consulting services and
assist the Company in the pursuit of potential business acquisitions and
combinations. Under the consulting provisions, the Company has agreed to (i) a
one year, $4,000 per month consulting retainer, (ii) a finders fee associated
with the successful closure of an acquisition, restructuring, joint venture or
merger and (iii) the Company will issue an aggregate of 200,000 five year
warrants to the investment banker of which 100,000 are exercisable at $2.00 per
share and the remaining 100,000 are exercisable at $2.50 per share.
Executive Offices
The Company's executive offices, together with those of its
subsidiaries, are located at 475 Tenth Avenue, New York, New York 10018 and its
telephone number is (212) 736-2300. Unless otherwise indicated, all references
to the Company include all of its subsidiaries.
Industry Overview
The in-store marketing industry is an estimated $12 billion industry.
The Company believes point-of-purchase merchandising systems provide a more
effective, measurable and low-cost means of attracting and influencing consumers
than television, print or other traditional mass advertising media.
While television advertising costs have risen, the number of viewers per
commercial has decreased because cable television has increased the number of
channels available to viewers. Furthermore, remote control units and
videocassette recorders have enabled viewers to avoid commercials. The growing
number of special-interest magazines, which segment reader demographics, has
similarly limited the effectiveness of print advertising while the cost of such
advertising has also increased. The Company believes that a majority of all
consumer brand purchase decisions are made on impulse at the point of sale.
Point-of-purchase merchandising systems thus attract and influence consumers at
the time when the majority of brand purchase decisions are made.
The Company believes retailers are also driving the growth of in-store
marketing. Computerized bar-coding and scanner systems have enabled retailers to
identify high-margin, high-turnover products and more effectively allocate floor
or shelf space to such products. Concurrently, consumer products companies have
been faced with an increasing number of competitive products, including
private-label offerings of retailers. As a result, many consumer products
companies have sought to maximize the appeal and efficiency of their allocated
space in retail stores. In-store merchandising systems are designed to increase
retail sales by attracting and influencing consumers at the point of sale. Such
systems also are designed to improve retail space utilization and product
organization, facilitate retail inventory management and reduce retail labor
costs.
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Operations
General
The Company identifies the in-store marketing objectives of its clients and
integrates research, creative design, engineering, production, package design
and related services to provide point-of-purchase merchandising display systems
intended to meet such objectives. The Company's systems are generally custom
designed to fit each client's requirements and specifications. Typically, at the
request of a client, the Company creates a customized prototype display system,
which often includes packaging for the client's product in addition to the
in-store merchandising display. Although clients occasionally provide the
Company's creative design department with specific merchandising ideas, in most
instances clients merely indicate the general nature of the display they desire
and rely upon the Company's creative design department to conceive and create
the merchandising system.
The Company's design and engineering departments work closely from
conception through final assembly and field installation with each client's
marketing and sales representatives and the retailers to facilitate the
development of a merchandising system. The Company's design department, in
concert with the client, develops alternative marketing ideas, which the
Company's engineering department, upon approval by the client, develops into a
prototype system. The Company's design and engineering departments employ
CAD/CAM and Auto-CAD equipment which, among other things, enables the Company to
design stock parts which can be easily incorporated into various projects as
well as change project designs more easily and quickly in response to a client's
needs.
If a client, after reviewing the Company's prototype, decides to
test-market the display, the Company provides in-store research and market
feasibility services to test such prototype. A client is often able to ascertain
from the results of the Company's market studies whether the Company's
merchandising systems are likely to lead to improved sales. If indicated by the
results of its research, the Company will fine-tune or modify its prototype
system for the client. The period from development to a volume purchase order
typically spans 6 to 18 months. There can be no assurances that the development
and test-marketing of a prototype for a client will ultimately lead to any
volume orders.
Production and Assembly
The Company has the internal capability to injection mold plastic
components and to assemble its merchandising systems, as compared to many of its
competitors which have no injection molding or assembly facilities and must
outsource to third parties. Once the Company enters into a contract with a
client to manufacture display units for installation, it makes a determination,
generally based upon cost considerations, whether to undertake the production
and assembly in its own facilities or to outsource it to others. The Company's
production and assembly facilities are principally employed for larger orders
and facilitate better client service, inventory management and production
controls.
All display systems, whether assembled by the Company or its independent
subcontractors, are delivered to the Company's clients or directly to retail
locations. Typically, there is some simple on-site assembly required, which is
usually performed by the client's own personnel, although the Company will
assist in on-site assembly if requested. The Company often provides clients with
an "800" telephone service number to call for assistance in connection with
on-site assembly.
Suppliers
The Company uses and has available a variety of outside sources to
supply the raw materials and fabricated components used in its display systems.
Such material and components are readily available from a number of sources.
Although the Company designs the software for its interactive computer systems,
it procures hardware components from a variety of third parties, which are also
readily available from a number of sources. The Company has not experienced any
significant disruptions from shortages or delivery delays, and believes that its
present sources of supply are adequate.
International
The Company has a three year European Marketing Agreement, which expires
October 1, 1998, with a wholly-owned subsidiary of Tchai Holdings, B.V.
("Tchai"), whereby the Company will receive production and product development
support. Each company has agreed to supply one another with marketing leads.
Commissions ranging from 2% to 10% of resulting sales will be paid to the party
which supplies the successful introduction.
Products
The Company's merchandising systems are designed to increase retail
sales by attracting and influencing consumers at the point of sale. Such systems
frequently incorporate interactive displays (from basic flip-charts to
touchscreen computer systems) to guide purchase decisions. The Company's
merchandising systems are also designed to improve retail space utilization and
product organization, facilitate retail inventory management and reduce retail
labor costs.
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Custom Displays
The Company designs, assembles and markets in-store custom display
systems for consumer products companies as well as national and regional
retailers. Its systems include in-store fixtures, shelf-management and
category-management systems, freestanding displays and sales promotion
materials. Examples of the Company's systems include the L'eggs(R) hosiery
merchandising systems, the Pillsbury(R) dough display system and the shelf and
pegboard system for Procter & Gamble's Cover Girl(R) and Max Factor(R) cosmetics
line. The Company has also developed several "store-within-a-store" systems,
whereby retail space is specifically devoted to a particular brand or category
and is distinctly identifiable by appearance within the context of the overall
retail environment. An example of a "store-within-a-store" designed and produced
by the Company is the Bali(R) Boutique located in a variety of department stores
and Wal*Mart stores cosmetic centers.
Stock Displays
Although many of the Company's clients require custom merchandising
systems, certain components therein can frequently be used in other systems. As
a result, the Company has accumulated tools and molds for component parts and
displays which are included in a catalogue and marketed to existing and new
clients. Since the investment in time and money for the development and
production of the tooling for the components and displays has already been made,
the Company can provide many of its clients with a timely, low-cost solution to
certain of their in-store merchandising needs. For example, the Company's System
35 is a freestanding display that can be ordered in 30 different size variations
with multiple shelf configurations. The System 35 addresses consumer products
companies' and retailers' needs for permanent island displays that, through
color, size, number of shelves and header treatments, can be customized for a
multitude of consumer products. The Company also markets a variety of
standardized on-shelf modifications such as extrusions and dividers. These
modifications offer the ability to differentiate display space by identifying
brand or category space and provide an area for communication of information.
Interactive Systems
The Company's interactive display systems include shelf-edge and
freestanding flip-charts, mechanical demonstration units and battery-powered and
touchscreen computer systems. Computer-based systems are useful both as a
point-of-purchase merchandising tool and an effective means of collecting and
disseminating information. The interactive computer-based systems ask consumers
to respond to a series of questions. After analyzing the consumer's responses,
the system makes recommendations of appropriate products which are immediately
available for purchase on the surrounding display. Computer-based systems also
enable consumer products companies to retrieve market research information based
upon consumers' responses, give consumers comprehensive and accurate product
information and assist consumers when sales personnel are unavailable. The
Company's sales of computer-based systems are directed toward large consumer
products companies and mass merchandisers, which potentially can use such
systems in quantities of 250 or more units.
Clients
The Company's clients include national and multi-national consumer
products companies such as Sara Lee Corporation ("Sara Lee") and P&G, both of
which have been clients for more than 20 years, as well as Clairol Corporation
("Clairol"), Foster Grant, Hallmark Cards, Inc. ("Hallmark"), Motorola, The
Pillsbury Company and Wal*Mart. During 1996, the Company has been able to add
such clients as Black & Decker, Nestle, Peerless, and Target and continue to
expand its services supplied to Wal*Mart.
With the greater availability of information regarding in-store product
turnover, the Company is increasingly providing its products and services to
mass merchandisers, as well as chain drugstores and supermarkets. Wal*Mart, for
example, has engaged the Company to design and assemble "store-within-a-store"
systems to provide its stores with visually discreet merchandising displays that
maximize space efficiencies. In addition, the Company works with certain
consumer products companies and retailers which have recently entered into joint
arrangements to develop and purchase their own "store-within-a-store" display
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systems with the intention of leasing portionsthereof to yet other consumer
products companies.
For the year ended December 31,1996, P&G, Sara Lee, and Wal*Mart
accounted for approximately 17%, 12%, and 11%, respectively, of the Company's
net revenues. For the year ended December 31, 1995, Sara Lee, P&G and Wal*Mart
accounted for approximately 24%, 11% and 13%, respectively, of the Company's net
revenues. For the year ended December 31, 1994, Sara Lee, P&G and Hallmark
accounted for approximately 31%, 15% and 11%, respectively, of the Company's net
revenues. Although the Company's relationship with both Sara Lee and P&G spans
more than 20 years, neither of such concerns is contractually bound to purchase
the Company's products or services. The loss of either or both of such clients
would have a material adverse effect on the Company.
Backlog
At December 31, 1996, the Company's aggregate backlog was $15.6 million,
as compared to $23.8 million and $19.5 million at December 31, 1995 and 1994,
respectively. Of such aggregate backlog at December 31, 1996, 22% was
attributable to one client. The Company anticipates that substantially all such
backlog at December 31, 1996, will be filled during the next twelve months. In
addition to the $15.6 million backlog at December 31, 1996, the Company's Supply
Contract, with Foster Grant requires Foster Grant, subject to certain
limitations, to purchase at least 70% of all its in-store merchandising display
purchases 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
December 31, 1996 was $29.2 million of which the Company estimates that $2.5
million will be shipped within the next twelve months. Due to quarter to quarter
fluctuations in the Company's backlog levels due to the timing, nature and size
of its merchandising system programs for its clients, such backlog levels are
not necessarily an indicator of future net revenue levels.
Marketing and Sales
Sales of the Company's merchandising displays and point-of-purchase
services are generated by Michael Wahl, its chief executive officer, and by 35
other sales employees. The Company typically sells its in-store displays and
display systems pursuant to separate purchase orders following customer approval
of a prototype. However, the Company is also paid for its services in creating,
developing and testing in-store merchandising systems and in assembling
prototypes prior to receipt of production run approvals. To a limited extent,
sales are also generated through independent sales representatives.
Warranties
The Company generally does not warrant its display systems to be free
from defects in materials or workmanship but generally replaces any display
system found to be defective. Such replacement costs historically have been
minimal. The Company generally warrants its interactive point-of-purchase
systems to be free from defects in materials or workmanship for periods ranging
from 3 to 12 months. The particular warranty granted on each sale is generally
determined on a client-by-client, product-by-product basis.
Patents
The Company has been issued numerous United States and foreign patents
relating to certain components of its merchandising display systems and has
several additional patent applications pending. The Company does not regard
patent protection as being of material importance to its ability to successfully
compete in the in-store merchandising display industry. The Company does not
hold any patents or material copyrights with respect to its computer software.
The Company relies upon confidentiality agreements, as well as restrictions on
dissemination of information to employees, to safeguard its confidential
information.
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Competition
The custom display segment of the in-store marketing industry in which
the Company primarily competes is very fragmented and highly competitive.
Certain of the Company's competitors, including several diversified companies
that not only design and assemble merchandising systems for their own products,
but also provide such systems and services to unaffiliated concerns, may have
greater financial and other resources than the Company. In addition, although
the Company believes that it has certain creative design, technological,
managerial and other advantages over its competitors, there can be no assurance
that the Company will maintain such advantages.
Most competitors generally operate on a local or regional level.
Additionally, competitors often specialize in only one particular aspect of the
custom display segment. As a result, the Company is one of the largest
participants in this segment. As consumer products companies and retailers
increasingly require vendors to offer comprehensive services and sophisticated
technologies, many smaller operators, which are primarily privately held, may
not have the capital resources, management skills and technical expertise
necessary to compete. Consequently, the Company believes the demand for its
products and services will increase and industry consolidation will occur. The
Company further believes it is well positioned to capitalize on such
consolidation.
Employees
As of December 31, 1996, the Company employed 217 persons, including 4
executive officers, 99 in production and assembly, 17 in design, 23 in
purchasing and engineering, 35 in marketing and sales and 39 in administration.
Approximately 68 of the Company's employees are covered by a collective
bargaining agreement between the Company and Local 241 of the National
Federation of Independent Unions, which expires December 31, 1999. The Company
believes that its current labor relations are good.
Financial Information about Foreign Operations and Export Sales
Reference is made to Note 11 in Notes to Consolidated Financial
Statements included in Item 8 hereof.
Item 2. Facilities.
The Company's executive offices are located at 475 Tenth Avenue, New
York, New York 10018, where it leases 48,000 square feet pursuant to two leases
that expire in October 2002. The aggregate annual base rentals for such floors
is $482,000. The Company sublets 8,750 square feet of such space for
approximately $89,000 annually, expiring in October 2002. The Company also
leases approximately 16,000 square feet of office space at 230 East Ohio Street
in Chicago, Illinois at an annual base rental of approximately $244,000 pursuant
to a lease which expires in June 1997. In June 1997, the Company expects to
obtain a new lease for approximately 5,000 square feet of office space either at
its existing location or another location yet to be determined.
The Company operates two production and assembly facilities located in
Reading, Pennsylvania. The Company's principal Reading, Pennsylvania facility is
owned by the Company and is comprised of a 140,000 square foot multi-story
production facility on three acres of property. The Company leases 56,000 square
feet of a 72,500 square foot production facility which expires in October 1997,
at an annual base rental of $159,000. The Company has an option to purchase this
leased production facility prior to October 1, 1997 for $1.2 million or, at the
Company's option, extend the lease for an additional 5 years.
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Item 3. Legal Proceedings.
The Company is subject to certain legal proceedings and claims which
have arisen in the ordinary course of its business. These actions when
ultimately concluded will not, in the opinion of management, have a material
adverse effect upon the financial position, results of operations or liquidity
of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of stockholders of the Company
during the fourth quarter of the fiscal year ended December 31, 1996.
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Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Market Information
The Company's Common Stock is quoted on The Nasdaq SmallCap Market
("Nasdaq") tier of the Nasdaq Stock Market under the symbol "HMGC". The
following table sets forth the range of the high and low quotations for the
common stock for the periods indicated. Such market quotations reflect
inter-dealer prices, without mark-up, mark-down or commission and may not
necessarily represent actual transactions.
High Low
1996
First quarter $ 3 $ 1-1/2
Second quarter 2-1/4 1-1/4
Third quarter 1-3/4 7/8
Fourth quarter 1-7/8 1
1995
First quarter $ 3-3/4 $ 2-31/64
Second quarter 3 1-1/4
Third quarter 3-1/4 1-3/4
Fourth quarter 3-1/16 1-15/16
At March 19, 1997, there were 358 holders of record and approximately
1,450 beneficial stockholders of the Company's common stock and the closing bid
quotation of the common stock on Nasdaq was $1-3/16 per share.
Dividend Policy
The Company has not paid dividends on the Common Stock since its
inception. The Company intends to reinvest any earnings in its business to
finance future growth. Accordingly, the Board of Directors does not anticipate
declaring any cash dividends in the foreseeable future. In addition, under the
terms of its revolving credit facility, the Company is prohibited from paying
cash dividends. See Note 5 in Notes to the Consolidated Financial Statements.
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Item 6. Selected Historical Financial Data.
The selected historical financial data presented below as of and for the
years ended December 31, 1996, 1995 and 1994 have been derived from and should
be read in conjunction with the Company's audited Consolidated Financial
Statements and related notes thereto and with "Management's Discussion and
Analysis of Financial Condition and Historical Results of Operations" included
elsewhere herein. The selected financial data of the Company at and for the
years ended December 31, 1996, 1995 and 1994 has been derived from the
Consolidated Financial Statements of the Company, which have been audited by
Friedman Alpren & Green LLP, Independent Certified Public Accountants.
Year Ended December 31,
-----------------------
1996 1995 1994 1993(a) 1992
---- ---- ---- ------ ----
(in thousands, except per share data)
Statement of Operations Data
Net revenues $45,552 $47,641 $55,578 $20,375 $3,750
Loss from operations (5,040) (10,009) (795) (290) (1,007)
Net loss ($ 5,535) ($10,118) ($ 963)($ 528)($1,083)
======= ======= ======= ======= ======
Net loss per common and
common equivalent share ($0.73) ($1.34) ($0.17) ($0.13) ($0.36)
===== ===== ===== ===== =====
Weighted average number of
common and common
equivalent shares outstanding 7,614 7,568 5,643 4,052 3,047
===== ===== ===== ===== =====
December 31,
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1996 1995 1994 1993(a) 1992
---- ---- ---- ------- ----
Balance Sheet Data: (in thousands)
Cash and cash equivalents $6,950 $8,139 $6,469 $5,205 $428
Working capital (3,236) 2,624 14,119 2,579 599
Total assets 28,755 32,648 36,718 33,022 3,637
Long-term debt 266 - 3,182 6,330 398
Stockholders' equity 5,191 10,076 20,223 3,191 1,352
(a) Amounts reflect the consummation of the acquisition of HMG, CDI and HMGBV
from Saatchi & Saatchi PLC and certain of its subsidiaries on October 1, 1993.
12
<PAGE>
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations.
General
During 1996, the Company implemented a three pronged strategic plan which
focused upon (i) the expansion of the Company's existing client revenue and
service base, (ii) the elimination of redundant and other overhead costs and
(iii) the consolidation of the manufacturing operations. The Company's strategic
plan included both opportunistic investment as well as the implementation of
operational cost reductions.
For the year ended December 31, 1996, the Company accomplished the
following strategic objectives; (i) renovated and expanded the Company's 140,000
square foot manufacturing facility in Reading, (ii) closed the first of two New
Jersey manufacturing facilities in May 1996 and moved its operations to Reading,
(iii) restructured the Company's New York and Chicago offices and closed the
Company's satellite sales office in Detroit, Michigan, (iv) entered into a one
year lease agreement in September 1996 for a second facility in Reading, with an
option to extend the lease for an additional 5 years or to exercise an option to
purchase the facility for $1.2 million which is comprised of 72,500 square feet
of manufacturing and warehousing space on approximately 5 acres of property, (v)
renovated and upgraded the Company's plastic injection molding division in
Reading, including the purchase of additional injection molding equipment, in
October and November 1996, (vi) consummated the Credit Agreement in November
1996 with a financial institution whereby the Company obtained a secured $11
million revolving line of credit and term loan facility, (vii) extended the
Company's $32.2 million supply contract with Foster Grant from seven to ten
years expiring December 2005, continued the requirement of Foster Grant to
purchase a minimum of 70% of its annual in-store merchandising display purchases
from the Company and modified the minimum annual dollar purchases required in
any one given year to be no less than $2.5 million per year, (viii) centralized
a portion of the Company's purchasing operations in New York, New Jersey,
Pennsylvania and Illinois to better utilize and leverage the Company's new
consolidated plant operating capacity in Reading, (ix) closed the second New
Jersey manufacturing facility in December 1996 and moved its operations to
Reading, (x) closed as of December 31, 1996, its European operations, HMGBV, and
(xi) expanded its client base during 1996 to include new clients.
Management estimates the combined effects of the above strategic plan
provides for significant cost savings to be realized in 1997 including (i)
approximately $1.6 million in savings relating to the reduction of direct
manufacturing labor, fringe, overhead and facility expenses as a consequence of
the plant consolidation in Reading, (ii) approximately $1.3 million in savings
relating to non-manufacturing personnel reductions as a consequence of office
consolidations, (iii) forecasted improvement in manufacturing gross profit as a
result of the consolidation of the manufacturing operations in Reading through
increased manufacturing efficiencies and reduced operating costs, (iv)
anticipated further improvement in selling, general and administrative expenses,
as a percentage of revenues, as the Company realizes further savings in overhead
expenses and (v) an expected favorable contribution by new clients to the
operations of the Company as these new clients establish merchandising programs
with the Company during 1997.
Results of Operations
Year Ended December 31, 1996 as Compared to
Years Ended December 31, 1995 and 1994
Net revenues decreased by $2.1 million to $45.5 million for the year
ended December 31, 1996 from $47.6 million for the year ended December 31, 1995.
The decrease in net revenues from 1995 to 1996 was principally due to (i) a
reduction in marketing expenditures of one significant client of $6.1 million,
offset by (ii) an increase in net revenues of $3.3 million derived from the
operations of HMG Intermark. The decrease in net revenues from such significant
client was principally the result of the client's reduction in capital and
marketing expenses for budgetary and other reasons. Reduced shipments to this
client may continue if such budgetary reductions and deferrals continue. There
can be no assurance that net revenues to this client will continue at the
current levels or resume at historical levels. Net revenues decreased $8.0
million to $47.6 million for the year ended December 31, 1995 from $55.6 million
for the year ended December 31, 1994. The decrease in net revenues from 1994 to
1995 was principally due to the net effect of (i) deferrals and reductions in
capital and marketing expenditures with the Company of two significant clients
13
<PAGE>
of $7.1 million, (ii) a reduction in net revenues from international operations
of $1.9 million and (iii) an increase in net revenues of $1.2 million for the
period October 1, 1995 through December 31, 1995 due to the acquisition of HMG
Intermark.
Gross profit decreased $1.2 million to $8.0 million for the year ended
December 31, 1996 from $9.2 million for the year ended December 31, 1995 due to
the decrease in the Company's net revenues and a decrease in gross margin. For
the year ended December 31, 1996, the gross margin was 17.5% as compared to
19.2% for the 1995 comparable period. The 1.7% decrease in gross margin was
principally due to a favorable production revenue mix resulting in a 0.3%
increase, and the under absorption of fixed overhead expenses as a percentage of
net revenues of 2.0%, which includes the net effect of (i) an increase in fixed
overhead expense relating to HMG Intermark's operations of 4.6% and (ii) a
decrease in fixed overhead expenses at the Company's New Jersey facility of
2.6%. Gross profit decreased $5.2 million to $9.2 million for the year ended
December 31, 1995 from $14.4 million for the comparable 1994 period due to the
decrease in the Company's net revenues and a decrease in gross margin. For the
year ended December 31, 1995, gross margin was 19.2% as compared to 25.9% for
the comparable 1994 period. The decrease in gross margin was principally due to
(i) unfavorable production revenue mix which resulted in a 5.1% decrease, (ii)
the Company's acceptance and shipment of a new program valued at $807,000 with a
new client at a negligible margin in order for the Company to demonstrate its
capabilities which resulted in a 0.4% decrease and (iii) the underabsorption of
fixed overhead expenses as a percent of net revenues of 1.2%.
Selling, general and administrative expenses ("SG&A) decreased $3.0
million to $13.0 million for the year ended December 31, 1996 as compared to
$16.0 million for the year ended December 31, 1995. The decrease in SG&A from
1995 to 1996 was principally a result of the Company's efforts to reduce its
expenses and restructure its operations, including the consolidation of
manufacturing facilities, resulting in (i) a reduction in personnel costs of
approximately $2.4 million, (ii) reduction in European expense of operations of
$243,000 and (iii) decreased spending in other general expenses. SG&A increased
to $16.0 million for the year ended December 31, 1995 as compared to $15.2
million for the comparable 1994 period. The increase in SG&A expenses of
$800,000 was principally due to the net effect of (i) the addition of new senior
marketing personnel, (ii) the expenses attributable to the establishment of a
new marketing office in Detroit, Michigan and (iii) the increase in SG&A
associated with HMG Intermark acquired as of September 30, 1995.
In December 1995, restructuring costs of $3.2 million were charged to
operations which principally related to the implementation of a cost reduction
program to be primarily implemented through consolidation and selective closures
of the Company's offices and manufacturing facilities. These closures and
consolidations are a direct result of (i) competitive conditions in the market
place and the corresponding impact on the Company, (ii) budgetary restraints
and/or reductions implemented by some of the Company's clients and (iii) the
acquisition of HMG Intermark's 140,000 square foot manufacturing facility in
Reading, Pennsylvania. The restructuring consisted of a series of planned
actions including (i) a reduction in personnel, (ii) the closure and
consolidation of plant facilities into the Company's Reading facility, (iii) the
closure or reduction in offices in New York, Chicago and Detroit and (iv) the
disposal of assets that are no longer required due to the elimination of
selected programs or site consolidations.
The restructuring cost were comprised principally of a $1.1 million
non-cash write-off of property and equipment and $2.1 million of projected
expenditures related to the cost reduction program. The provision for the
reduction of employees was approximately $600,000 which included approximately
50 employees from all areas including manufacturing, development, sales,
marketing and administration. Approximately $1.5 million was provided for the
costs related to the closing and consolidation of production facilities and
offices.
For the year ended December 31, 1996, the Company generated interest
income of $351,000 as compared to $578,000 and $301,000, for the comparable 1995
and 1994 periods, respectively. The decrease in interest income of approximately
$227,000 from 1995 to 1996 was attributable principally to a reduction in cash
and cash equivalents invested in interest bearing marketable securities and
commercial paper. The increase from 1994 to 1995 is attributable to that portion
of the net proceeds of the Company's public offering not immediately required
for the Company's operations that were invested in interest bearing marketable
securities and commercial paper.
14
<PAGE>
Interest expense was $834,000 for the year ended December 31, 1996 as
compared to $793,000 and $642,000 for the comparable 1995 and 1994 periods,
respectively. The increase in interest expense of approximately $41,000 was
principally due to the increased average borrowings in 1996 as compared to 1995.
The increase in interest expense of $151,000 for the year ended December 31,
1995 was principally due to the increased average borrowings in 1995 as compared
with the average borrowings for the comparable 1994 period.
The Company recorded a gain from foreign currency translation of $90,000
for the year ended December 31, 1995 as a consequence of the European Marketing
Agreement with Tchai and the reduction in the scope of HMGBV's operations.
As a consequence of the foregoing factors, the Company incurred a net
loss of $5.5 million, or $0.73 per share, for the year ended December 31, 1996
as compared to a net loss of $10.1 million, or $1.34 per share, for the year
ended December 31, 1995. For the year ended December 31, 1994, the Company
incurred a net loss of $963,000, or $0.17 per share.
Stockholders' Equity
Stockholders' equity decreased $4.9 million to $5.2 million at December
31, 1996 from $10.1 million at December 31, 1995. The net decrease in
stockholders' equity was principally due to the net loss of $5.5 million, offset
by (i) proceeds derived from the HMG Private Placement of common stock whereby
the Company issued 377,500 shares of common stock for an aggregate value of
$377,000 and (ii) the exercise of stock options whereby the Company issued
184,572 shares of common stock and derived net proceed of $273,000.
In conjunction with the strategic positioning of the Company, in December
1996, the Company initiated the 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 and subsequent to December 31,
1996, the Company sold an additional 375,000 shares of common stock and derived
net proceeds of approximately $375,000 as of March 19, 1997. The aggregate net
proceeds received from the HMG Private Placement as of March 19, 1997 is
$752,000. All stock issued pursuant to the terms of the HMG Private Placement is
restricted stock which has not been registered under the Securities Act 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.
Pursuant to an agreement dated January 16, 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") of a minimum of
60 units and a maximum of 120 units at a price of $25,000 per unit, aggregating
a minimum gross proceeds of $1.5 million and a maximum of $3.0 million, within
120 days of the issuance of the 1997 Private Offering memorandum. Each unit will
consist of 25,000 shares of the Company's common stock. The anticipated timing
for the consummation of the 1997 Private Offering is during the second quarter
1997. Upon consummation of the 1997 Private Offering, management estimates that
the net proceeds to be derived from this transaction will range from $1.2
million to $2.5 million and the Company would issue between 1.5 million and 3.0
million shares of common stock. All stock issued pursuant to the terms of the
1997 Private Placement is restricted stock which has not been registered under
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.
In addition, upon consummation of the 1997 Private Offering, the Company
will issue 10% of the aggregate number of shares of common stock sold in the
form of five year warrants to the investment banker at an exercise price of
$1.10 per share. Furthermore, as part of the 1997 Private Offering, the Company
also agreed to engage its investment banker to provide consulting services and
assist the Company in the pursuit of potential business acquisitions and
combinations. Under the consulting provisions, the Company has agreed to (i) a
one year, $4,000 per month consulting retainer, (ii) a finders fee associated
with the successful closure of any acquisition, restructuring, joint venture or
merger and (iii) the Company will issue an aggregate of 200,000 five year
warrants to the investment banker of which 100,000 are exercisable at $2.00 per
share and the remaining 100,000 are exercisable at $2.50 per share.
15
<PAGE>
Income Taxes
At December 31, 1996, the Company had available $27.5 million of net
operating loss carryforwards which expire during the years 2001 through 2011. No
benefit from these loss carryforwards are reflected in the consolidated
financial statements.
The Company's income tax provision for the year ended December 31, 1996
was $12,000 as compared to $14,000 and $13,000 for the years ended December 31,
1995 and December 31, 1994, respectively, and resulted principally from state
and local alternative minimum taxes.
Backlog
At December 31, 1996, the Company's aggregate backlog was $15.6 million,
as compared to $23.8 million and $19.5 million at December 31, 1995 and 1994,
respectively. Of such aggregate backlog at December 31, 1996, 22% was
attributable to one client. The Company anticipates that substantially all such
backlog at December 31, 1996, will be filled during the next twelve months. In
addition to the $15.6 million backlog at December 31, 1996, the Company's Supply
Contract with Foster Grant requires Foster Grant, subject to certain
limitations, to purchase at least 70% of all its in-store merchandising display
purchases 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
December 31, 1996 was $29.2 million of which the Company estimates that $2.5
million will be shipped within the next twelve months. Due to quarter to quarter
fluctuations in the Company's backlog levels due to the timing, nature and size
of its merchandising system programs for its clients, such backlog levels are
not necessarily an indicator of future net revenue levels.
Inflation
The effect of inflation on the Company's operations has not been
significant to date.
Liquidity and Capital Resources
Cash and cash equivalents at December 31, 1996, 1995 and 1994 aggregated
approximately $6.9 million, $8.1 million and $6.5 million, respectively. For the
years ended December 31, 1996, 1995 and 1994 the Company's cash flows from
operating, investing and financing activities are summarized below:
Year Ended December 31,
1996 1995 1994
---- ---- ----
(in millions)
Net cash used in
operating activities ($2.0) ($7.7) ($ 4.6)
---- ---- -----
Investing activities:
Redemption (purchase) of marketable securities 6.8 (6.8)
Acquisition, net of cash acquired (0.2)
Capital expenditures (1.6) (0.4) (0.8)
--- --- ---
Net cash provided by (used in) investing activities(1.6) 6.2 (7.6)
--- --- ---
Financing activities:
Net proceeds from sale of common stock 0.4 17.8
Proceeds from exercise of
stock options 0.3 0.1
Proceeds from issuance of notes, net 0.7 7.0
Net increase (decrease) in indebtedness 1.7 2.5 (11.4)
---- --- ----
Net cash provided by
financing activities 2.4 3.2 13.5
---- ---- -----
Net increase (decrease) in cash
and cash equivalents ($1.2) $1.7 $ 1.3
==== ==== =====
16
<PAGE>
The Company's decrease in cash and cash equivalents of $1.2 million for
the year ended December 31, 1996 was principally due to (i) net cash used in
operating activities of $2.0 million and (ii) capital expenditures of $1.6
million, offset by (iii) net borrowings under the Company's credit facility of
$1.7 million, (iv) net proceeds from the sale of common stock pursuant to a
private placement of $377,000 and (v) net proceeds from the exercise of stock
options of $273,000. The Company's negative cash flow from operations for the
year ended December 31, 1996 principally resulted from (i) the net loss from
operations of $5.5 million and (ii) the aggregate reduction in general
liabilities of $780,000, offset by (iii) decreases in current and other assets,
other than cash and cash equivalents of $3.5 million and (iv) non-cash charges
of $856,000 for depreciation and amortization.
The Company's increase in cash and cash equivalents of $1.7 million for
the year ended December 31, 1995 was principally due to (i) the redemption of
marketable securities of $6.8 million and (ii) net borrowings under the
Company's bank credit facility of $2.5 million, offset by (iii) net cash used in
operating activities of $7.7 million. The Company's negative cash flows from
operations for the year ended December 31, 1995 principally resulted from (i)
the net loss from operations of $10.1 million, offset by (ii) non-cash charges
of $1.3 million for depreciation and amortization and $1.1 million for the write
off of property and equipment.
The Company's increase in cash and cash equivalents of $1.3 million for
the year ended December 31, 1994 was principally due to the proceeds from the
public offering of its Common Stock offset in part by (i) net cash used in
operating activities of $4.6 million, (ii) the purchase of marketable securities
of $6.8 million and (iii) net principal payments of $4.4 million made to reduce
the Company's aggregate borrowings under the Company's bank credit facilities
and the acquisition note. The Company's negative cash flows from operations for
the year ended December 31, 1994 principally resulted from the aggregate
reduction in $8.4 million of the Company's general liabilities offset by
decreases in current and other assets, other than cash and marketable securities
of $3.6 million.
On November 22, 1996, the Company consummated 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 of 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 Company used funds available under the Credit Agreement to
retire its previous credit facility with a bank. 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.
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. The average balance
outstanding under the Company's credit agreements for the years ended December
31, 1996, 1995 and 1994 was approximately $8.8 million, $5.1 million and
$527,000, respectively, at the weighted average interest rate of 8.6%, 9.8% and
8.2%, respectively.
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 December 31, 1996, the balance
outstanding on the term loan component of the Credit Agreement was $334,000.
The Company's working capital at December 31, 1996 was a deficit of $3.2
million, inclusive of borrowings of $9.4 million pursuant to the three year
Credit Agreement. The working capital deficit was due principally to (i)
negative cash flows from operations of $2.0 million and (ii) increased borrowing
under the Company's credit facilities whereby such proceeds were used, in part,
to finance capital expenditures of $1.6 million, inclusive of $1.1 million in
one-time facility renovations and equipment upgrades at Reading. 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
17
<PAGE>
implementation of its 1996 strategic plan whereby the Company moved and
consolidated its manufacturing facilities in Reading, restructured the Company's
New York and Chicago offices, upgraded the Company's injection molding division,
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 addition, the Company has engaged
its investment banker to act as a placement agent on a "best efforts" basis for
the 1997 Private Placement. Management believes that each of the above cost
reduction components, an expanded client base, future cash flows from operations
and the HMG and 1997 Private Placements 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
annual report on Form 10-K 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.
18
<PAGE>
Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES PAGE
Independent Auditors' Report F-2
Consolidated Balance Sheets at December 31, 1996 and 1995 F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994 F-5
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1996, 1995 and 1994 F-7
Notes to Consolidated Financial Statements F-8
F-1
19
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
HMG WORLDWIDE CORPORATION
We have audited the accompanying consolidated balance sheets of HMG
WORLDWIDE CORPORATION AND SUBSIDIARIES as of December 31, 1996 and 1995, and the
related consolidated statements of operations, cash flows and changes in
stockholders' equity for the years ended December 31, 1996, 1995 and 1994. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of HMG
WORLDWIDE CORPORATION AND SUBSIDIARIES as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for the years ended December
31, 1996, 1995 and 1994 in conformity with generally accepted accounting
principles.
FRIEDMAN ALPREN & GREEN LLP
New York, New York
March 20, 1997
F-2
20
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31,
1996 1995
---- ----
ASSETS
Current assets:
Cash and cash equivalents (Note 1) $ 6,950 $ 8,139
Accounts receivable - less allowance
for doubtful accounts of $577 and $596 (Note 14) 6,454 8,681
Inventory (Notes 1 and 3) 4,214 5,254
Prepaid expenses 95 440
Other current assets 240 225
-------- --------
Total current assets 17,953 22,739
Property and equipment - net (Notes 1 and 4) 3,349 2,143
Excess of cost over fair market value
of assets acquired, less accumulated
amortization of $1,207 and $799 (Notes 1 and 2) 6,952 7,360
Other assets 501 406
-------- --------
$ 28,755 $ 32,648
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations (Note 5) $9,439 $ 7,557
Note payable (Note 2) 338 714
Accounts payable 5,803 4,331
Accrued employee compensation and benefits 1,033 1,571
Deferred revenue (Note 1) 1,835 696
Accrued expenses 1,566 1,533
Restructuring costs (Note 12) 623 1,973
Other current liabilities 552 1,740
-------- --------
Total current liabilities 21,189 20,115
Pension obligation (Notes 1 and 6) 1,684 1,965
Other long-term liabilities 691 492
-------- --------
23,564 22,572
======== ========
Stockholders' equity:
Common stock, par value $0.01; 50,000,000 shares
authorized; 8,129,589 and 7,567,517 shares
issued and outstanding (Notes 8 and 15) 81 76
Additional paid-in capital (Notes 8 and 15) 33,903 33,258
Accumulated deficit (28,793) (23,258)
-------- --------
5,191 10,076
-------- --------
$ 28,755 $ 32,648
======== ========
See accompanying notes to consolidated financial statements.
F-3
21
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
Year Ended December 31,
-------------------------
1996 1995 1994
---- ---- ----
Net revenues (Notes 1 and 10) $ 45,552 $ 47,641 $ 55,578
Cost of revenues 37,589 38,479 41,147
---------- ---------- ---------
Gross profit 7,963 9,162 14,431
Selling, general and administrative
expenses 13,003 15,996 15,226
Restructuring costs (Note 12) 3,175
----------- ---------- --------
Loss from operations (5,040) (10,009) (795)
Interest income 351 578 301
Interest expense (Note 5) (834) (793) (642)
Other income 30 186
Gain from foreign currency
translation (Note 1) 90
---------- ---------- ---------
Loss before provision for income
taxes (5,523) (10,104) (950)
Provision for income taxes (Note 7) (12) (14) (13)
---------- ---------- ---------
Net loss ($ 5,535) ( $10,118) ($ 963)
========== ========== =========
Net loss per common and
common equivalent share ($0.73) ($1.34) ($0.17)
===== ===== =====
Weighted average number of common
and common equivalent shares
outstanding 7,614,356 7,567,517 5,642,613
========= ========= =========
See accompanying notes to consolidated financial statements.
F-4
22
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Cash received from customers $ 48,930 $ 46,275 $ 57,021
Interest received 351 578 301
Cash paid to suppliers (39,739) (42,326) (48,738)
Cash paid to employees (10,671) (11,400) (12,375)
Income taxes paid (12) (14) (46)
Interest paid (816) (793) (804)
-------- -------- --------
Net cash used in operating
activities (1,957) (7,680) (4,641)
-------- -------- --------
Cash flows from investing activities:
Acquisitions, net of cash acquired (176)
Proceeds from redemption
of marketable securities 6,828
Purchases of marketable securities (6,828)
Capital expenditures (1,654) (419) (814)
-------- -------- --------
Net cash provided by (used in)
investing activities (1,654) 6,233 (7,642)
-------- -------- --------
Cash flows from financing activities:
Net proceeds from the sale of common stock
as part of a public offering 17,818
Net proceeds from the sale of common
stock as part of a private placement 377
Net proceeds from exercise of stock
options 273 10 132
Proceeds derived from a term loan 340
Proceeds derived from a credit
agreement, net 1,814 6,483 1,075
Principal payment of a note payable
issued in connection with an
acquisition (9,630)
Proceeds from issuance of notes, net 714 7,000
Principal payments of outstanding debt
obligations (382) (4,161) (2,945)
-------- -------- --------
Net cash provided by financing
activities 2,422 3,046 13,450
-------- -------- --------
Effect of exchange rate changes 71 97
-------- -------- --------
Net increase (decrease) in cash
and cash equivalents (1,189) 1,670 1,264
Cash and cash equivalents at
beginning of year 8,139 6,469 5,205
-------- -------- --------
Cash and cash equivalents at end of year $ 6,950 $ 8,139 $ 6,469
======== ======== ========
See accompanying notes to consolidated financial statements.
F-5
23
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(in thousands)
Year Ended December 31,
----------------------------
1996 1995 1994
---- ---- ----
Reconciliation of net loss to net cash
used in operating activities:
Net loss ($ 5,535) ($10,118) ($ 963)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Depreciation and amortization 856 1,283 1,256
Restructuring costs - non-cash 1,146
Other income (94)
Gain on foreign currency translation (90)
Decrease (increase) in assets,
net of effects of acquisition:
Accounts receivable 2,227 (760) 1,695
Inventory 1,040 202 2,228
Prepaid expenses 345 286 32
Other assets (110) 285 (402)
Increase (decrease) in liabilities,
net of effects of acquisition:
Accounts payable 1,472 (46) (2,566)
Deferred revenue 1,139 (678) (232)
Accrued expenses (1,760) 810 (5,595)
Restructuring costs (1,350)
Pension obligation (281)
------ ------- -------
Net cash used in operating activities ($ 1,957) ($ 7,680) ($ 4,641)
======== ======== ========
Fair value of assets acquired in
connection with an acquisition $ 2,218
Fair value of liabilities assumed
in connection with an acquisition $ 3,226
See accompanying notes to consolidated financial statements.
F-6
24
<PAGE>
<TABLE>
<CAPTION>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except share data)
Foreign Total
Additional Currency Stock-
Common Stock Paid-in Accumulated Translation holders'
Shares Amount Capital Deficit Adjustments Equity
------ ------ ---------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 4,439,772 $ 44 $ 15,330 ($ 12,177) ($ 6) $ 3,191
Issuance of shares as part of
exercise of stock options 92,925 1 131 132
Shares sold as part of
Public Offering 3,024,654 31 17,787 17,818
Foreign currency
translation adjustment 45 45
Net loss (963) (963)
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1994 7,557,351 76 33,248 (13,140) 39 20,223
Issuance of shares as part of
exercise of stock options 10,166 10 10
Foreign currency
translation adjustment (39) (39)
Net loss (10,118) (10,118)
---------- ---------- ---------- ---------- ---------- ---------
Balance at December 31, 1995 7,567,517 76 33,258 (23,258) -- 10,076
Issuance of shares as part of
exercise of stock options 184,572 2 271 273
Shares sold as part of a
private placement 377,500 3 374 377
Net loss (5,535) (5,535)
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1996 8,129,589 $ 81 $ 33,903 ($ 28,793) $ -- $ 5,191
========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
25
<PAGE>
HMG WORLDWIDE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and Significant Accounting Policies
Organization: The Company was incorporated in New York in 1984, as
MarkitStar, Inc. and changed its corporate domicile to Delaware in 1986. On
October 4, 1993, MarkitStar, Inc. effected a name change to HMG Worldwide
Corporation (the "Company").
The Company, using its marketing resources and expertise, is engaged in the
design, development, production and assembly of in-store, or point-of-purchase,
marketing and merchandising displays and systems. The Company's operations are
conducted through five operating wholly-owned subsidiaries being respectively
HMG Worldwide In-Store Marketing, Inc. ("HMG"), Intermark Corp. ("Intermark"),
HMG Intermark Worldwide Manufacturing, Inc. ("HMG Intermark"), Creative
Displays, Inc. ("CDI") and HMG Europe B.V. ("HMGBV"). Effective December 31,
1996, the Company closed HMGBV's office and terminated its remaining employee.
The Company conducts its operations in New York, Illinois and Pennsylvania.
Pursuant to a purchase agreement dated September 30, 1995, the Company
consummated a series of transactions with Benson Eyecare Corporation ("Benson")
whereby Benson's Foster Grant Group L.P. ("Foster Grant") entered into a ten
year supply contract, as amended, ("Supply Contract") with the Company and the
Company acquired Benson's merchandising display operations, now known as HMG
Intermark (see Notes 2 and 6).
Principles of Consolidation: The accompanying Consolidated Financial
Statements include the accounts of the Company and its subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.
The acquisition of HMG Intermark effective September 30, 1995, has been
accounted for as a purchase. The Consolidated Statements of Operations and Cash
Flows for the year ended December 31, 1995 include the results of operations and
cash flows of HMG Intermark for the period October 1, 1995 through December 31,
1995. Pro forma financial information for this acquisition has not been
presented because it is not deemed significant to the Consolidated Financial
Statements.
Use of Estimates: Management uses estimates and assumptions in preparing
financial statements. Those estimates and assumptions affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities, and the reported revenues and expenses.
Cash and Cash Equivalents: The Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents.
Inventory: Inventory, consisting principally of merchandising display
components, is stated at the lower of cost or market on a standard cost basis
which approximates average cost (see Note 3).
Property and Equipment: Property and equipment are stated at cost. Equipment
under capital leases are recorded at the present value of minimum lease payments
at the inception of the lease. Depreciation is computed based upon the estimated
useful lives of the assets using the straight-line method. Equipment held under
capital leases and leasehold improvements are amortized on the straight-line
method over the shorter of the lease term or estimated useful life of the asset.
F-8
26
<PAGE>
HMG WORLDWIDE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 1 - Organization and Significant Accounting Policies (continued)
Excess of Cost Over Fair Market Value of Assets Acquired: The excess of cost
over fair market value of assets acquired arising from acquisitions is amortized
on the straight-line method over a period of twenty years. Related amortization
expense was approximately $408,000, $363,000 and $349,000 for the years ending
December 31, 1996, 1995 and 1994, respectively. The periods of amortization are
reviewed on a quarterly basis to determine whether events and circumstances
warrant revised estimates of useful lives. This evaluation considers, among
other factors, expected cash flows and profits of the businesses to which the
excess of cost over fair market value of assets acquired relates. The excess of
cost over fair market value of assets acquired will be written off if it becomes
evident that it has been permanently impaired.
Fair Value of Financial Instruments: The fair value of the revolving credit
facility and note payable approximates carrying value due to the short
maturities.
Foreign Currency Translation: The functional currency of HMGBV is the Dutch
Guilder. Assets and liabilities are translated into U.S. dollars using the
current exchange rate at the Balance Sheet date. Translation adjustments
resulting from fluctuation in exchange rates are recorded as a separate
component of stockholders' equity. Income and expense items are translated at
the average exchange rates during the respective periods. All translation
adjustments realized by the Company during 1996, which in total were not
material, were charged to operations.
Revenue recognition: Revenue is recognized when a display or system is
shipped and when services are performed.
Reclassification: Certain reclassifications have been made to conform the
presentation of prior years to the current year presentation.
Research and Development: Research and development costs are charged to
operations as incurred.
Income Taxes: Income taxes are provided on the liability method on all
revenues and expenses included in the Consolidated Statements of Operations,
regardless of the period in which such items are recognized for income tax
purposes, except for items representing a permanent difference between pre-tax
accounting income or loss and taxable income or loss (see Note 7). Under the
liability method of accounting for income taxes, deferred taxes are based on
rates that are expected to be in effect when temporary differences are scheduled
to reverse.
Earnings per Share: Earnings per share amounts are based on the weighted
average number of common shares outstanding during each period. Common shares
issuable upon exercise of stock options are included in the earnings per share
computation unless they are immaterial in amount or anti-dilutive (see Note 8).
Employee Benefit Plans: The Company and its subsidiaries sponsor a series of
defined benefit and defined contribution plans for its union and non-union
employees. For the defined benefit plans, the Company has adopted Statement of
Financial Accounting Standards ("SFAS") 87 "Employers' Accounting for Pensions"
and SFAS 106 "Employers' Accounting for Postretirement Benefits Other Than
Pensions" (see Note 6).
F-9
27
<PAGE>
HMG WORLDWIDE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 1 - Organization and Significant Accounting Policies (continued)
Accounting for Stock-Based Compensation: Prior to January 1, 1996, the
Company accounted for its stock option plans in accordance with Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. As such, compensation expense would be
recorded on the date of grant only if the current market price of the underlying
stock exceeded the exercise price. On January 1, 1996, the Company adopted SFAS
123, Accounting for Stock-Based Compensation, which permits entities to
recognize as expense over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25 and provide pro forma net
income and pro forma earnings per share disclosures for employee stock grants
made in 1995 and future years as if the fair-value-based method defined in SFAS
123 has been applied. The Company has elected to continue to apply the
provisions of APB No. 25 in accounting for its plan and, accordingly, no
compensation cost has been recognized for its stock options in the financial
statements.
Recently Issued Accounting Standards: The Financial Accounting Standards
Board has issued SFAS No. 121, "Accounting For The Impairment Of Long-Lived
Assets And For Long-Lived Assets To Be Disposed Of", which is effective for the
years beginning after December 15, 1995. The provisions of this statement have
not had a material impact on the Company's results of operations or financial
position
Note 2 - Acquisition of HMG Intermark and Long-Term Supply Contract with
Foster Grant
Pursuant to a purchase agreement dated September 30, 1995, the Company
consummated a series of transactions with Benson whereby Benson's Foster Grant
subsidiary entered into the in-store merchandising display Supply Contract with
the Company and the Company acquired Benson's merchandising display operations,
now known as HMG Intermark.
The Supply Contract requires Foster Grant, subject to certain conditions, to
purchase at least 70% of its in-store merchandising display purchases from the
Company through December 2005 with average annual purchases to aggregate no less
than $2.5 million. The Supply Contract contains provisions which include (i)
Foster Grant's right to competitively bid its merchandising display purchases
with comparable suppliers of the Company, (ii) the Company must meet certain
price criteria with its services and (iii) the Company has the right of last
refusal on all merchandising display programs on which it has placed a bid with
Foster Grant.
In addition, Benson advanced through its Foster Grant subsidiary $1.0
million to the Company as a deposit against the first year's in-store
merchandising display purchases. The Company issued to Benson a corresponding,
non-interest bearing note payable of $1.0 million. During the first eighteen
months of the Supply Contract, the Company shall apply a 25% credit against the
cost of display shipments to Foster Grant up to an aggregate of $4.0 million in
merchandising display shipments as repayment of the note payable. In the event
that the 25% credits issued to Foster Grant do not aggregate to $1.0 million
prior to March 31, 1997, the Company shall remit the shortfall, if any, to
Benson to retire the note payable. At December 31, 1996, the Company's note
payable to Benson was approximately $338,000.
In addition to the Supply Contract, the Company acquired from Benson the
merchandising display production and assembly operations, located in Reading,
Pennsylvania, by acquiring all of the outstanding shares of capital stock of HMG
Intermark. The Company recorded HMG Intermark's assets and liabilities based
upon their estimated fair market value as of the acquisition date. Additionally,
the Company recorded approximately $1.2 million as the excess cost over fair
market value of assets acquired.
F-10
28
<PAGE>
HMG WORLDWIDE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 3 - Inventory
Inventory consisted of the following components at December 31, 1996 and 1995:
December 31,
-----------------
1996 1995
---- ----
(in thousands)
Finished goods $1,312 $1,000
Work-in-proess 653 1,353
Raw materials 2,249 2,901
------ ------
$4,214 $5,254
====== ======
Note 4 - Property and Equipment
The following is a summary of property and equipment, estimated useful lives
and accumulated depreciation and amortization at December 31, 1996 and 1995:
December 31,
----------------
Description 1996 1995 Estimated Useful Life
----------- ---- ----
(in thousands)
Land $ 103 $ 103
Buildings 1,755 813 32 years
Equipment 1,143 854 3-7 years
Furniture and fixtures 192 192 5 years
Leasehold improvements 586 539 Lesser of lease term
or eight years
Tooling 960 726 3-7 years
------ -----
4,739 3,227
Less: accumulated
depreciation and
amortization 1,390 1,084
------ -----
$3,349 $2,143
====== ======
Depreciation and amortization expense for property and equipment for the
years ended December 31, 1996, 1995 and 1994 was approximately $448,000,
$920,000 and $907,000, respectively.
Note 5 - Credit Facilities
Long-term obligations at December 31, 1996 and 1995 are as follows:
December 31,
---------------
1996 1995
(in thousands)
Revolving credit facility $9,371 $7,557
Term loan 334
------ ------
9,705 7,557
Less: current maturities 9,439 7,557
------ ------
$ 266 $ --
====== ======
F-11
29
<PAGE>
HMG WORLDWIDE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 5 - Credit Facilities (continued)
Revolving Credit Facility
On November 22, 1996, the Company consummated a $11.0 million three year
Loan and Security Agreement ("Credit Agreement") with a financial institution in
the form of a revolving credit facility and a term loan. The Credit Agreement
provides for a secured revolving credit facility which advances up to of 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 Company used funds available under
the Credit Agreement to retire its previous credit facility with a bank. 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.
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.
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 December 31, 1996, the balance outstanding on
the term loan component of the Credit Agreement was $334,000.
Prior to November 22, 1996, the Company maintained a credit facility with a
bank which provided for a secured revolving line of credit which advanced up to
the lesser of 80% of eligible accounts receivable and the Company's cash and
cash equivalents and marketable securities, or $10.0 million. Borrowings under
the prior credit facility were charged interest at either the banks prime rate
plus 1% per annum or the Eurodollar rate plus 2% per annum and required the
Company to pay a quarterly commitment fee at a rate of half of 1% per annum of
the average unused amount of funds available.
The average balance outstanding under the Company's credit agreements for
the years ended December 31, 1996, 1995 and 1994 was approximately $8.8 million,
$5.1 million and $527,000, respectively, at the weighted average interest rate
of 8.6%, 9.8% and 8.2%, respectively.
Note 6 - Employee Benefit Plans
The Company and its subsidiaries sponsor a series of defined benefit and
defined contribution employee benefit plans covering both union and non-union
personnel. A summary of each of these sponsored plans is as follows:
HMG Intermark Pension and Health Care Plans
HMG Intermark sponsors a defined benefit plan ("Pension Plan") and a post
retirement plan for certain health care benefits ("Health Care Plan") covering
all union employees pursuant to agreements between HMG Intermark and Local 241
of the National Federation of Independent Unions.
F-12
30
<PAGE>
HMG WORLDWIDE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 6 - Employee Benefit Plans (continued)
Pursuant to the terms of the Pension Plan, HMG Intermark union employees,
with dates of hire prior to March 31, 1996, generally become eligible for
retirement benefits after reaching age 55 with 10 years of continuous service or
after reaching age 65. Retirees are entitled to receive pension benefits, based
upon date of retirement, of between $4.00 and $13.50 per month for each year of
credited service. HMG Intermark funds the actuarially determined costs of the
Pension Plan, including the amortization of prior service costs over 30 years.
HMG Intermark's actuarial assumptions are based upon an expected return on
assets of 8% and a discount rate of 7%. HMG Intermark union employees with dates
of hire subsequent to March 31, 1996 are not eligible for retirement benefits
pursuant to the terms of this Pension Plan. Alternatively, such post March 31,
1996 hirees and all other HMG Intermark union employees shall be covered,
effective January 1, 1997, by the HMG Intermark Capital Accumulation Plan, a
defined contribution plan qualifying under the IRC Section 401(k). The plan
permits all employees who are 21 years of age and who have one year of service
to contribute up to 10% of their salary to the plan. Additional discretionary
contributions can be made at the option of HMG Intermark.
The following is a summary of the components of pension costs and the
accumulated pension obligation of HMG Intermark at December 31, 1996 and 1995:
For the Period
October 1, 1995
(date of acquisition)
For the Year Ended through
December 31, 1996 December 31, 1995
------------------ -------------------
Net periodic cost:
Service cost - benefits
earned during
the period with interest $ 45 $ 9
Interest cost on accumulated
benefit obligation 341 89
Actual return on assets (270) (102)
Net amortization and deferral 55 52
--------- ---------
Net periodic pension cost $ 171 $ 48
========= =========
December 31,
----------------------
1996 1995
--------- ---------
Accumulated pension obligation:
Vested benefits obligation ($ 5,083) ($ 5,073)
Non-vested benefit obligation (2)
--------- --------
Accumulated benefit obligation
and projected benefit obligation (5,083) (5,075)
Fair market value of plan assets 3,228 2,899
--------- ---------
Funded status of projected
benefit obligation (1,855) (2,176)
Unrecognized net loss 170 231
Adjustment to recognized
minimum liability (170) (231)
--------- ---------
Accrued pension benefit obligation (1,855) (2,176)
Less: current portion 171 211
--------- ---------
Pension obligation - long-term ($ 1,684) ($ 1,965)
========= =========
F-13
31
<PAGE>
HMG WORLDWIDE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 6 - Employee Benefit Plans (continued)
Pursuant to the terms of the Health Care Plan, HMG Intermark union
employees, with dates of hire prior to March 31, 1996, become eligible for
retirement health care benefits after the years of credited service plus their
age at the time of retirement is equal to or greater than 85 (Rule of 85). If
any employee, at the time of their retirement, meets the Rule of 85 prior to
reaching age 65, HMG Intermark shall continue to provide health care benefits
under the Health Care Plan until the retiree reaches age 65. HMG Intermark does
not pre-fund the cost of the Health Care Plan. At December 31, 1996 and 1995,
the Company has included as a component of other long-term liabilities
approximately $334,000 and $325,000, respectively, relating to the unfunded
Health Care Plan obligation. The accrued post retirement obligation under the
Health Care Plan is actuarially determined based upon the following significant
assumptions, (i) retirement age of 63, (ii) a discount rate of 7% and (iii) a
gross medical cost increase of an average of 9% for the next five years and 6%
increase thereafter.
The following is a summary of the components of the Health Care Plan costs
and the accumulated health care obligation of HMG Intermark at December 31, 1996
and 1995:
For the Period
October 1, 1995
(date of acquisition)
For the Year Ended through
December 31, 1996 December 31, 1995
----------------- -----------------
Service cost - benefits
earned during the period $ 44 $ 13
===== =====
Net premiums paid during the period $ 49 $ 12
===== =====
Net periodic cost:
Service cost - benefits
earned during the
the period with interest $ 5 $ 2
Interest cost on accumulated
benefit obligation 33 9
Actual loss on benefit payments 6 2
----- -----
Net periodic health care cost $ 44 $ 13
===== =====
December 31,
-----------------
1996 1995
----- -----
Accumulated health care obligation:
Accumulated benefit obligation and
projected benefit obligation ($489) ($489)
----- -----
Funded status of projected
benefit obligation (489) (489)
Unrecognized net loss 104 99
----- -----
Health care obligation (385) (390)
Less: current portion 51 65
----- -----
Health care obligation
long-term ($334) ($325)
===== =====
Capital Accumulation Plan
The HMG Worldwide Corporation Capital Accumulation Plan and Trust is a
defined contribution plan qualifying under IRC Section 401(k) covering all
employees not participating in a collective bargaining agreement. The plan
permits all employees who are 21 years of age and who have one year of service
to contribute up to 10% of their salary to the plan. In addition the HMG
Worldwide Corporation Capital Accumulation Plan provides an employer matching
provision whereby the Company matches fifty cents for every dollar of employee
contribution up to 6% of base compensation. Company contributions of
approximately $155,000, $114,000, and $161,000 were made and charged to
operations for the years ended
F-14
32
<PAGE>
HMG WORLDWIDE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 6- Employee Benefit Plans (continued)
December 31, 1996, 1995 and 1994 respectively. The HMG Worldwide Corporation
Capital Accumulation Plan also provides for a fixed contribution provision
whereby the Company annually contributes 3% of base compensation for any plan
participant employed on December 31. Company contributions of approximately
$160,000, $155,000 and $175,000 were made and charged to operations for the
years ended December 31, 1996, 1995, and 1994, respectively. The plan also
allows the Company to make discretionary contributions at the end of the plan
year. The Company did not make any discretionary contributions for these years.
Multi-Employer Benefit Plans
HMG participated in two multi-employer benefit plans covering all union
employees pursuant to agreements between HMG and Local 2682, United Brotherhood
of Carpenters and Joiners. These plans were defined benefit plans; however,
specific benefit levels were not negotiated with, or known by the employer. The
pension plan required HMG to contribute 6% of each employee's wages, excluding
overtime, on a monthly basis. Pension plan contributions of approximately
$82,000, $99,000, and $119,000 were made and charged to operations for the years
ended December 31, 1996, 1995 and 1994, respectively. The welfare plan required
HMG to make a specified contribution for each employee per month and for each
hour for all regular and overtime hours worked. Welfare plan contributions of
approximately $142,000, $187,000 and $235,000 were made and charged to income
during the periods noted above. Pursuant to the closing of HMG's New Jersey
manufacturing facility effective December 31, 1996, the Company is no longer
subject to sponsoring these plans and has accordingly discontinued its
participation in the plans.
Note 7- Income Taxes
The components of the provisions for income taxes are as follows:
Year Ended December 31,
------------------------
1996 1995 1994
---- ---- ----
(in thousands)
Current:
Federal $ - $ - $ -
State and local 12 14 13
---- ---- ----
12 14 13
---- ---- ----
Deferred:
Federal - - -
State and local - - -
---- ----- ----
- - -
---- ----- ----
$ 12 $ 14 $ 13
==== ==== ====
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying value of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes as well as operating loss
carryforwards.
F-15
33
<PAGE>
HMG WORLDWIDE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 7 - Income Taxes (continued)
The following is a summary of the significant components of the Company's
deferred taxes:
December 31,
------------
1996 1995
---- -----
(in thousands)
Deferred taxes:
Net operating loss carryforwards $10,316 $7,232
Accruals not currently deductible 441 1,390
Inventory capitalization 83 ( 61)
Depreciation 744 869
Other 136 89
-------- -------
Subtotal 11,720 9,519
Less: Valuation allowance (11,720) (9,519)
-------- -------
Net deferred taxes $ - $ -
======== =======
At December 31, 1996, the Company had net operating loss carryforwards
("NOL") of approximately $27.5 million which expire during the years 2001
through 2011.
A reconciliation of the tax provisions and amounts computed by applying the
federal income tax rate of 34% to the loss before income taxes is as follows:
Year Ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
(in thousands)
Computed tax benefit, net of increase
in valuation allowance $ - $ - $ -
State and local income taxes 12 14 13
----- ----- -----
$ 12 $ 14 $ 13
===== ===== =====
Note 8 - Common Stock
In August 1994, the Company, in an underwritten offering pursuant to a
registration statement with the Securities and Exchange Commission, sold
3,024,654 shares of its common stock at $6.75 per share from which it derived
net proceeds of $17.8 million.
The Company maintains four stock options plans which have been adopted by
the Board and subsequently approved by its stockholders. Three of the stock
option plans are comprised of two option categories; incentive stock options for
full-time employees and consultants, including officers and directors, and
nonstatutory stock options for full-time employees and non-employee directors.
The one additional plan provided for incentive stock options for full-time
employees, officers and directors and non-statutory stock options for employees
and consultants and non-employee directors. The total number of shares reserved
and available under the four plans are 2,543,012 shares.
The following is a summary of transactions for the years ended December 31,
1996, 1995 and 1994:
1996 1995 1994
---- ---- ----
Options outstanding at January 1 2,031,450 2,157,225 2,330,600
Incentive options granted at $1.25 599,450
Options exercised (184,572) (10,166) (92,925)
Options canceled (69,000) (115,609) (80,450)
--------- --------- ---------
Options outstanding at December 31 2,377,328 2,031,450 2,157,225
========= ========= =========
F-16
34
<PAGE>
HMG WORLDWIDE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 8 - Common Stock (continued)
At December 31, 1996, the Company has 177,450, 23,500, 599,450, 38,600,
1,334,528 and 203,800 options outstanding exercisable at $0.9375, $1.00, $1.25,
$1.56, $1.625 and $7.625 per share, respectively. Pursuant to the terms of one
plan, 244,944 options are subject to a vesting period of five years.
Additionally, in August 1995, the Company issued 50,000 five year warrants at an
exercise price of $2.00 per share to an individual to assist the Company in its
marketing endeavors. The weighted average exercise price and period of exercise
of all outstanding stock options and warrants at December 31, 1996 was $1.99 per
share and 7.7 years, respectively.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its employee stock options. Under APB No. 25, because the
exercise price of the Company's employee stock options equals or exceeds the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Pro forma information regarding net income and earnings per share is
required by SFAS 123 and has been determined as if the Company had accounted for
its employee stock options under the fair value method of SFAS 123. The weighted
average fair value of options granted during 1996 was $0.31 per share. The fair
value for these options was estimated at the date of grant using a Black Scholes
option pricing model with the following weighted average assumptions; risk free
interest rate of 6.8%; volatility factor of expected market price of the
Company's common stock of 53% and a weighted average expected life of the option
of 8 years. Under the provisions of SFAS 123, the Company's pro forma
compensation expense arising from the grant of stock options for the year ended
December 31, 1996 was approximately $160,000 and pro forma net loss and net loss
per share would have been approximately $5.7 million and $0.75 per share,
respectively.
Note 9 - Lease Commitments
The Company leases manufacturing, warehousing and office facilities and
production and office equipment, under leases expiring at various dates. Certain
facility leases contain renewal provisions and generally require the Company to
pay increases over base period amounts for taxes and other operating expenses.
At December 31, 1996, future minimum payments under noncancellable operating
leases are as follows:
Year Amount
---- ------
(in thousands)
1997 $ 739
1998 511
1999 482
2000 482
2001 482
Thereafter 402
------
$3,098
======
Rent expense for the years ended December 31, 1996, 1995 and 1994 was
approximately $1.6 million, $2.1 million and $1.9 million, respectively.
At December 31, 1996, the Company had letters of credit outstanding totaling
approximately $132,000 to guarantee obligations under certain leases.
F-17
35
<PAGE>
HMG WORLDWIDE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 10 - Significant Clients
Net revenues from individual clients of the Company accounting for 10% or
more of net revenues for the years ended December 31, 1996, 1995 and 1994 are as
follows:
1996 1995 1994
---- ---- ----
Sara Lee Corporation 12% 24% 31%
Procter & Gamble Co. 17% 11% 15%
Wal*Mart Stores, Inc. 11% 13%
Hallmark Cards, Inc. 11%
Note 11 - Foreign Operations
HMGBV, headquartered in the Netherlands, entered into the European Marketing
Agreement on October 1, 1995 with Turbo Screen B.V., a wholly-owned subsidiary
of Tchai Holdings B.V. ("Tchai") of the Netherlands. Pursuant to the terms of
the European Marketing Agreement, Tchai will provide the Company with production
and product development support and employ four of HMGBV's then five employees.
In addition, Tchai paid approximately $30,000 for certain equipment owned by
HMGBV. The Company and Tchai have also agreed to supply one another with
marketing leads. Commissions ranging from 2% to 10% of resulting sales will be
paid to the party which supplies the successful introduction. Pursuant to
European Marketing Agreement, the Company has earned commission of approximately
$71,000 for the year ended December 31, 1996. The Company has not incurred any
commission expense under this agreement to date.
Financial information for HMGBV is as follows:
Year Ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
(in thousands)
Net revenues $ 90 $ 390 $2,331
====== ===== ======
Operating income (loss) ($ 99) ($ 631) $ 4
===== ===== ======
Identifiable assets $ 102 $173 $1,130
====== ===== ======
Effective December 31, 1996, the Company closed its HMGBV office and
terminated its remaining employee. All future operations and services required
by the Company's clients in Holland will be handled through Tchai pursuant to
the terms of the European Marketing Agreement.
In addition to the net revenues noted above, other subsidiaries of the
Company have sales to various foreign countries, principally to customers in
Europe and the Far East. For the years ended December 31, 1995 and 1994 the
Company has included in its Consolidated Statements of Operations, net sales,
exclusive of HMGBV revenues, of approximately $624,000 and $708,000,
respectively, relating to the export of products to Europe and the Far East. The
Company did not engage in any export sales for the year ended December 31, 1996.
F-18
36
<PAGE>
HMG WORLDWIDE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 12 - Restructuring Costs
In December 1995, restructuring costs of $3.2 million were charged to
operations which principally related to the implementation of a cost reduction
program to be primarily implemented through consolidation and selective closures
of the Company's offices and manufacturing facilities. These closures and
consolidations are a direct result of (i) competitive conditions in the market
place and the corresponding impact on the Company, (ii) budgetary restraints
and/or reductions implemented by some of the Company's clients and (iii) the
acquisition of and subsequent renovation of HMG Intermark's 140,000 square foot
manufacturing facility in Reading, Pennsylvania. The restructuring consists of a
series of planned actions including (i) a reduction in personnel, (ii) the
closure and consolidation of plant facilities into the Company's Reading
facility, (iii) the closure or reduction in offices in New York, Chicago and
Detroit and (iv) the disposal of assets that are no longer required due to the
elimination of selected programs or site consolidations.
The restructuring costs are comprised principally of a $1.1 million non-cash
write-off of property and equipment and $2.1 million of projected expenditures
related to the cost reduction program. The provision for the reduction of
employees was approximately $600,000 which includes approximately 50 employees
from all areas including manufacturing, development, sales, marketing and
administration. Approximately $1.5 million was provided for the costs related to
the closing and consolidation of production facilities and offices. The Company
completed most of the consolidation by December 31, 1996 with the balance to be
completed by June 30, 1997.
Note 13 - Related Party Transactions
For the years ended December 31, 1996, 1995, and 1994, the Company incurred
a total of approximately $200,000, $142,000 and $482,000, respectively, for
various legal and consulting services provided by firms whose members or
officers are stockholders or directors of the Company.
Note 14 - Commitments and Contingent Liabilities
The Company is subject to certain legal proceedings and claims which have
arisen in the ordinary course of its business. These actions when ultimately
concluded will not, in the opinion of management, have a material adverse effect
upon the financial position, results of operations or liquidity of the Company.
In April 1984, HMG entered into an agreement with one of its sales
representatives, Howard Displays, Inc. ("HDI"), whereby HMG is required to make
contingent consideration payments to the former principal shareholder of HDI.
Such payments are based upon the net revenues derived from sales to active HDI
clients. These payments continue until one year after the death of this
individual. For the years ended December 31, 1996, 1995, and 1994, approximately
$234,000, $525,000, and $733,000, respectively, were charged to operations.
The Company is potentially subject to significant concentrations of credit
risk on its cash and short-term investments (cash equivalents) and accounts
receivable. Short-term investments are in commercial paper of corporations with
high credit ratings and securities of U.S. Government agencies and are held by
one financial institution with a high credit standing. Receivables, which under
normal trade terms are not secured, are from a large number of consumer products
companies. The two customers with the largest balances account for approximately
28% of accounts receivable at December 31, 1996.
F-19
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<PAGE>
HMG WORLDWIDE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 15 - Private Placement and Exercise of Options
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 sock 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. Subsequent to December 31, 1996, 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 $375,000 as of March 19,
1997. The aggregate net proceeds received from the HMG Private Placement as of
March 19, 1997 is $752,000. 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.
Contemporaneous with the HMG Private Placement, in December 1996 the Company
derived net proceeds of approximately $272,000 through the exercise of stock
options for which the Company issued 184,572 shares.
Pursuant to an agreement dated January 16, 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") of a minimum of
60 units and a maximum of 120 units at a price of $25,000 per unit aggregating a
minimum gross proceeds of $1.5 million and a maximum of $3.0 million, within 120
days of the issuance of the 1997 Private Offering memorandum. Each unit will
consist of 25,000 shares of the Company's common stock. The anticipated timing
for the consummation of the 1997 Private Offering is during the second quarter
1997. Upon consummation of the 1997 Private Offering, management estimates that
the net proceeds to be derived from this transaction will range from $1.2
million to $2.5 million and the Company would issue between 1.5 million and 3.0
million shares of common stock. All stock to be issued pursuant to the terms of
the 1997 Private Placement will be restricted stock which will not be registered
under 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.
In addition, upon consummation of the 1997 Private Offering, the Company
will issue 10% of the aggregate number of shares of common stock sold in the
form of five year warrants to the investment banker at an exercise price of
$1.10 per share. Furthermore, as part of the 1997 Private Offering, the Company
also agreed to engage its investment banker to provide consulting services and
assist the Company in the pursuit of potential business acquisitions and
combinations. Under the consulting provisions, the Company has agreed to (i) a
one year, $4,000 per month consulting retainer, (ii) a finders fee associated
with the successful closure of an acquisition, restructuring, joint venture or
merger and (iii) the Company will issue an aggregate of 200,000 five year
warrants to the investment banker of which 100,000 are exercisable at $2.00 per
share and the remaining 100,000 are exercisable at $2.50 per share.
F-20
38
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
There have been no changes in accountants due to disagreements on accounting
and financial disclosure during the 24 months prior to December 31, 1996.
18
39
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
The executive officers and directors of the Company are as follows:
Associated
with the
Company
Name Age Offices Held Since
- ---- --- ------------ ------
Michael Wahl 59 Chairman of the Board and 1984
Chief Executive Officer
Andrew Wahl 36 President and Director 1984
Robert V. Cuddihy, Jr. 37 Chief Operating Officer, 1987
Chief Financial Officer
and Director
L. Randy Riley 45 Executive Vice President 1993
and Director
Herbert F. Kozlov 44 Secretary and Director 1988
Lawrence J. Twill, Sr. 59 Director 1987
MICHAEL WAHL has been a director of the Company since its inception in May
1984. Mr. Wahl became the Company's Chairman and Chief Executive Officer,
effective October 1, 1993. Since 1984, Mr. Wahl has served as the Chairman of
the Board of the Company. Since May 1986, Mr. Wahl has also served as the chief
executive officer of the Company. Mr. Wahl served as the Company's HMG President
from 1976 to April 1986.
ANDREW WAHL has been a director of the Company since its inception in May
1984. Mr. Wahl became the President effective October 1, 1993, and relinquished
his roles as Chairman and Chief Executive Officer. From May 1984 to October
1993, Mr. Wahl served as the Company's Chief Executive Officer. In December
1990, Mr. Wahl became the Secretary of the Company. From July 1987 to October
1993, Mr. Wahl has also served as the Company's Chairman of the Board.
Additionally, Mr. Wahl served as the Company's President from May 1984 until
December 1990. From September 1980 until May 1984, Mr. Wahl served as Vice
President for HMG, where his primary responsibilities were in the areas of new
business development and pension and profit-sharing management.
ROBERT V. CUDDIHY, JR. has been the Company's chief financial officer and
Secretary since July 1987 and a director since February 1988. In March 1989, Mr.
Cuddihy also assumed the responsibilities of chief operating officer of the
Company. In December 1990, Mr. Cuddihy became the Company's President and
discontinued his function as its Secretary. Mr. Cuddihy relinquished his role as
President, effective October 1, 1993. From July 1981 until July 1987, Mr.
Cuddihy was with KPMG Peat Marwick, Certified Public Accountants, where he last
served as a senior audit manager.
L. RANDY RILEY has been a director of the Company since March 1994. Mr.
Riley is, and for at least the past five years has been, employed by HMG in an
executive capacity, most recently as President of HMG. He was previously
employed by Ernest & Julio Gallo and by Colgate-Palmolive Company in senior
marketing positions.
19
40
<PAGE>
HERBERT F. KOZLOV has been a director of the Company since February 1988.
From August 1989 until December 1995, Mr. Kozlov has also served as the chief
executive officer of Electronic Voting Systems, Inc., a subsidiary of the
Company. Effective October 1, 1993, Mr. Kozlov assumed the responsibilities of
Corporate Secretary. Mr. Kozlov is a member of Parker Duryee Rosoff & Haft,
counsel to the Company. Mr. Kozlov has been a practicing attorney for more than
ten years.
LAWRENCE J. TWILL, SR. has been a director of the Company since July 1987.
Mr. Twill has been President of Ashwood Capital, a private merchant bank, since
March 1991. From February 1990 to February 1991, he was Managing Director of
Peers & Co., which at the time was a subsidiary of Kemper Securities, Inc. From
June 1988 to February 1990, he served as Executive Vice President, Investment
Banking and a member of the Executive Committee of Bateman Eichler, Hill
Richards, a subsidiary of Kemper Securities, Inc. From February 1986 to June
1988, Mr. Twill was the Chairman and Chief Executive Officer of Woolcott &
Company, an investment banking firm, and from April 1984 to March 1985 he was
the President and Chief Executive Officer of New York Air, Inc. Mr. Twill is
also a member of the Board of Directors of United Waste Systems, Inc.
Michael Wahl is the father of Andrew Wahl. There are no other family
relationships among the Company's officers and directors.
All directors hold office until the next annual meeting of stockholders
and the election and qualification of their successors. Executive officers are
elected annually by the Board of Directors to hold office until the first
meeting of the Board following the next annual meeting of stockholders and until
their successors are chosen and qualified.
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's officers and directors, and persons who own more than 10%
of the Company's Common Stock, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission ("SEC"). Officers,
directors and greater than 10% stockholders are required by the SEC regulations
to furnish the Company with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms 5 were
required for those persons, the Company believes that through December 31, 1996,
all filing requirements applicable to its officers, directors and greater than
10% beneficial owners were complied with.
20
41
<PAGE>
Item 11. Executive Compensation.
Summary Compensation
Set forth below is the aggregate compensation for services rendered in
all capacities to the Company during its fiscal years ended December 31, 1996,
1995 and 1994 by its chief executive officer and each of its executive officers
whose compensation exceeded $100,000 during its fiscal year ended December 31,
1996.
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term Compensation
----------------------
Annual Compensation Awards Payouts
------------------- ---------------- -------
Other Number of All
Name and Annual Restricted Securities Long-Term Other
Principal Compen- Stock Underlying Incentive Compen-
Position Year Salary Bonus sation(1) Awards Options Payouts sation
- --------- ---- ------ ----- --------- ------ ---------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Michael Wahl 1996 $250,000 $ - 140,000
Chief Executive 1995 $250,000 $100,000
Officer 1994 $250,000 $100,000
Andrew Wahl 1996 $250,000 $ - 140,000
President 1995 $190,000 $ 76,500
1994 $190,000 $125,000
Robert V.
Cuddihy, Jr. 1996 $200,000 $ - 70,000
Chief Operating 1995 $150,000 $100,000
Officer 1994 $150,000 $125,000
Chief Financial
Officer
L. Randy Riley 1996 $250,000 $ 70,000 129,450
Executive Vice 1995 $210,000 $ -
President 1994 $210,000 $ 70,000
</TABLE>
(1) Personal benefits provided to Messrs. Michael Wahl, Andrew Wahl, Cuddihy
and Riley did not exceed the disclosure thresholds established under SEC
rules and therefore are not included in this table.
Set forth below is information with respect to options to purchase the
Company's Common Stock granted in the year ended December 31, 1996 and prior
years under the Company's 1986, 1991 1993 and 1994 Stock Option Plans.
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year End Option Values
Number of Securities
Number of Underlying Unexercised Value of Unexercised
Shares Options at In-the-Money Options
Acquired December 31, 1996 at December 31, 1996
on Value Unexer- Unexer-
Name Exercise Realized Exercisable cisable Exercisable cisable
- ---- -------- -------- ----------- ------- ----------- -------
Michael Wahl 184,572 $272,430 599,828 $ -
Andrew Wahl 516,750 $21,199
Robert V.
Cuddihy, Jr. 223,850 $14,981
L. Randy
Riley 223,850 $ -
21
Employment Agreements
Effective October 1, 1993, Michael Wahl became the Company's Chairman of
the Board and Chief Executive Officer pursuant to a five year employment
contract ("Wahl Employment Agreement") at a base salary of no less than $250,000
per year. He is also entitled to receive such bonuses as may be awarded to him
from time to time by the Board in its sole discretion.
Upon termination of the Wahl Employment Agreement by the Company for any
reason other than for cause, the Company will be obligated to continue to make
salary payments to Mr. Wahl, or to his estate in the event of his death, for
42
<PAGE>
a period of up to two years after such termination. The Wahl Employment
Agreement also precludes Mr. Wahl from competing with the Company for a period
of two years following termination of employment.
With the exception of Michael Wahl, none of the executive officers is
employed by the Company pursuant to an employment agreement.
Compensation of Directors
The Company's policy is to reimburse directors for travel and
out-of-pocket expenses incurred, if any, to attend its directors' meetings. See
"Compensation Committee Interlocks and Insider Participation".
Board Compensation Committee Report on Executive Compensation
Although the Company has a Compensation Committee, the Board as a whole
rather than the Compensation Committee has set compensation for its executive
officers for each of the past three years. Four of such directors received cash
compensation as executive officers of the Company.
Effective October 1, 1993, Michael Wahl, who had previously been the chief
executive officer of HMG, became Chairman of the Board and Chief Executive
Officer of the Company pursuant to an employment agreement (the "Wahl Employment
Agreement"). In negotiating the Wahl Employment Agreement, the Board of
Directors determined that Mr. Wahl should receive a base salary equal to that
which he received under a five year employment agreement entered into in 1990
with HMG under the former owners. In order to induce Mr. Wahl to enter into such
prior employment agreement, HMG had agreed to pay Mr. Wahl the additional sum of
$1.0 million, of which $750,000 had been paid, with the balance payable to Mr.
Wahl in two installments of $125,000 each due in 1994 and 1995, respectively.
The Wahl Employment Agreement superseded Mr. Wahl's prior employment agreement
with HMG and released HMG from its obligation to pay Mr. Wahl these two
remaining $125,000 installments and provided for no new inducement payments. The
Board of Directors granted Mr. Wahl options to acquire the Company's Common
Stock in lieu of any such payments (the "Wahl Options").
Compensation levels afforded to Andrew Wahl, Robert V. Cuddihy, Jr., L.
Randy Riley and to the Company's other executive officers are based in
substantial part upon a comparative evaluation by the Company's Board of
Directors of each such person's functional responsibility and performance in
that particular segment of the Company's operations for which each is
responsible and, where discernable, the profitability of that segment.
During 1996, the Board approved the payment of bonuses and the grant of
stock options, to a number of employees, including executive officers. These
bonuses and grant of options were approved after considering the significant
transactions initiated and consummated by the executive officers on behalf of
the Company during the past year. The Board noted that the Company's executive
officers accomplishments included (i) renovated and expanded the Company's
140,000 square foot manufacturing facility in Reading, (ii) closed the first of
two New Jersey manufacturing facilities in May 1996 and moved its operations to
Reading, (iii) restructured the Company's New York and Chicago offices and
closed the Company's satellite sales office in Detroit Michigan, (iv) entered
into a one year lease agreement in September 1996 for a second facility in
Reading, with an option to extend the lease for an additional 5 years or to
exercise an option to purchase such facility for $1.2 million which is comprised
of 72,500 square feet of manufacturing and warehousing space on approximately 5
22
43
<PAGE>
acres of property, (v) renovated and upgraded the Company's plastic injection
molding division in Reading, including the purchase of additional injection
molding equipment, in October and November 1996, (vi) consummated the Credit
Agreement in November 1996 with a financial institution whereby the Company
obtained a secured $11 million line revolving line of credit and term loan
facility, (vii) extended the Company's $32.2 million supply contract with Foster
Grant from seven to ten years expiring December 2005, continued the requirement
of Foster Grant to purchase a minimum of 70% of its annual in-store
merchandising display purchases from the Company and modified the minimum annual
dollar purchases required in any one given year to be no less than $2.5 million
per year, (viii) centralized a portion of the Company's purchasing operations in
New York, New Jersey, Pennsylvania and Illinois to better utilize and leverage
the Company's new consolidated plant operating capacity in Reading, (ix) closed
the second New Jersey manufacturing facility in December 1996 and moved its
operations to Reading, (x) closed, as of December 31, 1996, its European
operations, HMGBV, and (xi) expanded its client base during 1996 to include new
clients.
March 1, 1997
Michael Wahl - Chairman Herbert F. Kozlov
Andrew Wahl Robert V. Cuddihy, Jr
L. Randy Riley Lawrence J. Twill, Sr.
Performance Graph
The following graph compares the yearly percentage change in the Company's
cumulative total stockholder return on its Common Stock (based on the market
price of the Company's Common Stock) with the cumulative total return of U.S.
companies on The Nasdaq Stock Market and non-financial companies on The Nasdaq
Stock Market.
1/1/92 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96
---------------------------------------------------------
HMG Worldwide $100 $ 31 $346 $120 $106 $ 40
Nasdaq US $100 $116 $134 $131 $185 $227
Nasdaq Non-Financial $100 $109 $126 $121 $169 $206
Compensation Committee Interlocks and Insider Participation
Each member of the Board of Directors participated in the determination of
the level of compensation of the Company's executive officers. Five of such
directors are officers of the Company, i.e., Michael Wahl - Chief Executive
Officer, Andrew Wahl - President, Robert V. Cuddihy, Jr. - Chief Operating
Officer and Chief Financial Officer, L. Randy Riley, Executive Vice President
and Herbert F. Kozlov - Secretary.
Herbert F. Kozlov, a director of the Company, is a member of Parker Duryee
Rosoff & Haft, counsel to the Company. Fees paid to such firm by the Company for
the year ended December 31, 1996 were approximately $200,000.
Lawrence J. Twill, Sr., a director of the Company, is President of Ashwood
Capital. Such firm, from time to time, also serves as an investment banking
advisor to the Company.
23
44
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth information as of March 19, 1997 based on
information obtained from the persons named below, with respect to the
beneficial ownership of shares of the Company's Common Stock by (i) each
director of the Company, (ii) certain executive officers of the Company, (iii)
each person known by the Company to be the owner of more than 5% of its
outstanding shares of Common Stock and (iv) all executive officers and directors
as a group:
Name and Address of Number of Approximate
Beneficial Holder Shares(1) Percentage of Class
- ------------------- --------- -------------------
Michael Wahl 1,262,875 (2) 13.9%
475 Tenth Avenue
New York, NY 10018
Andrew Wahl 715,203 (3) 7.9%
475 Tenth Avenue
New York, NY 10018
Robert V. Cuddihy, Jr. 350,308 (4) 4.0%
475 Tenth Avenue
New York, NY 10018
Herbert F. Kozlov 202,976 (5) 2.3%
529 Fifth Avenue
New York, NY 10017
L. Randy Riley 332,583 (6) 3.8%
475 Tenth Avenue
New York, NY 10018
Lawrence J. Twill, Sr. 91,150 (7) 1.1%
111 East 30th Street (16A)
New York, NY 10016
Gilmour 1994 Jersey Trust 972,222 (8,9) 11.4%
7 Bond Street
St. Helier
Jersey, Channel Island
State of Wisconsin Investment Board 740,000 8.7%
P.O. Box 7842
Madison, WI 53707
Great Court Analysis LLC
5150 Overland Avenue
Culver City, CA 90230 540,000 6.3%
All executive officers 2,955,095 (10) 28.6%
and directors as a group
(6 persons)
24
45
<PAGE>
(1) Includes shares issuable pursuant to currently exercisable options and
options which will be exercisable within 60 days of March 19, 1997. Except
as otherwise indicated, the persons named herein have sole voting and
disposition power with respect to the shares beneficially owned.
(2) Includes 599,828 shares issuable upon exercise of options.
(3) Includes 516,750 shares issuable upon exercise of options.
(4) Includes 223,850 shares issuable upon exercise of options.
(5) Includes 185,100 shares issuable upon exercise of options.
(6) Includes 223,850 shares issuable upon exercise of options.
(7) Includes 80,400 shares issuable upon exercise of options.
(8) The trustee of the Gilmour 1994 Jersey Trust (the "Trust") is Hill Samuel
(Channel Islands) Trust Company Limited. The directors of the trustee have
indirect shared voting and dispositive powers with respect to such shares.
(9) Does not include 35,000 shares beneficially owned by David Harrison
Gilmour, a primary beneficiary of the Trust, and 100,002 shares
beneficially owned by Mr. Gilmour's spouse.
(10) Includes 1,829,778 shares issuable upon exercise of options owned by
such executive officers and directors.
Item 13. Certain Relationships and Related Transactions.
In 1994, the Company advanced $250,000 to Robert V. Cuddihy, Jr., an
officer and Director. Such amount is due to be repaid in one installment due
January 31, 1998. Unpaid amounts bear interest at a fluctuating rate equal to
the six months U.S. Treasury bill rate. In 1995 and 1996, Mr. Cuddihy made
prepayments of $66,422 and $4,906 respectively, plus accrued interest. At
December 31, 1996, the unpaid balance of such advance was $178,672.
In 1995, the Company advanced $100,000 to Andrew Wahl, an officer and
Director. Such amount is due to be repaid in one installment due January 1,
1998. Unpaid amounts bear interest at a fluctuating rate equal to the six months
U.S. Treasury bill rate. In 1995, Mr. Wahl made a prepayment of $25,000. At
December 31, 1996, the unpaid principal balance of such advance was $75,000 and
no interest was paid during 1996.
Herbert F. Kozlov, a director of the Company, is a member of Parker Duryee
Rosoff & Haft, counsel to the Company. Fees paid to such firm by the Company for
the year ended December 31, 1996 were approximately $200,000.
Lawrence J. Twill, Sr., a director of the Company, is President of Ashwood
Capital. Such firm, from time to time, also serves as an investment banking
advisor to the Company.
25
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<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) (1) Financial Statements. See Index to Consolidated Financial
Statements in Item 8 hereof.
(2) Financial Statement Schedules.
Schedule II - Valuation and Qualifying Accounts and Reserves
(3) Exhibits
Exhibit
Number Description of Exhibit
------ ----------------------
3(a)Certificate of Incorporation, as amended (6)
(b)By-laws(1)
10(a)1986 Stock Option Plan(1)*
(b)1991 Stock Option Plan(2)*
(c)1993 Stock Option Plan(3)*
(d)Agreement between Louis Adler Realty Company and Registrant,
dated December 16, 1993, for the lease of the 12th Floor at
475 Tenth Avenue, New York, New York(4)
(e)Agreement between Louis Adler Realty Company and Registrant, dated
December 16, 1993, for the lease of the 8th Floor at 475 Tenth
Avenue, New York, New York(4)
(f)Purchase and Exchange Agreement, dated as of April 30, 1993, by and
among Saatchi & Saatchi Company PLC, a corporation organized under
the laws of England, Saatchi & Saatchi Marketing Services Group,
Inc., a Delaware corporation, Saatchi & Saatchi Advertising B.V., a
corporation organized under the laws of the Netherlands, and
Registrant(3)
(g)Supplement, dated as of August 20, 1993, to Purchase and Exchange
Agreement dated as of April 30, 1993 by and among Saatchi & Saatchi
Company PLC, a corporation organized under the laws of England,
Saatchi & Saatchi Marketing Services Group, Inc., a Delaware
corporation, Saatchi & Saatchi Advertising B.V., a corporation
organized under the laws of the Netherlands, and Registrant(3)
(h)Employment Agreement, dated April 30, 1993, between Registrant,
Marlboro Marketing, Inc., a New York corporation, and Michael
Wahl(3)*
(i)1994 Stock Option Plan (5)*
(j)Stock Purchase Agreement, dated as of September 30, 1995, between
Benson Eyecare Corporation and Intermark Corp (6)
(k)Display Purchase Agreement, dated as of September 30, 1995, between
HMG Worldwide In-Store Marketing, Inc., and Foster Grant Group L.P.
and Benson Eyecare Corporation (6)
(l)Marketing Support and Equipment Sale Agreement, dated as of
October 1, 1995, between Turbo Screen B.V., Tchai Holdings B.V.,
HMG Europe B.V. and HMG Worldwide In-Store Marketing, Inc. (6)
(m)Loan and Security Agreement between Congress Financial Corporation
and Registrant dated November 22, 1996
21 Subsidiaries of the Registrant (6)
23 Consents of Friedman Alpren & Green LLP
27 Financial Data Schedule
(b) Registrant did not file any reports on Form 8-K during
the last quarter of the period ended December 31, 1996.
26
47
<PAGE>
(1) Denotes document filed as an exhibit to Registrant's Proxy Statement,
dated November 25, 1986, and incorporated herein by reference.
(2) Denotes document filed as an exhibit to Registrant's Proxy Statement,
dated February 7, 1992, and incorporated herein by reference.
(3) Denotes document filed as an exhibit to Registrant's Proxy Statement,
dated September 7, 1993, and incorporated herein by reference.
(4) Denotes document filed as an exhibit to Registrant's Registration
Statement on Form S-2 dated August 9, 1994 (File No. 33-44832) and
incorporated herein by reference.
(5) Denotes document filed as an exhibit to Registrant's Proxy Statement,
dated October 21, 1994.
(6) Denotes document filed as an exhibit to Registrant's Annual Report
on Form 10-K dated December 31, 1995,and incorporated herein by reference
* Management contract or compensatory plan or arrangement
27
48
<PAGE>
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) 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
Date: March 28, 1997 By:/s/Robert V. Cuddihy, Jr.
-------------------------
Robert V. Cuddihy, Jr.
Chief Operating Officer and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the dates indicated:
/s/Michael Wahl
- ----------------------- Chairman of the March 28, 1997
Michael Wahl Board and Chief
Executive Officer
/s/Andrew Wahl
- ----------------------- President and March 28, 1997
Andrew Wahl Director
/s/Robert V. Cuddihy, Jr.
- ------------------------ Chief Operating March 28, 1997
Robert V. Cuddihy, Jr. Officer, Chief
Financial Officer
and Director
/s/L. Randy Riley
- ------------------------ Executive Vice March 28, 1997
L. Randy Riley President
/s/Herbert F. Kozlov Director March 28, 1997
- ------------------------
Herbert F. Kozlov
/s/Lawrence J. Twill, Sr. Director March 28, 1997
- ------------------------
Lawrence J. Twill, Sr.
28
49
<PAGE>
INDEX TO FINANCIAL STATEMENT SCHEDULES
The following financial statement schedules are filed as part of this Report:
PAGE
Independent Auditors' Report A-2
Schedule II - Valuation and Qualifying Accounts and Reserves A-3
Schedules other than those listed are omitted as not required or applicable.
A-1
50
<PAGE>
INDEPENDENT AUDITOR'S REPORT ON SUPPLEMENTAL SCHEDULES
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
HMG WORLDWIDE CORPORATION
We have audited, in accordance with generally accepted auditing
standards, the financial statements included in HMG WORLDWIDE CORPORATION'S
annual report to shareholders in this FORM 10-K, and have issued our report
thereon dated March 20, 1997. Our audits were made for the purpose of forming an
opinion on those statements taken as a whole. The schedules listed in the index
above are presented for purposes of complying with the Securities and Exchange
Commission's rules and are not part of the basic financial statements. These
schedules have been subjected to the auditing procedures applied in our audits
of the basic financial statements and, in our opinion, fairly state in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
FRIEDMAN ALPREN & GREEN LLP
CERTIFIED PUBLIC ACCOUNTANTS
New York, New York
March 20, 1997
A - 2
<PAGE>
<TABLE>
<CAPTION>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in thousands)
Additions/
Deductions
Balance at Charged to Charged to Balance
Beginning Costs and Other at End
of Period Expenses Accounts Deductions(a) of Period
---------- ---------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Allowance for doubtful accounts $ 596 $ 64 $ - ($ 83) $ 577
===== ===== ===== ==== =====
Year ended December 31, 1995:
Allowance for doubtful accounts $ 773 ($ 47) $ - ($130) $ 596
===== ===== ===== ==== =====
Year ended December 31, 1994:
Allowance for doubtful accounts $ 518 $ 265 $ - ($ 10) $ 773
===== ====== ===== ==== -----
</TABLE>
(a) Specified write-off of accounts receivable.
A-3
<PAGE>
Exhibit 10(m)
<PAGE>
Loan and Security Agreement
by and among
CONGRESS FINANCIAL CORPORATION
as Lender
and
HMG WORLDWIDE CORPORATION,
HMG WORLDWIDE IN-STORE MARKETING, INC.,
HMG/INTERMARK WORLDWIDE MANUFACTURING, INC.,
and
INTERMARK CORP.
as Borrowers
Dated: November 22, 1996
<PAGE>
TABLE OF CONTENTS
-----------------
Page
SECTION 1. DEFINITIONS..........................................-1-
SECTION 2. CREDIT FACILITIES...................................-13-
-----------------
2.1 Revolving Loans.....................................-13-
---------------
2.2 Letter of Credit Accommodations.....................-15-
-------------------------------
2.3 Initial Term Loans..................................-17-
------------------
....................................................-18-
2.4 Additional Real Property Term Loan.....................-18-
SECTION 3. INTEREST AND FEES...................................-21-
-----------------
3.1 Interest............................................-21-
--------
3.2 Closing Fee.........................................-22-
-----------
3.3 Servicing Fee.......................................-22-
-------------
3.4 Unused Line Fee.....................................-22-
---------------
SECTION 4. CONDITIONS PRECEDENT................................-23-
4.1 Conditions Precedent to Initial Loans and Letter of
Credit Accommodations...............................-23-
4.2 Conditions Precedent to All Loans and Letter of
Credit Accommodations...............................-25-
SECTION 5. GRANT OF SECURITY INTEREST..........................-25-
5.1 Collateral..........................................-25-
5.2 Senior Real Property Lien...........................-27-
SECTION 6. COLLECTION AND ADMINISTRATION.......................-27-
-----------------------------
6.1 Borrowers' Loan Accounts............................-27-
------------------------
6.2 Statements..........................................-27-
----------
6.3 Collection of Accounts..............................-28-
----------------------
6.4 Payments............................................-29-
--------
6.5 Authorization to Make Loans.........................-30-
---------------------------
6.6 Use of Proceeds.....................................-30-
---------------
6.7 Appointment of HMG Worldwide as Agent for
Borrowers...........................................-30-
SECTION 7. COLLATERAL REPORTING AND COVENANTS..................-31-
----------------------------------
7.1 Collateral Reporting................................-31-
--------------------
7.2 Accounts Covenants..................................-31-
------------------
7.3 Inventory Covenants.................................-33-
-------------------
7.4 Equipment Covenants.................................-34-
-------------------
7.5 Power of Attorney...................................-35-
-----------------
7.6 Right to Cure.......................................-35-
-------------
7.7 Access to Premises..................................-36-
------------------
SECTION 8. REPRESENTATIONS AND WARRANTIES......................-36-
8.1 Corporate Existence, Power and Authority;
Subsidiaries........................................-36-
------------
8.2 Financial Statements; No Material Adverse Change....-37-
------------------------------------------------
8.3 Chief Executive Office; Collateral Locations........-37-
--------------------------------------------
8.4 Priority of Liens; Title to Properties..............-37-
--------------------------------------
8.5 Tax Returns.........................................-37-
-----------
8.6 Litigation..........................................-38-
----------
8.7 Compliance with Other Agreements and Applicable
-----------------------------------------------
Laws................................................-38-
----
(i)
<PAGE>
8.8 Bank Accounts.......................................-38-
-------------
8.9 Environmental Compliance............................-38-
------------------------
8.10 Employee Benefits...................................-39-
-----------------
8.11 Accuracy and Completeness of Information............-40-
----------------------------------------
8.12 Interrelated Business...............................-40-
---------------------
8.13 Survival of Warranties; Cumulative..................-41-
----------------------------------
SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS..................-41-
----------------------------------
9.1 Maintenance of Existence............................-41-
------------------------
9.2 New Collateral Locations............................-41-
------------------------
9.3 Compliance with Laws, Regulations, Etc..............-42-
---------------------------------------
9.4 Payment of Taxes and Claims.........................-43-
---------------------------
9.5 Insurance...........................................-43-
---------
9.6 Financial Statements and Other Information..........-44-
------------------------------------------
9.7 Sale of Assets, Consolidation, Merger, Dissolution,
---------------------------------------------------
Etc.................................................-46-
----
9.8 Encumbrances........................................-46-
------------
9.9 Indebtedness........................................-47-
------------
9.10 Loans, Investments, Guarantees, Etc.................-51-
------------------------------------
9.11 Dividends and Redemptions...........................-52-
-------------------------
9.12 Transactions with Affiliates........................-52-
----------------------------
9.13 Custodial Account; Additional Bank Accounts.........-53-
-------------------------------------------
9.14 Compliance with ERISA...............................-53-
---------------------
9.15 Tangible Net Worth..................................-54-
------------------
9.16 Costs and Expenses..................................-54-
------------------
9.17 Further Assurances..................................-55-
------------------
SECTION 10. EVENTS OF DEFAULT AND REMEDIES...............-55-
------------------------------
10.1 Events of Default...................................-55-
-----------------
10.2 Remedies............................................-57-
--------
10.3 CONFESSION OF JUDGMENT AND WAIVERS..................-59-
----------------------------------
SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS
AND CONSENTS; GOVERNING LAW .............-60-
--------------------------------
11.1 Governing Law; Choice of Forum; Service of Process;
--------------------------------------------------
Jury Trial Waiver...................................-60-
-----------------
11.2 Waiver of Notices...................................-61-
-----------------
11.3 Amendments and Waivers..............................-61-
----------------------
11.4 Waiver of Counterclaims.............................-62-
-----------------------
11.5 Indemnification.....................................-62-
---------------
SECTION 12. TERM OF AGREEMENT; MISCELLANEOUS.............-62-
--------------------------------
12.1 Term................................................-62-
----
12.2 Notices.............................................-64-
-------
12.3 Partial Invalidity..................................-64-
------------------
12.4 Successors..........................................-65-
----------
12.5 Entire Agreement....................................-65-
----------------
(ii)
<PAGE>
INDEX TO
EXHIBITS AND SCHEDULES
Exhibit A Information Certificate
Exhibit B Form of Additional Real Property
Term Loan Note
Exhibit C Description of Easement to be
granted in favor of Albright College
Schedule 1.11(o) Certain Account Debtor
Concentrations
Schedule 8.4 Existing Liens
Schedule 8.8 Bank Accounts
Schedule 8.9 Environmental Matters
Schedule 8.10 Employee Benefit Plans
Schedule 9.9 Existing Indebtedness
Schedule 9.10 Existing Loans, Advances and
Guarantees
(iii)
<PAGE>
LOAN AND SECURITY AGREEMENT
This Loan and Security Agreement dated November 22, 1996 is entered into
by and among Congress Financial Corporation, a California corporation ("Lender")
and HMG Worldwide Corporation, a Delaware corporation ("HMG Worldwide"), HMG
Worldwide In-Store Marketing, Inc., a New York corporation ("HMG In-Store"),
HMG/Intermark Worldwide Manufacturing, Inc., a Delaware corporation ("HMG
Manufacturing") and Intermark Corp., a New York corporation ("Intermark"; and
together with HMG Worldwide, HMG In-Store and HMG Manufacturing, individually
referred to as a "Borrower" and collectively, as "Borrowers").
W I T N E S S E T H:
WHEREAS, Borrowers have requested that Lender enter into certain
financing arrangements with Borrowers pursuant to which Lender may make loans
and provide other financial accommodations to Borrowers; and
WHEREAS, Lender is willing to make such loans and provide such financial
accommodations on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual conditions and agreements
set forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
SECTION
1. DEFINITIONS
All terms used herein which are defined in Article 1 or Article 9 of the
Uniform Commercial Code shall have the meanings given therein unless otherwise
defined in this Agreement. All references to the plural herein shall also mean
the singular and to the singular shall also mean the plural unless the context
otherwise requires. All references to Borrowers shall, unless the context
otherwise expressly provides, mean any Borrower and all Borrowers, individually
and collectively, jointly and severally. All references to Borrower and Lender
pursuant to the definitions set forth in the recitals hereto, or to any other
person herein, shall include their respective successors and assigns. The words
"hereof", "herein", "hereunder", "this Agreement" and words of similar import
when used in this Agreement shall refer to this Agreement as a whole and not any
particular provision of this Agreement and as this Agreement now exists or may
hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced. The word "including" when used in this Agreement shall mean
"including, without limitation". An Event of Default shall exist or continue or
be continuing until such Event of Default is waived in accordance with Section
11.3 or is cured in a manner satisfactory to Lender. Any accounting term used
herein unless otherwise defined in this Agreement shall have the meanings
customarily given to such term in accordance with GAAP. For
-1-
<PAGE>
purposes of this Agreement, the following terms shall have the respective
meanings given to them below:
1.1 "Accounts" shall mean, as to each Borrower, all present and future
rights of such Borrower to payment for goods sold or leased or for services
rendered, which are not evidenced by instruments or chattel paper, and whether
or not earned by performance.
1.2 "Additional Real Property Term Loan" shall mean the term loan made by
Lender to HMG Manufacturing after the date hereof as provided in Section 2.4
hereof.
1.3 "Availability Reserves" shall mean, as of any date of determination,
such amounts as Lender may from time to time establish and revise in good faith
reducing the amount of Revolving Loans and Letter of Credit Accommodations that
would otherwise be available to Borrowers under the lending formula(s) provided
for herein: (a) to reflect events, conditions, contingencies or risks that, as
determined by Lender in good faith, do or may adversely affect either (i) the
Collateral or any other property which is security for the Obligations or its
value, (ii) the assets, business or prospects of any Borrower or any Obligor or
(iii) the security interests and other rights of Lender in the Collateral
(including the enforceability, perfection and priority thereof) or (b) to
reflect Lender's good faith belief that any collateral report or financial
information furnished by or on behalf of any Borrower or any Obligor to Lender
is or may have been incomplete, inaccurate or misleading in any material respect
or (c) to reflect outstanding Letter of Credit Accommodations as provided in
Section 2.2 hereof or (d) in respect of any state of facts which Lender
determines in good faith constitutes an Event of Default or may, with notice or
passage of time or both, constitute an Event of Default.
1.4 "Blocked Accounts" shall have the meaning set forth in
Section 6.3 hereof.
1.5 "Cash Equivalents" shall mean cash and other investments consisting
of the following: (a) direct obligations of the United States of America or any
agency thereof, or obligations guaranteed by the United States of America or any
agency thereof, in each case having a maturity not beyond ninety (90) days, (b)
time deposit accounts, certificates of deposit and money market deposits, in
each case having maturity not beyond ninety (90) days, issued by a bank or trust
company which is organized under the laws of the United States of America or any
state thereof whose debt is rated "A" (or such similar rating) or higher by at
least one nationally recognized statistical rating organization (as defined in
Rule 436 under the Securities Act of 1933, as amended), (c) commercial paper
with a rating of "P-1" (or higher) according to Moody's Investors Service, Inc.
or "A-1" (or higher) according to Standard and Poor's Corporation having a
maturity not beyond ninety (90) days, and (d) money market funds sponsored by
any registered broker dealer or mutual fund distributor, which invests only in
one or more of the securities referred to in clauses (a), (b) or (c) above.
-2-
<PAGE>
1.6 "Code" shall mean the Internal Revenue Code of 1986, as the same now
exists or may from time to time hereafter be amended, modified, recodified or
supplemented, together with all rules, regulations and interpretations
thereunder or related thereto.
1.7 "Collateral" shall have the meaning set forth in Section
5 hereof.
1.8 "Custodial Account" shall mean account no. 09923-00-J in the name of
HMG Worldwide at the Custodian Bank, or such other account at the Custodian Bank
as Lender shall approve in writing.
1.9 "Custodial Account Agreement" shall mean, as to HMG Worldwide, an
agreement among such Borrower, Lender and the Custodian Bank, pursuant to which
the Custodian Bank (i) acknowledges Lender's first priority security interest in
and lien upon the Cash Equivalents and other property now or hereafter held in
or credited to the Custodial Account and the proceeds thereof, (ii) accepts the
appointment as bailee or third party in possession for Lender for purposes of
the applicable regulations of the United States Department of the Treasury and
as bailee and financial intermediary for Lender for purposes of the Uniform
Commercial Code or applicable law, and; (iii) agrees to follow instructions not
to, without Lender's prior written instructions, take any action to encumber or
transfer any interest in any Cash Equivalents or other property held in or
credited to the Custodial Account or the proceeds thereof, or any interest
therein and to follow only Lender's written instructions regarding the sale or
other disposition of the Cash Equivalents or other property held in or credited
to the Custodial Account, except for such Borrower's direction of investment or
reinvestment of the Cash Equivalents and any proceeds thereof into different
Cash Equivalents.
1.10 "Custodian Bank" shall mean CoreStates Bank, N.A., of Philadelphia,
Pennsylvania, and its successors and assigns.
1.11 "Eligible Accounts" shall mean, as to each Borrower, Accounts
created by such Borrower which are and continue to be acceptable to Lender based
on the criteria set forth below. In general, Accounts of a Borrower shall be
Eligible Accounts if:
(a) such Accounts arise from the actual and bona fide sale and
shipment of goods (other than bill and hold invoices satisfying the exception
set forth in Section 1.11(f) below), or delivery of goods if delivery is
required under the terms of the sale, by such Borrower in the ordinary course of
its business which transactions are completed in accordance with the terms and
provisions contained in any documents related thereto;
(b) such Accounts are not unpaid more than ninety (90)
days after the date of the original invoice for them;
(c) such Accounts comply with the terms and conditions
contained in Section 7.2(c) of this Agreement;
(d) such Accounts do not arise from sales on consign ment,
guaranteed sale, sale and return, sale on approval, or other
-3-
<PAGE>
terms under which payment by the account debtor may be conditional
or contingent;
(e) the chief executive office of the account debtor with respect
to such Accounts is located in the United States of America, or, at Lender's
option, if such Accounts are payable in the United States of America and in
United States dollars and either: (i) the account debtor has delivered to such
Borrower an irrevocable letter of credit issued or confirmed by a bank
satisfactory to Lender and sufficient to cover such Account, in form and
substance satisfactory to Lender and, if required by Lender, the original of
such letter of credit has been delivered to Lender or Lender's agent and the
issuer thereof notified of the assignment of the proceeds of such letter of
credit to Lender, or (ii) such Account is subject to credit insurance payable to
Lender issued by an insurer and on terms and in an amount acceptable to Lender,
or (iii) such Account is otherwise acceptable in all respects to Lender (subject
to such lending formula with respect thereto as Lender may determine); provided,
that, notwithstanding the foregoing, foreign Accounts payable in the United
States of America in United States dollars by Canadian account debtors shall be
treated as domestic Accounts if all perfection steps deemed necessary or
appropriate by Lender have been taken with respect to such foreign Accounts of
such Borrower in the province where the account debtor is located and
Availability Reserves are established by Lender to cover any potential liens or
claims against such Accounts entitled to preference or priority over Lender's
interests therein under Canadian Federal or provincial law;
(f) such Accounts do not consist of progress billings, bill and
hold invoices or retainage invoices, except as to bill and hold invoices, if
Lender shall have received an agreement in writing from the account debtor, in
form and substance satisfactory to Lender, confirming the unconditional
obligation of the account debtor to take the goods related thereto and pay such
invoice;
(g) the account debtor with respect to such Accounts has not
asserted a counterclaim, defense or dispute and does not have, and does not
engage in transactions which may give rise to, any right of setoff against such
Accounts (but the portion of the Accounts of such account debtor in excess of
the amount at any time and from time to time owed by Borrowers to such account
debtor or claimed owed by such account debtor may be deemed Eligible Accounts);
(h) there are no facts, events or occurrences which would impair
the validity, enforceability or collectability of such Accounts or reduce the
amount payable or delay payment thereunder;
(i) such Accounts are subject to the first priority, valid and
perfected security interest of Lender and any goods giving rise thereto are not,
and were not at the time of the sale thereof, subject to any liens except those
permitted in this Agreement;
(j) neither the account debtor nor any officer or employee of the
account debtor with respect to such Accounts is an officer, employee or agent of
or affiliated with Borrowers directly
-4-
<PAGE>
or indirectly by virtue of family membership, ownership, control,
management or otherwise;
(k) the account debtors with respect to such Accounts are not any
foreign government, the United States of America, any State, political
subdivision, department, agency or instrumentality thereof, unless, if the
account debtor is the United States of America, any State, political
subdivision, department, agency or instrumentality thereof, upon Lender's
request, the Federal Assignment of Claims Act of 1940, as amended or any similar
State or local law, if applicable, has been complied with in a manner
satisfactory to Lender;
(l) there are no proceedings or actions which are threatened or
pending against the account debtors with respect to such Accounts which might
result in any material adverse change in any such account debtor's financial
condition;
(m) such Accounts are not subject to any arrangement between the
account debtor invoiced on such Account and another person, whereby such other
person does or is claimed to have an obligation to such invoiced account debtor
to pay the Account or reimburse the invoiced account debtor, in whole or in
part;
(n) such Accounts do not include amounts due from an account
debtor for services rendered in excess of $250,000 in the aggregate at any one
time outstanding for all such Eligible Accounts of all Borrowers on a combined
basis (but the portion of the Accounts arising from the sale of Inventory may be
deemed Eligible Accounts);
(o) such Accounts of a single account debtor or its affiliates do
not constitute more than twenty-five (25%) percent of all otherwise Eligible
Accounts of Borrowers or, in Lender's discretion, exercised in good faith,
thirty-five (35%) percent of all otherwise Eligible Accounts of Borrowers in the
case of any of the account debtors listed on Schedule 1.11(o) hereof or its
affiliates (but the portion of the Accounts owed by such account debtor not in
excess of such percentage may be deemed Eligible Accounts);
(p) such Accounts are not owed by an account debtor who has
Accounts unpaid more than ninety (90) days (or, in the case of such Accounts
owed by L'eggs Products, Inc., more than one hundred twenty (120) days), after
the date of the original invoice for them which constitute (i) more than fifty
(50%) percent of the total Accounts owed to Borrowers by such account debtor, or
(ii) in the case of any of the account debtors listed on Schedule 1.11(o) hereto
("Scheduled Account Debtors") during any time when the Eligible Accounts of all
Borrowers owed by such Scheduled Account Debtor exceeds twenty-five (25%)
percent of all otherwise Eligible Accounts of all Borrowers, more than
thirty-three (33%) percent of the total Accounts owed to all Borrowers by such
Scheduled Account Debtor;
(q) such Accounts are owed by account debtors whose total
indebtedness to Borrowers does not exceed the credit limit with respect to such
account debtors as determined in good faith by
-5-
<PAGE>
Lender from time to time (but the portion of the Accounts not in excess of such
credit limit may be deemed Eligible Accounts); and
(r) such Accounts are owed by account debtors deemed creditworthy
at all times by Lender, as determined by Lender in good faith.
General criteria for Eligible Accounts may be established and revised from time
to time by Lender in good faith. Any Accounts which are not Eligible Accounts
shall nevertheless be part of the Collateral.
1.12 "Eligible Additional Real Property" shall mean Real Property located
in the Commonwealth of Pennsylvania that is purchased for all cash by HMG
Manufacturing from a non-affiliated party after the date hereof, suitable and
intended to be used by such Borrower in such Borrower's manufacturing operations
and as to which good and marketable title has passed to such Borrower.
1.13 "Eligible Cash Equivalents" shall mean, as to HMG Worldwide, Cash
Equivalents owned by HMG Worldwide that are and continue to be acceptable to
Lender in good faith based on the following criteria:
(a) such Cash Equivalents are held in the Custodial Account;
(b) such Cash Equivalents are subject to the first priority,
valid and perfected security interest of Lender;
(c) Lender shall have received, in form and substance
satisfactory to Lender, and there shall remain in full force and effect a
Custodial Account Agreement.
1.14 "Eligible Inventory" shall mean, as to each Borrower, Inventory of
such Borrower consisting of finished goods held for resale in the ordinary
course of the business of such Borrower supported by a valid, signed and
confirmed purchase order for such Inventory, and which Inventory is acceptable
to Lender based on the criteria set forth below. In general, Eligible Inventory
shall not include (a) finished goods other than finished point-of-purchase
merchandising display systems, (b) raw materials, (c) work-in-process; (d)
components which are not part of finished goods; (e) spare parts for equipment;
(f) packaging and shipping materials; (g) supplies used or consumed in such
Borrower's business; (h) Inventory at premises other than those owned and
controlled by a Borrower, except if Lender shall have received an agreement in
writing from the person in possession of such Inventory and/or the owner or
operator of such premises in form and substance satisfactory to Lender
acknowledging Lender's first priority security interest in the Inventory,
waiving security interests and claims by such person against the Inventory and
permitting Lender access to, and the right to remain on, the premises so as to
exercise Lender's rights and remedies and otherwise deal with the Collateral;
(i) Inventory subject to a security interest or lien in favor of any person
other than Lender, except those (if any) permitted in this Agreement; (j) bill
and hold goods; (k) unserviceable, obsolete or slow moving Inventory (which
includes,
-6-
<PAGE>
without limitation, finished goods that have remained on hand more than one
hundred twenty (120) days following their acquisition or production by
Borrowers, whether or not such Inventory is subject to a subsisting purchase
order); (l) Inventory which is not subject to the first priority, valid and
perfected security interest of Lender; (m) returned, damaged and/or defective
Inventory; and (n) Inventory purchased or sold on consignment. General criteria
for Eligible Inventory may be established and revised from time to time by
Lender in good faith. Any Inventory which is not Eligible Inventory shall
nevertheless be part of the Collateral.
1.15 "Environmental Laws" shall mean all federal, state, district, local
and foreign laws, rules, regulations, ordinances, and consent decrees relating
to health, safety, hazardous substances, pollution and environmental matters, as
now or at any time hereafter in effect, applicable to any Borrower's business
and facilities (whether or not owned by it), including laws relating to
emissions, discharges, releases or threatened releases of pollutants,
contamination, chemicals, or hazardous, toxic or dangerous substances, materials
or wastes into the environment (including, without limitation, ambient air,
surface water, ground water, land surface or subsurface strata) or otherwise
relating to the generation, manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of pollutants, contaminants,
chemicals, or hazardous, toxic or dangerous substances, materials or wastes.
1.16 "Equipment" shall mean, as to each Borrower, all of such Borrower's
now owned and hereafter acquired equipment, machinery, computers and computer
hardware and software (whether owned or licensed), vehicles, tools, furniture,
fixtures, all attachments, accessions and property now or hereafter affixed
thereto or used in connection therewith, and substitutions and replacements
thereof, wherever located.
1.17 "ERISA" shall mean the United States Employee Retirement Income
Security Act of 1974, as the same now exists or may hereafter from time to time
be amended, modified, recodified or supplemented, together with all rules,
regulations and interpretations thereunder or related thereto.
1.18 "ERISA Affiliate" shall mean any person required to be aggregated
with Borrower or any of its Subsidiaries under Sections 414(b), 414(c), 414(m)
or 414(o) of the Code.
1.19 "Event of Default" shall mean the occurrence or existence of any
event or condition described in Section 10.1 hereof.
1.20 "Excess Availability" shall mean the amount, as determined by
Lender, calculated at any time, equal to:
(a) the lesser of: (i) the aggregate amount of the Revolving
Loans available to Borrowers as of such time based on the applicable lending
formulas set forth in Section 2.1(a) hereof, as determined by Lender, and
subject to the sublimits and Availability Reserves from time to time established
by Lender hereunder, and (ii) the Maximum Credit, less the then outstanding
principal amount of the Term Loans, minus
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(b) the sum of: (i) the amount of all then outstanding and unpaid
Obligations (but not including for this purpose the then outstanding principal
amount of the Term Loans), plus (ii) the aggregate amount of all then
outstanding and unpaid trade payables of Borrowers which are past due as of such
time.
1.21 "Financing Agreements" shall mean, collectively, this Agreement and
all notes, guarantees, mortgages, security agreements and other agreements,
documents and instruments now or at any time hereafter executed and/or delivered
by any Borrower or any Obligor in connection with this Agreement, as the same
now exist or may hereafter be amended, modified, supplemented, extended,
renewed, restated or replaced.
1.22 "GAAP" shall mean generally accepted accounting principles in the
United States of America as in effect from time to time as set forth in the
opinions and pronouncements of the Accounting Principles Board and the American
Institute of Certified Public Accountants and the statements and pronouncements
of the Financial Accounting Standards Boards which are applicable to the
circumstances as of the date of determination consistently applied, except that,
for purposes of Section 9.15 hereof, GAAP shall be determined on the basis of
such principles in effect on the date hereof and consistent with those used in
the preparation of the audited financial statements delivered to Lender prior to
the date hereof.
1.23 "Hazardous Materials" shall mean any hazardous, toxic or dangerous
substances, materials and wastes, including, without limitation, hydrocarbons
(including naturally occurring or man-made petroleum and hydrocarbons),
flammable explosives, asbestos, urea formaldehyde insulation, radioactive
materials, biological substances, polychlorinated biphenyls, pesticides,
herbicides and any other kind and/or type of pollutants or contaminants
(including, without limitation, materials which include hazardous constituents),
sewage, sludge, industrial slag, solvents and/or any other similar substances,
materials, or wastes and including any other substances, materials or wastes
that are or become regulated under any Environmental Law (including, without
limitation any that are or become classified as hazardous or toxic under any
Environmental Law).
1.24 "Information Certificate" shall mean the Information Certificate(s)
of Borrowers constituting Exhibit A hereto containing material information with
respect to Borrowers, their business and assets provided by or on behalf of
Borrowers to Lender in connection with the preparation of this Agreement and the
other Financing Agreements and the financing arrangements provided for herein.
1.25 "Initial Term Loans" shall mean the term loans made by Lender to HMG
In-Store and HMG Manufacturing as provided for in Section 2.3 hereof.
1.26 "Inventory" shall mean, as to each Borrower, all of such Borrower's
now owned and hereafter existing or acquired raw materials, work in process,
finished goods and all other inventory of whatsoever kind or nature, wherever
located.
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1.27 "Letter of Credit Accommodations" shall mean the letters of credit,
merchandise purchase or other guaranties which are from time to time either (a)
issued or opened by Lender for the account of any Borrower or any Obligor or (b)
with respect to which Lender has agreed to indemnify the issuer or guaranteed to
the issuer the performance by a Borrower of its obligations to such issuer.
1.28 "Loans" shall mean the Revolving Loans and the Term Loans.
1.29 "Market Value" shall mean, with respect to Cash Equivalents or other
property held in or credited to the Custodial Account, the amount which could be
realized upon the immediate sale of such Cash Equivalents or other property, net
of all commissions and expenses that would be payable in connection with such
sale, as determined by Lender based on information supplied from time to time at
Lender's request by the Custodian Bank or other source deemed reliable by Lender
in good faith.
1.30 "Maximum Credit" shall mean the amount of $12,000,000.
1.31 "Mortgages" shall mean any mortgage, deed of trust, deed to secure
debt or other instrument now or hereafter granting a lien in favor of Lender
upon any Real Property of a Borrower, including, without limitation, the
Open-End Mortgage and Security Agreement, dated of even date herewith, by HMG
Manufacturing in favor of Lender with respect to the Real Property and related
assets of HMG Manufacturing located at 234 South 8th Street, Reading,
Pennsylvania, as the same now exist or may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced.
1.32 "Net Amount of Eligible Accounts" shall mean the gross amount of
Eligible Accounts less (a) sales, excise or similar taxes included in the amount
thereof and (b) returns, discounts, claims, credits and allowances of any nature
at any time issued, owing, granted, outstanding, available or claimed with
respect thereto.
1.33 "Net Income" shall mean as to any Person, with respect to any
period, the net income (loss) of such Person for such period (excluding to the
extent included therein any extraordinary gains) after deducting all charges
which should be deducted before arriving at the net income (loss) for such
period, all in accordance with GAAP and after deducting the Provision for Taxes
for such period. For the purposes of this definition, (a) net income excludes
any gain (but not loss) together with any related Provision for Taxes for such
gain (but not loss) realized upon the sale or other disposition of any assets
that are not sold in the ordinary course of business (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or of any
capital stock of such Person or a subsidiary of such Person and any net income
realized as a result of changes in accounting principles or the application
thereof to such Person, and (b) the term "Provision for Taxes" shall mean an
amount equal to all taxes imposed on or measured by net income, whether federal,
state or local, and whether foreign or domestic, that are paid or payable by any
Person in respect of any period in accordance with GAAP.
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1.34 "Obligations" shall mean any and all Revolving Loans, the Term
Loans, Letter of Credit Accommodations and all other obligations, liabilities
and indebtedness of every kind, nature and description owing by any or all
Borrowers to Lender and/or its affiliates, including principal, interest,
charges, fees, costs and expenses, however evidenced, whether as principal,
surety, endorser, guarantor or otherwise, whether arising under this Agreement
or otherwise, whether now existing or hereafter arising, whether arising before,
during or after the initial or any renewal term of this Agreement or after the
commencement of any case with respect to any or all Borrowers under the United
States Bankruptcy Code or any similar statute (including the payment of interest
and other amounts which would accrue and become due but for the commencement of
such case, whether or not such amounts are allowed or allowable in whole or in
part in such case), whether direct or indirect, absolute or contingent, joint or
several, due or not due, primary or secondary, liquidated or unliquidated,
secured or unsecured, and however acquired by Lender.
1.35 "Obligor" shall mean any guarantor, endorser, acceptor, surety or
other person liable on or with respect to the Obligations or who is the owner of
any property which is security for the Obligations, other than a Borrower.
1.36 "Payment Account" shall have the meaning set forth in Section 6.3
hereof.
1.37 "Person" or "person" shall mean any individual, sole proprietorship,
partnership, corporation (including any corporation which elects subchapter S
status under the Code, limited liability company, limited liability partnership,
business trust, unincorporated association, joint stock corporation, trust,
joint venture or other entity or any government or any agency or instrumentality
or political subdivision thereof.
1.38 "PIDA" shall have the meaning set forth in Section 2.4 (c) (x)
hereof.
1.39 "PIDA Loans" shall have the meaning set forth in Section 2.4(c)(x)
hereof.
1.40 "Prime Rate" shall mean the rate from time to time publicly
announced by CoreStates Bank, N.A., or its successors, at its office in
Philadelphia, Pennsylvania, as its prime rate, whether or not such announced
rate is the best rate available at such bank.
1.41 "Real Property" shall mean, as to each Borrower, all now owned and
hereafter acquired real property of such Borrower, including leasehold
interests, together with all buildings, structures, and other improvements
located thereon and all licenses, easements and appurtenances relating thereto,
wherever located, including, without limitation, the real property and related
assets more particularly described in the Mortgages.
1.42 "Records" shall mean, as to each Borrower, all of such Borrower's
present and future books of account of every kind or nature, purchase and sale
agreements, invoices, ledger cards, bills
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of lading and other shipping evidence, statements, correspondence, memoranda,
credit files and other data relating to the Collateral or any account debtor,
together with the tapes, disks, diskettes and other data and software storage
media and devices, file cabinets or containers in or on which the foregoing are
stored (including any rights of such Borrower with respect to the foregoing
maintained with or by any other person).
1.43 "Revolving Loans" shall mean the loans now or hereafter made by
Lender to or for the benefit of Borrowers on a revolving basis (involving
advances, repayments and readvances) as set forth in Section 2.1 hereof.
1.44 "Tangible Net Worth" shall mean as to any Person, at any time, in
accordance with GAAP (except as otherwise specifically set forth below), on a
consolidated basis for such Person and its subsidiaries (if any), the amount
equal to the difference between: (i) the aggregate net book value of all assets
of such Person and its subsidiaries, calculating the book value of inventory for
this purpose on a first-in-first-out basis, after excluding prepaid items, good
will and other intangible assets and after deducting from such book values all
appropriate reserves in accordance with GAAP (including all reserves for
doubtful receivables, obsolescence, depreciation and amortization) and (ii) the
aggregate amount of the indebtedness and other liabilities of such Person and
its subsidiaries (including tax and other proper accruals).
1.45 "Term Loans" shall mean, individually and collectively, the Initial
Term Loans and the Additional Real Property Term Loan.
1.46 "Value" shall mean, as determined by Lender in good faith, with
respect to Inventory, the lower of (a) cost computed on a first-in-first-out
basis in accordance with GAAP or (b) market value.
SECTION 2. CREDIT FACILITIES
2.1 Revolving Loans.
(a) Subject to and upon the terms and conditions contained
herein, Lender agrees to make Revolving Loans to each Borrower from time to time
in amounts requested by such Borrower up to the amount equal to the sum of:
(i) in the case of HMG Worldwide, one hundred
(100%) percent of the Market Value of the Eligible Cash
Equivalents of HMG Worldwide;
(ii) eighty-five (85%) percent of the Net
Amount of Eligible Accounts of such Borrower, plus
(iii) sixty (60%) percent of the Value of Eligible Inventory
of such Borrower, subject to a sublimit of $750,000 in the
aggregate for all Borrowers, less
(iv) any Availability Reserves.
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(b) Lender may, in its discretion, from time to time, upon not
less than five (5) days prior notice to HMG Worldwide, (i) reduce the lending
formula with respect to Eligible Accounts to the extent that Lender determines
in good faith that: (A) the dilution with respect to the Accounts for any period
(based on the ratio of (1) the aggregate amount of reductions in Accounts other
than as a result of payments in cash to (2) the aggregate amount of total sales)
has increased in any material respect or may be reasonably anticipated to
increase in any material respect above historical levels, or (B) the general
creditworthiness of account debtors has declined or (ii) reduce the lending
formula(s) with respect to Eligible Inventory to the extent that Lender
determines that: (A) the number of days of the turnover of the Inventory for any
period has changed in any material respect or (B) the liquidation value of the
Eligible Inventory, or any category thereof, has decreased, or (C) the nature
and quality of the Inventory has deteriorated. In determining whether to reduce
the lending formula(s), Lender may consider events, conditions, contingencies or
risks which are also considered in determining Eligible Accounts, Eligible
Inventory or in establishing Availability Reserves.
(c) Except in Lender's discretion, the aggregate amount of the
Loans and the Letter of Credit Accommodations outstanding at any time shall not
exceed the Maximum Credit. In the event that the outstanding amount of any
component of the Loans, or the aggregate amount of the outstanding Loans and
Letter of Credit Accommodations, exceed the amounts available under the lending
formulas, the sublimit for Letter of Credit Accommodations set forth in Section
2.2(d) or the Maximum Credit, as applicable, such event shall not limit, waive
or otherwise affect any rights of Lender in that circumstance or on any future
occasions and Borrowers shall, upon demand by Lender, which may be made at any
time or from time to time, immediately repay to Lender the entire amount of any
such excess(es) for which payment is demanded.
(d) For purposes only of applying the sublimit on Revolving Loans
based on Eligible Inventory pursuant to Section 2.1(a)(iii), Lender may treat
the amount of its reliance on Eligible Inventory to be purchased under
outstanding Letter of Credit Accommodations as a Revolving Loan based on
Eligible Inventory pursuant to Section 2.1(a)(iii). In determining the actual
amount of such reliance, the outstanding Revolving Loans and Availability
Reserves in respect of each Borrower shall be attributed first to any components
of the lending formulas in Section 2.1(a) that are not subject to such sublimit,
before being attributed to the components of the lending formulas subject to
such sublimit.
(e) Notwithstanding anything to the contrary contained in this
Section 2.1 or Section 2.2, Lender shall not make any Revolving Loans or provide
or arrange for Letter of Credit Accommodations to any Borrower based upon the
Value of Eligible Inventory of such Borrower until such time as Lender is
satisfied, in its sole discretion, with the internal Inventory recordkeeping and
reporting procedures established and maintained by all Borrowers; provided,
however, that during the period commencing on the date hereof and ending on
January 31, 1997, if a Borrower shall provide Lender with adequate records with
regard to any otherwise
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Eligible Inventory consisting of finished goods purchased and received by such
Borrower under Letter of Credit Accommodations provided or arranged by Lender
for the account of such Borrower, such Eligible Inventory shall be deemed
eligible for lending purposes during such period, but in no event shall the
amount of Revolving Loans available based on the Value of such Eligible
Inventory exceed the amount of $200,000 in the aggregate at any one time
outstanding during such period for all Borrowers on a combined basis. After
January 31, 1997, the proviso to the preceding sentence shall be inapplicable.
2.2 Letter of Credit Accommodations.
(a) Subject to, and upon the terms and conditions contained
herein, at the request of a Borrower, Lender agrees to provide or arrange for
Letter of Credit Accommodations for the account of such Borrower containing
terms and conditions acceptable to Lender and the issuer thereof. Any payments
made by Lender to any issuer thereof and/or related parties in connection with
the Letter of Credit Accommodations shall constitute additional Revolving Loans
to such Borrower pursuant to this Section 2.
(b) In addition to any charges, fees or expenses charged by any
bank or issuer in connection with the Letter of Credit Accommodations, each
Borrower shall pay to Lender a letter of credit fee at a rate equal to one and
one-half (1.5%) percent per annum on the daily outstanding balance of the Letter
of Credit Accommodations issued for its account outstanding during the
immediately preceding month (or part thereof), payable in arrears as of the
first day of each month, except that each Borrower shall pay to Lender such
letter of credit fee, at Lender's option, without notice, at a rate equal to
three and one-half (3.5%) percent per annum on such daily outstanding balance
for: (i) the period from and after the date of termination or non-renewal hereof
until Lender has received full and final payment of all Obligations
(notwithstanding entry of judgment against any Borrower) and (ii) the period
from and after the date of the occurrence of an Event of Default for so long as
such Event of Default is continuing as determined by Lender. Such letter of
credit fee shall be calculated on the basis of a three hundred sixty (360) day
year and actual days elapsed and the obligation of such Borrower to pay such fee
shall survive the termination or non-renewal of this Agreement.
(c) No Letter of Credit Accommodations shall be available to a
Borrower unless on the date of the proposed issuance of any Letter of Credit
Accommodations, the Revolving Loans available to such Borrower (subject to the
Maximum Credit and any Availability Reserves) are equal to or greater than: (i)
if the proposed Letter of Credit Accommodation is for the purpose of purchasing
Eligible Inventory, the sum of (A) forty (40%) percent of the Value of such
Eligible Inventory, plus (B) freight, taxes, duty and other amounts which Lender
estimates must be paid in connection with such Inventory upon arrival and for
delivery to one of such Borrower's locations for Eligible Inventory within the
United States of America and (ii) if the proposed Letter of Credit Accommodation
is for any other purpose, an amount equal to one hundred (100%) percent of the
face amount of the Letter of Credit Accommodation and all other commitments and
obligations made or
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incurred by Lender with respect thereto. Effective on the issuance of each
Letter of Credit Accommodation, an Availability Reserve shall be established in
the applicable amount set forth in Section 2.2(c)(i) or Section 2.2(c)(ii).
(d) Except in Lender's discretion, the amount of all outstanding
Letter of Credit Accommodations and all other commitments and obligations made
or incurred by Lender in connection therewith shall not at any time exceed, in
the aggregate for all Borrowers, $1,000,000. At any time an Event of Default
exists or has occurred and is continuing, upon Lender's request, Borrowers will
either furnish cash collateral to secure the reimbursement obligations to the
issuer in connection with any Letter of Credit Accommodations or furnish cash
collateral to Lender for the Letter of Credit Accommodations, and in either
case, the Revolving Loans otherwise available to Borrowers shall not be reduced
as provided in Section 2.2(c) to the extent of such cash collateral.
(e) Borrowers shall indemnify and hold Lender harmless from and
against any and all losses, claims, damages, liabilities, costs and expenses
which Lender may suffer or incur in connection with any Letter of Credit
Accommodations and any documents, drafts or acceptances relating thereto,
including any losses, claims, damages, liabilities, costs and expenses due to
any action taken by any issuer or correspondent with respect to any Letter of
Credit Accommodation. Borrowers assume all risks with respect to the acts or
omissions of the drawer under or beneficiary of any Letter of Credit
Accommodation and for such purposes the drawer or beneficiary shall be deemed
the agent of Borrowers. Borrowers assume all risks for, and agree to pay, all
foreign, Federal, State and local taxes, duties and levies relating to any goods
subject to any Letter of Credit Accommodations or any documents, drafts or
acceptances thereunder. Borrowers hereby release and hold Lender harmless from
and against any acts, waivers, errors, delays or omissions, whether caused by
Borrowers, by any issuer or correspondent or otherwise with respect to or
relating to any Letter of Credit Accommodation. The provisions of this Section
2.2(e) shall survive the payment of Obligations and the termination or
non-renewal of this Agreement.
(f) Nothing contained herein shall be deemed or construed to
grant Borrowers any right or authority to pledge the credit of Lender in any
manner. Lender shall have no liability of any kind with respect to any Letter of
Credit Accommodation provided by an issuer other than Lender unless Lender has
duly executed and delivered to such issuer the application or a guarantee or
indemnification in writing with respect to such Letter of Credit Accommodation.
Borrowers shall be bound by any interpretation made in good faith by Lender, or
any other issuer or correspondent under or in connection with any Letter of
Credit Accommodation or any documents, drafts or acceptances thereunder,
notwithstanding that such interpretation may be inconsistent with any
instructions of Borrowers. Lender shall have the sole and exclusive right and
authority to, and Borrowers shall not: (i) at any time an Event of Default
exists or has occurred and is continuing, (A) approve or resolve any questions
of non-compliance of documents, (B) give any instructions as to acceptance or
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rejection of any documents or goods or (C) execute any and all applications for
steamship or airway guaranties, indemnities or delivery orders, and (ii) at all
times, (A) grant any extensions of the maturity of, time of payment for, or time
of presentation of, any drafts, acceptances, or documents, and (B) agree to any
amendments, renewals, extensions, modifications, changes or cancellations of any
of the terms or conditions of any of the applications, Letter of Credit
Accommodations, or documents, drafts or acceptances thereunder or any letters of
credit included in the Collateral. Lender may take such actions either in its
own name or in the name of a Borrower.
(g) Any rights, remedies, duties or obligations granted or
undertaken by a Borrower to any issuer or correspondent in any application for
any Letter of Credit Accommodation, or any other agreement in favor of any
issuer or correspondent relating to any Letter of Credit Accommodation, shall be
deemed to have been granted or undertaken by such Borrower to Lender. Any duties
or obligations undertaken by Lender to any issuer or correspondent in any
application for any Letter of Credit Accommodation, or any other agreement by
Lender in favor of any issuer or correspondent relating to any Letter of Credit
Accommodation, shall be deemed to have been undertaken by the applicable
Borrower to Lender and to apply in all respects to such Borrower.
2.3 Initial Term Loans.
(a) Lender is, on the date hereof, making an Initial Term Loan to
HMG In-Store in the original principal amount of $50,000. The Initial Term Loan
to HMG In-Store is (i) evidenced by a Term Promissory Note in such original
principal amount duly executed and delivered by HMG In-Store to Lender
concurrently herewith; (ii) to be repaid, together with interest and other
amounts, in accordance with this Agreement, such Term Promissory Note, and the
other Financing Agreements; and (iii) secured by all of the Collateral.
(b) Lender is, on the date hereof, also making an Initial Term
Loan to HMG Manufacturing in the original principal amount of $290,000. The
Initial Term Loan to HMG Manufacturing is (i) evidenced by a Term Promissory
Note in such original principal amount duly executed and delivered by HMG
Manufacturing to Lender concurrently herewith; (ii) to be repaid, together with
interest and other amounts, in accordance with this Agreement, such Term
Promissory Note and the other Financing Agreements; and (iii) secured by all of
the Collateral.
2.4 Additional Real Property Term Loan.
(a) Subject to, and upon the terms and conditions contained
herein, including the Maximum Credit, Lender agrees to make the Additional Real
Property Term Loan to HMG Manufacturing in a single advance in respect of
Eligible Additional Real Property, in an amount of up to the lesser of: (i)
$750,000 and (ii) sixty (60%) percent of the "quick sale" liquidation value of
such Eligible Additional Real Property, as set forth in an appraisal report
addressed to Lender, or upon which Lender is expressly permitted to rely,
prepared at Borrowers' expense, by independent
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appraisers acceptable to Lender, having form, scope and methodology acceptable
to Lender; provided, however, that the Additional Real Property Term Loan will
not be made available unless all of the conditions set forth below are fulfilled
and such loan is made prior to the first anniversary of the date hereof.
(b) The proceeds of the Additional Real Property Term Loan shall
be used by HMG Manufacturing, together with other funds of HMG Manufacturing (up
to a total amount, including the Additional Real Property Term Loan, of
$1,250,000), to pay the purchase price to acquire good and marketable title to
the Eligible Additional Real Property, free and clear of all liens, claims,
security interests and other encumbrances, except in favor of Lender. The
Additional Real Property Term Loan shall be (i) evidenced by a Term Promissory
Note in the form annexed hereto as Exhibit B, which shall be executed and
delivered by HMG Manufacturing to evidence the Additional Real Property Term
Loan made by Lender to such Borrower, concurrently with the disbursement of the
Additional Real Property Term Loan, (ii) repaid together with interest and other
amounts payable thereunder, and in accordance with the provisions of such Term
Promissory Note and the other Financing Agreements and (iii) secured by all of
the Collateral, including the Eligible Additional Real Property.
(c) Without limiting the foregoing, the availability of the
Additional Real Property Term Loan to HMG Manufacturing shall be subject to the
satisfaction of each of the following additional conditions precedent:
(i) Lender shall have received from such Borrower,
prior to September 22, 1997 (A) not less than thirty (30) days' prior written
notice of the requested Additional Real Property Term Loan, which notice shall
specify the following: (I) the proposed date and amount of the requested
Additional Real Property Term Loan, (II) a description of the proposed Eligible
Additional Real Property and (III) the purchase price of the Eligible Additional
Real Property; and (B) a copy of the purchase agreement, contract of sale or
other similar agreements with respect to such Borrower's acquisition of the
Eligible Additional Real Property, together with a copy of the appraisal report
as required under Section 2.4(a) above;
(ii) such Borrower shall have acquired or shall
acquire, contemporaneously with the disbursement of such Additional Real
Property Term Loan, good and marketable title to and possession of the Eligible
Additional Real Property, free and clear of all liens, security interests,
claims or other encumbrances, except for (A) a perfected first priority security
interest in and lien upon the Eligible Additional Real Property in favor of
Lender, (B) a second priority security interest in and lien upon the Eligible
Additional Real Property securing certain of the PIDA Loans which security
interest and lien is subordinate to the security interest and liens therein of
Lender and is otherwise permitted in Section 9.8(g) hereof and (C) customary
utility and other easements and encroachments, of the type permitted under
Section 9.8(d) hereof, including, if applicable, the easement to be granted by
HMG Manufacturing to Albright College as described in Exhibit C hereto;
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(iii) Lender shall have received a Phase I
environmental audit of the Eligible Additional Real Property conducted by an
independent environmental engineering firm acceptable to Lender, and in form,
scope and methodology satisfactory to Lender, confirming, as of a date
acceptable to Lender (A) that the Eligible Additional Real Property does not
contain any Hazardous Materials, (B) the seller of such Eligible Additional Real
Property is in compliance with all material applicable Environmental Laws and
(C) the absence of any material potential or actual liability of such seller for
any remedial action with respect to any environmental condition or any other
material environmental problem with respect to the Eligible Additional Real
Property;
(iv) Lender shall have received an Open-End Mortgage
and Security Agreement in form and substance satisfactory to Lender, which shall
be executed and delivered by such Borrower to grant in favor of Lender a first
priority mortgage lien upon and security interest in the Eligible Additional
Real Property and related assets;
(v) Lender shall have received, in form and
substance satisfactory to Lender, a valid and effective title insurance policy
issued by a title insurance company and agent acceptable to Lender (A) insuring
the priority, amount and validity of the Mortgage with respect to the Eligible
Additional Real Property, (B) insuring against matters that would be disclosed
by surveys and (C) containing any legally available endorsements, assurances or
affirmative coverage requested by Lender for protection of its interests;
(vi) Lender shall have received, in form and
substance satisfactory to Lender, financial projections of such Borrower
evidencing that such Borrower has sufficient cash flow to service the additional
indebtedness and costs incurred in connection with the Additional Real Property
Term Loan and the PIDA Loans (as defined below);
(vii) Lender shall have received the most recent
unaudited financial statements of Borrowers prepared in accordance with GAAP
required to be delivered to Lender pursuant to Section 9.6(a)(i) hereof
reflecting that, in the determination of Lender, Borrowers have met or exceeded
their financial projections, as set forth on the HMG Worldwide Budget Analysis
1997, dated as of October 10, 1996, delivered to Lender prior to the date
hereof;
(viii) Borrowers shall, in the aggregate, have
Excess Availability as determined by Lender, as of the date of the Additional
Real Property Term Loan, in an amount not less than $500,000, after giving
effect to the disbursement of the Additional Real Property Term Loan and payment
of or provision for the fees and expenses of the transaction;
(ix) no Event of Default or event or condition
which, with notice or passage of time, or both, would constitute an Event of
Default, shall exist or have occurred and, if required by Lender, Borrowers
shall have delivered a certificate signed on behalf of each Borrower by a senior
officer of each Borrower
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certifying the absence of any such Event of Default, event or
condition;
(x) HMG Manufacturing shall have obtained, on terms
and conditions satisfactory to Lender, an additional loan or loans either
directly from a Pennsylvania Industrial Development Authority ("PIDA") or from a
financial institution which loans are sponsored or guaranteed by PIDA, in the
aggregate amount of not less than $500,000 (the "PIDA Loans"), which
indebtedness, to the extent secured by a mortgage lien upon the Eligible
Additional Real Property, is subject to and subordinate in right of payment to
the right of Lender to receive the prior indefeasible payment and satisfaction
in full payment of all of the Obligations and which indebtedness, to the extent
secured by a mortgage lien upon the Real Property located at 234 South 8th
Street, Reading, Pennsylvania, is in compliance with the terms and conditions
set forth in Section 9.8(f) hereof, in each case pursuant to such subordination
and intercreditor agreements as are required to be delivered to Lender pursuant
hereto;
(xi) Lender shall have received an original
executed Term Promissory Note in the form of Exhibit B hereto, appropriately
completed, inter alia, to set forth the date and principal amount of the
Additional Real Property Term Loan and to set forth the amount of each monthly
principal installment in the amount of one-sixtieth (1/60th) of the original
principal amount of such Additional Real Property Term Loan, and to set forth
the dates of the first monthly payments of principal and interest as determined
by Lender, such Term Promissory Note to be duly authorized, executed and
delivered by such Borrower to Lender, which note shall thereupon evidence
obligations of such Borrower unconditionally owed to Lender, without offset,
defense or counterclaim of any kind, nature or description whatsoever; and
(xii) Lender shall have received, in form and
substance satisfactory to Lender, such opinion letters of counsel to Borrowers
with respect to the Mortgage upon the Eligible Additional Real Property and such
other matters as Lender may request.
2.5 Availability Reserves. All Revolving Loans otherwise available to
Borrowers pursuant to the lending formulas and subject to the Maximum Credit and
other applicable limits hereunder shall be subject to Lender's continuing right
to establish and revise Availability Reserves.
SECTION 3. INTEREST AND FEES
3.1 Interest.
(a) Subject to a one time reduction in the rates referred to in
Section 3.1(c) below, Borrowers shall pay to Lender interest on the outstanding
principal amount of the non-contingent Obligations at the rate of one (1%)
percent per annum in excess of the Prime Rate, except that Borrowers shall pay
to Lender interest, at Lender's option, without notice, at the rate of three
(3%) percent per annum in excess of the Prime Rate: (i) on the non- contingent
Obligations for (A) the period from and after the date of termination or
non-renewal hereof until such time as Lender has received full and final payment
of all such Obligations (notwithstanding entry of judgment against any
Borrower), and (B) the period from and after the date of the occurrence of an
Event of Default for so long as such Event of Default is continuing as
determined by Lender and (ii) on the Revolving Loans at any time outstanding to
a Borrower in excess of the amounts available to such Borrower under Section 2
(whether or not such excess(es), arise or are made with or without Lender's
knowledge or consent and whether made before or after an Event of Default). All
interest accruing hereunder on and after the occurrence of any of the events
referred to in Sections 3.1(a)(i) or 3.1(a)(ii) above shall be payable on
demand.
(b) Interest shall be payable by Borrowers to Lender monthly in
arrears not later than the first day of each calendar month and shall be
calculated on the basis of a three hundred sixty (360) day year and actual days
elapsed. The interest rate shall increase or decrease by an amount equal to each
increase or decrease in the Prime Rate effective on the first day of the month
after any change in such Prime Rate is announced. The increase or decrease shall
be based on the Prime Rate in effect on the last day of the month in which any
such change occurs. In no event shall charges constituting interest payable by
Borrowers to Lender exceed the maximum amount or the rate permitted under any
applicable law or regulation, and if any part or provision of this Agreement is
in contravention of any such law or regulation, such part or provision shall be
deemed amended to conform thereto.
(c) The rates of interest referred to in Section 3.1(a) above
shall be automatically reduced, but not more than once, by one-quarter of one
(.25%) percent per annum, provided, that, (i) the Net Income of HMG Worldwide,
for its fiscal year ending December 31, 1997 based upon its annual audited
financial statements on a consolidated basis for such fiscal year received by
Lender, is greater than $250,000 and (ii) as of the effective date of such
reduction, no Event of Default and no event or condition which, with notice or
passage of time or both, would constitute an Event of Default, shall exist or
have occurred and be continuing. Such interest rate reduction shall become
effective upon delivery and acceptance of such financial statements by Lender,
provided the conditions referred to above are then satisfied.
3.2 Closing Fee. Borrowers shall pay to Lender as a closing fee the
amount of $150,000, which fee shall be fully earned as of the date hereof, of
which $75,000 shall be payable on the date hereof and $75,000 shall be payable
six (6) months from the date hereof; such amount to be paid after the date
hereof shall become immediately due and payable, at Lender's option, upon the
occurrence of an Event of Default.
3.3 Servicing Fee. Borrowers shall pay to Lender quarterly a servicing
fee in an amount equal to $6,000 in respect of Lender's services for each
calendar quarter (or part thereof) while this Agreement remains in effect and
for so long thereafter as any of the Obligations are outstanding, which fee
shall be fully earned as
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of and payable in advance on the date hereof and on the first day
of each calendar quarter hereafter.
3.4 Unused Line Fee. Borrower shall pay to Lender monthly an unused line
fee at a rate equal to one-half (.5%) percent per annum calculated upon the
amount by which $11,000,000 exceeds the average daily principal balance of the
outstanding Revolving Loans and Letter of Credit Accommodations during the
immediately preceding month (or part thereof) while this Agreement is in effect
and for so long thereafter as any of the Obligations are outstanding, which fee
shall be payable on the first day of each month in arrears.
SECTION 4. CONDITIONS PRECEDENT
4.1 Conditions Precedent to Initial Loans and Letter of Credit
Accommodations. Each of the following is a condition precedent to Lender making
the initial Loans and providing the initial Letter of Credit Accommodations
hereunder:
(a) Lender shall have received, in form and substance
satisfactory to Lender, all releases, terminations and such other documents as
Lender may request to evidence and effectuate the termination by the existing
lender or lenders to Borrowers of their respective financing arrangements with
Borrowers and the termination and release by it or them, as the case may be, of
any interest in and to any assets and properties of Borrowers and each Obligor,
duly authorized, executed and delivered by it or each of them, including, but
not limited to, (i) UCC termination statements for all UCC financing statements
previously filed by it or any of them or their predecessors, as secured party
and any Borrower or any Obligor, as debtor and (ii) satisfactions and discharges
of any mortgages, deeds of trust or deeds to secure debt by Borrowers or any
Obligor in favor of such existing lender or lenders, in form acceptable for
recording in the appropriate government office;
(b) Lender shall have received evidence, in form and substance
satisfactory to Lender, that Lender has valid perfected and first priority
security interests in and liens upon the Collateral and any other property which
is intended to be security for the Obligations or the liability of any Obligor
in respect thereof, subject only to the security interests and liens permitted
herein or in the other Financing Agreements;
(c) all requisite corporate action and proceedings in connection
with this Agreement and the other Financing Agreements shall be satisfactory in
form and substance to Lender, and Lender shall have received all information and
copies of all documents, including records of requisite corporate action and
proceedings which Lender may have requested in connection therewith, such
documents where requested by Lender or its counsel to be certified by
appropriate corporate officers or governmental authorities;
(d) no material adverse change shall have occurred in the assets,
business or prospects of any Borrower since the date of Lender's latest field
examination and no change or event shall have occurred which would impair the
ability of any Borrower or any Obligor to perform its obligations hereunder or
under any of the
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other Financing Agreements to which it is a party or of Lender to
enforce the Obligations or realize upon the Collateral;
(e) Lender shall have completed a field review of the Records and
such other information with respect to the Collateral as Lender may require to
determine the amount of Revolving Loans available to each Borrower, the results
of which shall be satisfactory to Lender, not more than seven (7) business days
prior to the date hereof;
(f) Lender shall have received, in form and substance
satisfactory to Lender, all consents, waivers, acknowledgments and other
agreements from third persons which Lender may deem necessary or desirable in
order to permit, protect and perfect its security interests in and liens upon
the Collateral or to effectuate the provisions or purposes of this Agreement and
the other Financing Agreements, including acknowledgements by lessors,
mortgagees and warehousemen of Lender's security interests in the Collateral,
waivers by such persons of any security interests, liens or other claims by such
persons to the Collateral and agreements permitting Lender access to, and the
right to remain on, the premises to exercise its rights and remedies and
otherwise deal with the Collateral;
(g) Lender shall have received, in form and substance
satisfactory to Lender, an absolute and unconditional continuing guarantee by
each of the Borrowers of payment and performance of the Obligations of each of
the other Borrowers, and an absolute and unconditional continuing guarantee by
Electronic Voting Systems, Inc., Display Depot, Inc. and Creative Displays, Inc.
of payment and performance of the Obligations of the Borrowers, secured by a
first and only security interest in favor of Lender granted by each of the
foregoing Obligors on all of their existing and future assets;
(h) Lender shall have received the Custodial Account Agreement
with the Custodian Bank, together with evidence satisfactory to Lender that
Eligible Cash Equivalents having a Market Value of at least $5,600,000 are being
held in the Custodial Account subject to such agreement;
(i) Borrower shall have Excess Availability as determined by
Lender, as of the date hereof, in an amount not less than $1,000,000 after
giving effect to the initial Loans made or to be made and Letter of Credit
Accommodations issued or to be issued in connection with the initial
transactions hereunder;
(j) Lender shall have received evidence of insurance and loss
payee endorsements required hereunder and under the other Financing Agreements,
in form and substance satisfactory to Lender, and certificates of insurance
policies and/or endorsements naming Lender as loss payee;
(k) Lender shall have received, in form and substance
satisfactory to Lender, such opinion letters of counsel to Borrower with respect
to the Financing Agreements and such other matters as Lender may request; and
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(l) Lender shall have received evidence of the transfer of
ownership of the machinery and equipment described in the Machinery, Equipment
and Vehicles Auction Sale Value Appraisal Report, dated October 1996, prepared
by Daley-Hodkin Appraisal Corporation from HMG In-Store to HMG Manufacturing, in
form and substance satisfactory to Lender;
(m) the other Financing Agreements and all instruments and
documents hereunder and thereunder shall have been duly executed and delivered
to Lender, in form and substance satisfactory to Lender.
4.2 Conditions Precedent to All Loans and Letter of Credit
Accommodations. Each of the following is an additional condition precedent to
Lender making Loans and/or providing Letter of Credit Accommodations to
Borrowers, including the initial Loans and Letter of Credit Accommodations and
any future Loans and Letter of Credit Accommodations:
(a) all representations and warranties contained herein and in
the other Financing Agreements shall be true and correct in all material
respects with the same effect as though such representations and warranties had
been made on and as of the date of the making of each such Loan or providing
each such Letter of Credit Accommodation and after giving effect thereto; and
(b) no Event of Default and no event or condition which, with
notice or passage of time or both, would constitute an Event of Default, shall
exist or have occurred and be continuing on and as of the date of the making of
such Loan or providing each such Letter of Credit Accommodation and after giving
effect thereto.
SECTION 5. GRANT OF SECURITY INTEREST
5.1 Collateral. To secure payment and performance of all Obligations,
each Borrower hereby grants to Lender a continuing security interest in, a lien
upon, and a right of set off against, and hereby assigns to Lender as security,
the following property and interests in property of such Borrower, whether now
owned or hereafter acquired or existing, and wherever located (collectively, the
"Collateral"):
(a) Accounts;
(b) all present and future contract rights, general intangibles
(including tax and duty refunds, registered and unregistered patents,
trademarks, service marks, copyrights, trade names, applications for the
foregoing, trade secrets, goodwill, processes, drawings, blueprints, customer
lists, licenses, whether as licensor or licensee, choses in action and other
claims and existing and future leasehold interests in equipment, real estate and
fixtures), chattel paper, documents, instruments, letters of credit, bankers'
acceptances and guaranties;
(c) all present and future monies, securities, credit balances,
deposits, deposit accounts and other property of such Borrower now or hereafter
held or received by or in transit to
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Lender or its affiliates or at any other depository or other institution from or
for the account of such Borrower, whether for safekeeping, pledge, custody,
transmission, collection or otherwise, and all present and future liens,
security interests, rights, remedies, title and interest in, to and in respect
of Accounts and other Collateral, including (i) rights and remedies under or
relating to guaranties, contracts of suretyship, letters of credit and credit
and other insurance related to the Collateral, (ii) rights of stoppage in
transit, replevin, repossession, reclamation and other rights and remedies of an
unpaid vendor, lienor or secured party, (iii) goods described in invoices,
documents, contracts or instruments with respect to, or otherwise representing
or evidencing, Accounts or other Collateral, including returned, repossessed and
reclaimed goods, and (iv) deposits by and property of account debtors or other
persons securing the obligations of account debtors;
(d) Inventory;
(e) Equipment;
(f) Real Property; provided, that, in the case of Real Property
acquired after the date hereof, the security interest in and lien hereby
intended to be granted by Borrowers shall be further evidenced and/or
effectuated by a mortgage, deed of trust or deed to secure debt satisfactory to
Lender, contemporaneously with the acquisition of such hereafter acquired Real
Property;
(g) without limiting the Collateral described in Section 5.1(c),
all existing and future cash, cash equivalents and other investments (including
the Cash Equivalents), and all right, title and interest of such Borrower in and
to existing and future investment accounts and custodial accounts wherever
located, together with the cash, cash equivalents and other investments and
other property now or hereafter held in or credited to such investment accounts
and custodial accounts;
(h) Records; and
(i) all products and proceeds of the foregoing, in any form,
including insurance proceeds and all claims against third parties for loss or
damage to or destruction of any or all of the foregoing.
5.2 Senior Real Property Lien. If HMG Manufacturing grants a mortgage
lien upon the Real Property located at 234 South 8th Street, Reading,
Pennsylvania to a person other than Lender as permitted by Section 9.8(f),
securing only indebtedness for borrowed money incurred in compliance with
Section 9.9(f) hereof, Lender shall subordinate its mortgage lien upon such Real
Property in favor of the mortgage lien of such other person upon such Real
Property in an amount not to exceed the original principal amount of $600,000,
less repayments thereof, pursuant to a subordination agreement with such other
person in form and substance satisfactory to Lender, as determined by Lender in
a commercially reasonable manner.
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SECTION 6. COLLECTION AND ADMINISTRATION
6.1 Borrowers' Loan Accounts. Lender shall maintain one or more loan
account(s) on its books in which shall be recorded (a) all Loans, Letter of
Credit Accommodations and other Obligations and the Collateral, (b) all payments
made by or on behalf of Borrowers and (c) all other appropriate debits and
credits as provided in this Agreement, including fees, charges, costs, expenses
and interest. All entries in the loan account(s) shall be made in accordance
with Lender's customary practices as in effect from time to time.
6.2 Statements. Lender shall render to HMG Worldwide (for itself and on
behalf of the other Borrowers) each month a statement setting forth the balance
in the loan account(s) maintained by Lender for Borrowers pursuant to the
provisions of this Agreement, including principal, interest, fees, costs and
expenses. Each such statement shall be subject to subsequent adjustment by
Lender but shall, absent manifest errors or omissions, be considered correct and
deemed accepted by Borrowers and conclusively binding upon Borrowers as an
account stated except to the extent that Lender receives a written notice from
any Borrower of any specific exceptions of such Borrower thereto within thirty
(30) days after the date such statement has been mailed by Lender. Until such
time as Lender shall have rendered to HMG Worldwide a written statement as
provided above, the balance in Borrowers' loan account(s) shall be presumptive
evidence of the amounts due and owing to Lender by Borrowers.
6.3 Collection of Accounts.
(a) Borrowers shall establish and maintain, at their expense,
blocked accounts or lockboxes and related blocked accounts (in either case,
"Blocked Accounts"), as Lender may specify, with such banks as are acceptable to
Lender into which Borrowers shall promptly deposit and direct their account
debtors to directly remit all payments on Accounts and all payments constituting
proceeds of Inventory or other Collateral in the identical form in which such
payments are made, whether by cash, check or other manner. The banks at which
the Blocked Accounts are established shall enter into an agreement, in form and
substance satisfactory to Lender, providing that all items received or deposited
in the Blocked Accounts are the property of Lender, that the depository bank has
no lien upon, or right to setoff against, the Blocked Accounts, the items
received for deposit therein, or the funds from time to time on deposit therein
and that the depository bank will wire, or otherwise transfer, in immediately
available funds, on a daily basis, all funds received or deposited into the
Blocked Accounts to such bank account of Lender as Lender may from time to time
designate for such purpose ("Payment Account"). Borrowers agree that all
payments made to such Blocked Accounts or other funds received and collected by
Lender, whether on the Accounts or as proceeds of Inventory or other Collateral
or otherwise shall be the property of Lender.
(b) For purposes of calculating interest on the
Obligations, such payments or other funds received will be applied
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(conditional upon final collection) to the Obligations one (1) business days
following the date of receipt of immediately available funds by Lender in the
Payment Account. For purposes of calculating the amount of the Revolving Loans
available to Borrowers such payments will be applied (conditional upon final
collection) to the Obligations on the business day of receipt by Lender in the
Payment Account, if such payments are received within sufficient time (in
accordance with Lender's usual and customary practices as in effect from time to
time) to credit Borrowers' loan account(s) on such day, and if not, then on the
next business day.
(c) Borrowers and all of their affiliates, subsidiaries,
shareholders, directors, employees or agents shall, acting as trustee for
Lender, receive, as the property of Lender, any monies, checks, notes, drafts or
any other payment relating to and/or proceeds of Accounts or other Collateral
which come into their possession or under their control and immediately upon
receipt thereof, shall deposit or cause the same to be deposited in the Blocked
Accounts, or remit the same or cause the same to be remitted, in kind, to
Lender. In no event shall the same be commingled with any Borrower's own funds.
Borrowers agree to reimburse Lender on demand for any amounts owed or paid to
any bank at which a Blocked Account is established or any other bank or person
involved in the transfer of funds to or from the Blocked Accounts arising out of
Lender's payments to or indemnification of such bank or person. The obligation
of Borrowers to reimburse Lender for such amounts pursuant to this Section 6.3
shall survive the termination or non-renewal of this Agreement.
(d) Until separate Blocked Accounts are established for each
Borrower as required pursuant to Section 6.3(a) hereof, Lender may apply any
proceeds of Accounts or other Collateral to the Obligations of HMG In-Store,
subject to weekly reallocation of collections and adjustments by Lender to the
Revolving Loan Obligations and Revolving Loan availability calculations as to
each Borrower, based on collection reconciliation reports delivered by Borrowers
to Lender not less frequently than once each week that shall allocate to the
applicable Borrower and its Accounts any proceeds that are received in the
Blocked Account since the period covered by the most recent such reconciliation
report delivered to Lender.
6.4 Payments. All Obligations shall be payable to the Payment Account as
provided in Section 6.3 or such other place as Lender may designate from time to
time. Lender may apply payments received or collected from Borrowers or for the
account of Borrowers (including the monetary proceeds of collections or of
realization upon any Collateral) to such of the Obligations, whether or not then
due, in such order and manner as Lender determines. At Lender's option, all
principal, interest, fees, costs, expenses and other charges provided for in
this Agreement or the other Financing Agreements may be charged directly to the
loan account(s) of Borrowers. Borrowers shall make all payments to Lender on the
Obligations free and clear of, and without deduction or withholding for or on
account of, any setoff, counterclaim, defense, duties, taxes, levies, imposts,
fees, deductions, withholding, restrictions or conditions of any kind. If after
receipt of any payment of, or proceeds of Collateral applied to the
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payment of, any of the Obligations, Lender is required to surrender or return
such payment or proceeds to any Person for any reason, then the Obligations
intended to be satisfied by such payment or proceeds shall be reinstated and
continue and this Agreement shall continue in full force and effect as if such
payment or proceeds had not been received by Lender. Borrowers shall be liable
to pay to Lender, and each Borrower does hereby indemnify and hold Lender
harmless for the amount of any payments or proceeds surrendered or returned.
This Section 6.4 shall remain effective notwithstanding any contrary action
which may be taken by Lender in reliance upon such payment or proceeds. This
Section 6.4 shall survive the payment of the Obligations and the termination or
non-renewal of this Agreement.
6.5 Authorization to Make Loans. Lender is authorized to make the Loans
and provide the Letter of Credit Accommodations based upon telephonic or other
instructions received from anyone purporting to be an officer of a Borrower
(including HMG Worldwide for itself and/or on behalf of the other Borrowers) or
other authorized person or, at the discretion of Lender, if such Loans are
necessary to satisfy any Obligations. All requests for Loans or Letter of Credit
Accommodations hereunder shall specify the date on which the requested advance
is to be made or Letter of Credit Accommodations established (which day shall be
a business day) and the amount of the requested Loan. Requests received after
11:00 a.m. New York City time on any day shall be deemed to have been made as of
the opening of business on the immediately following business day. All Loans and
Letter of Credit Accommodations under this Agreement shall be conclusively
presumed to have been made to, and at the request of and for the benefit of,
Borrowers when deposited to the credit of a Borrower or otherwise disbursed or
established in accordance with the instructions of a Borrower (including HMG
Worldwide for itself and/or on behalf of the other Borrowers) or in accordance
with the terms and conditions of this Agreement.
6.6 Use of Proceeds. Borrowers shall use the initial proceeds of the
Loans provided by Lender to Borrowers hereunder only for: (a) payments to each
of the persons listed in the disbursement direction letter furnished by
Borrowers to Lender on or about the date hereof and (b) costs, expenses and fees
in connection with the preparation, negotiation, execution and delivery of this
Agreement and the other Financing Agreements. All other Loans made or Letter of
Credit Accommodations provided by Lender to Borrowers pursuant to the provisions
hereof shall be used by Borrowers only for general operating, working capital
and other proper corporate purposes of Borrowers not otherwise prohibited by the
terms hereof. None of the proceeds will be used, directly or indirectly, for the
purpose of purchasing or carrying any margin security or for the purposes of
reducing or retiring any indebtedness which was originally incurred to purchase
or carry any margin security or for any other purpose which might cause any of
the Loans to be considered a "purpose credit" within the meaning of Regulation G
of the Board of Governors of the Federal Reserve System, as amended.
6.7 Appointment of HMG Worldwide as Agent for Borrowers. The
Borrowers, other than HMG Worldwide, hereby irrevocably appoint HMG
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Worldwide, and each officer thereof, as their agent and attorney-in-fact to
request Loans and Letter of Credit Accommodations on their behalf, at Lender's
option, to receive disbursements of Loans on their behalf (which may be made to
the same account of HMG Worldwide to which disbursements of Loans to HMG
Worldwide are made), to receive notices and statements of account from Lender,
to take such other actions on their behalf as is provided hereunder or under any
of the other Financing Agreements and generally to deal with Lender on their
behalf, for all matters pertaining to the financing arrangements under this
Agreement.
SECTION 7. COLLATERAL REPORTING AND COVENANTS
7.1 Collateral Reporting. Each Borrower shall provide Lender with the
following documents in a form satisfactory to Lender: (a) on a regular basis as
required by Lender, a schedule of Accounts, credits issued and cash received;
(b) on a weekly basis or more frequently as Lender may request, (i) a statement
issued by the Custodian Bank itemizing all Cash Equivalents and other property
held in or credited to the Custodial Account and the Market Values thereof as of
the statement date and (ii) a special report of Inventory purchased under Letter
of Credit Accommodations during each week during the period commencing on the
date hereof and ending on January 31, 1997; (c) on a monthly basis or more
frequently as Lender may request, (i) perpetual inventory reports, (ii)
inventory reports by category and (iii) agings of accounts payable, (d) upon
Lender's request, (i) copies of customer statements and credit memos, remittance
advices and reports, and copies of deposit slips and bank statements, (ii)
copies of shipping and delivery documents, and (iii) copies of purchase orders,
invoices and delivery documents for Inventory and Equipment acquired by
Borrowers; (e) agings of accounts receivable on a monthly basis or more
frequently as Lender may request; and (f) such other reports as to the
Collateral as Lender shall request from time to time. If any of Borrowers'
records or reports of the Collateral are prepared or maintained by an accounting
service, contractor, shipper or other agent, Borrowers hereby irrevocably
authorize such service, contractor, shipper or agent to deliver such records,
reports, and related documents to Lender and to follow Lender's instructions
with respect to further services at any time that an Event of Default exists or
has occurred and is continuing.
7.2 Accounts Covenants.
(a) Borrowers shall notify Lender promptly of: (i) any material
delay in any Borrower's performance of any of its obligations to any account
debtor or the assertion of any claims, offsets, defenses or counterclaims by any
account debtor, or any disputes with account debtors, in each case involving an
amount in excess of $25,000, or any settlement, adjustment or compromise
thereof, (ii) all material adverse information relating to the financial
condition of any account debtor and (iii) any event or circumstance which, to
any Borrower's knowledge would cause Lender to consider any then existing
Accounts as no longer constituting Eligible Accounts. No credit, discount,
allowance or extension or agreement for any of the foregoing shall be granted by
a Borrower
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to any account debtor without Lender's consent, except in the ordinary course of
such Borrower's business in accordance with practices and policies previously
disclosed in writing to Lender. So long as no Event of Default exists or has
occurred and is continuing, Borrowers shall settle, adjust or compromise any
claim, offset, counterclaim or dispute with any account debtor. At any time that
an Event of Default exists or has occurred and is continuing, Lender shall, at
its option, have the exclusive right to settle, adjust or compromise any claim,
offset, counterclaim or dispute with account debtors or grant any credits,
discounts or allowances.
(b) In addition to the reporting requirements elsewhere set forth
herein, each Borrower shall separately notify Lender promptly of any return of
Inventory by any one account debtor if the inventory so returned in such case
has a value in excess of $20,000. At any time that Inventory is returned,
reclaimed or repossessed, the Account (or portion thereof) which arose from the
sale of such returned, reclaimed or repossessed Inventory shall not be deemed an
Eligible Account. In the event any account debtor returns Inventory when an
Event of Default exists or has occurred and is continuing, the applicable
Borrower receiving such Inventory shall, upon Lender's request, (i) hold the
returned Inventory in trust for Lender, (ii) segregate all returned Inventory
from all of its other property, (iii) dispose of the returned Inventory solely
according to Lender's instructions, and (iv) not issue any credits, discounts or
allowances with respect thereto without Lender's prior written consent.
(c) With respect to each Account: (i) the amounts shown on any
invoice delivered to Lender or schedule thereof delivered to Lender shall be
true and complete, (ii) no payments shall be made thereon except payments
immediately delivered to Lender pursuant to the terms of this Agreement, (iii)
no credit, discount, allowance or extension or agreement for any of the
foregoing shall be granted by a Borrower to any account debtor except as
reported to Lender in accordance with this Agreement and except for credits,
discounts, allowances or extensions made or given in the ordinary course of such
Borrower's business in accordance with practices and policies previously
disclosed to Lender, (iv) there shall be no setoffs, deductions, contras,
defenses, counterclaims or disputes existing or asserted with respect thereto
except as reported to Lender in accordance with the terms of this Agreement, (v)
none of the transactions giving rise thereto will violate any applicable State
or Federal laws or regulations, all documentation relating thereto will be
legally sufficient under such laws and regulations and all such documentation
will be legally enforceable in accordance with its terms.
(d) Lender shall have the right at any time or times, in Lender's
name or in the name of a nominee of Lender, to verify the validity, amount or
any other matter relating to any Account or other Collateral, by mail,
telephone, facsimile transmission or otherwise.
(e) Each Borrower shall deliver or cause to be delivered to
Lender, with appropriate endorsement and assignment, with full recourse to such
Borrower, all chattel paper and instruments which
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such Borrower now owns or may at any time acquire immediately upon such
Borrower's receipt thereof, except as Lender may otherwise agree.
(f) Lender may, at any time or times that an Event of Default
exists or has occurred and is continuing, (i) notify any or all account debtors
that the Accounts have been assigned to Lender and that Lender has a security
interest therein and Lender may direct any or all accounts debtors to make
payment of Accounts directly to Lender, (ii) extend the time of payment of,
compromise, settle or adjust for cash, credit, return of merchandise or
otherwise, and upon any terms or conditions, any and all Accounts or other
obligations included in the Collateral and thereby discharge or release the
account debtor or any other party or parties in any way liable for payment
thereof without affecting any of the Obligations, (iii) demand, collect or
enforce payment of any Accounts or such other obligations, but without any duty
to do so, and Lender shall not be liable for its failure to collect or enforce
the payment thereof nor for the negligence of its agents or attorneys with
respect thereto and (iv) take whatever other action Lender may deem necessary or
desirable for the protection of its interests. At any time that an Event of
Default exists or has occurred and is continuing, at Lender's request, all
invoices and statements sent to any account debtor shall state that the Accounts
and such other obligations have been assigned to Lender and are payable directly
and only to Lender and Borrowers shall deliver to Lender such originals of
documents evidencing the sale and delivery of goods or the performance of
services giving rise to any Accounts as Lender may require.
7.3 Inventory Covenants. With respect to the Inventory: (a) each Borrower
shall at all times maintain inventory records reasonably satisfactory to Lender,
keeping correct and accurate records itemizing and describing the kind, type,
quality and quantity of Inventory, such Borrower's cost therefor and daily
withdrawals therefrom and additions thereto; (b) each Borrower shall conduct a
physical count of the Inventory at least once each year, but at any time or
times as Lender may request on or after an Event of Default, and promptly
following such physical inventory shall supply Lender with a report in the form
and with such specificity as may be reasonably satisfactory to Lender concerning
such physical count; (c) no Borrower shall remove any Inventory from the
locations set forth or permitted herein, without the prior written consent of
Lender, except for sales of Inventory by a Borrower in the ordinary course of
such Borrower's business and except to move Inventory directly from one location
set forth or permitted herein to another such location; (d) upon Lender's
request, Borrowers shall, at Lender's expense prior to an Event of Default and
at Borrowers' expense any time thereafter, deliver or cause to be delivered to
Lender written reports or appraisals as to the Inventory in form, scope and
methodology acceptable to Lender and by an appraiser acceptable to Lender,
addressed to Lender or upon which Lender is expressly permitted to rely; (e)
each Borrower shall produce, use, store and maintain the Inventory, with all
reasonable care and caution and in accordance with applicable standards of any
insurance and in conformity with applicable laws (including the requirements of
the Federal Fair Labor Standards Act of 1938, as amended and all rules,
regulations and orders related
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thereto); (f) each Borrower assumes all responsibility and liability arising
from or relating to the production, use, sale or other disposition of its
Inventory; (g) no Borrower shall sell Inventory to any customer on approval, or
any other basis which entitles the customer to return or may obligate a Borrower
to repurchase such Inventory; (h) each Borrower shall keep its Inventory in good
and marketable condition; and (i) no Borrower shall, without prior written
notice to Lender, acquire or accept any Inventory on consignment or approval.
7.4 Equipment Covenants. With respect to the Equipment: (a) upon Lender's
request, each Borrower shall, at its expense, at any time or times as Lender may
request on or after an Event of Default, deliver or cause to be delivered to
Lender written reports or appraisals as to the Equipment in form, scope and
methodology acceptable to Lender and by an appraiser acceptable to Lender; (b)
each Borrower shall keep its Equipment in good order, repair, running and
marketable condition (ordinary wear and tear and obsolete Equipment excepted);
(c) each Borrower shall use its Equipment with all reasonable care and caution
and in accordance with applicable standards of any insurance and in conformity
in all material respects with all applicable laws; (d) the Equipment of each
Borrower is and shall be used in such Borrower's business and not for personal,
family, household or farming use; (e) no Borrower shall remove any Equipment
from the locations set forth or permitted herein, except to the extent necessary
to have any Equipment repaired or maintained in the ordinary course of the
business of such Borrower or to move Equipment directly from one location set
forth or permitted herein to another such location and except for the movement
of motor vehicles used by or for the benefit of such Borrower in the ordinary
course of such Borrower's business; (f) the Equipment is now and shall remain
personal property and no Borrower shall permit any of the Equipment to be or
become a part of or permanently affixed to real property; and (g) each Borrower
assumes all responsibility and liability arising from the use of its Equipment.
7.5 Power of Attorney. Each Borrower hereby irrevocably designates and
appoints Lender (and all persons designated by Lender) as such Borrower's true
and lawful attorney-in-fact, and authorizes Lender, in such Borrower's or
Lender's name, to: (a) at any time an Event of Default or event which with
notice or passage of time or both would constitute an Event of Default exists or
has occurred and is continuing (i) demand payment on Accounts or other proceeds
of Inventory or other Collateral, (ii) enforce payment of Accounts by legal
proceedings or otherwise, (iii) exercise all of such Borrower's rights and
remedies to collect any Account or other Collateral, (iv) sell or assign any
Account upon such terms, for such amount and at such time or times as the Lender
deems advisable, (v) settle, adjust, compromise, extend or renew an Account,
(vi) discharge and release any Account, (vii) prepare, file and sign such
Borrower's name on any proof of claim in bankruptcy or other similar document
against an account debtor, (viii) notify the post office authorities to change
the address for delivery of such Borrower's mail to an address designated by
Lender, and open and dispose of all mail addressed to such Borrower, and (ix) do
all acts and things which are necessary, in Lender's determination, to fulfill
such Borrower's Obligations
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under this Agreement and the other Financing Agreements and (b) at any time to
(i) take control in any manner of any item of payment or proceeds thereof, (ii)
have access to any lockbox or postal box into which such Borrower's mail is
deposited, (iii) endorse such Borrower's name upon any items of payment or
proceeds thereof and deposit the same in the Lender's account for application to
the Obligations, (iv) endorse such Borrower's name upon any chattel paper,
document, instrument, invoice, or similar document or agreement relating to any
Account or any goods pertaining thereto or any other Collateral, (v) sign such
Borrower's name on any verification of Accounts and notices thereof to account
debtors and (vi) execute in such Borrower's name and file any UCC financing
statements or amendments thereto. Each Borrower hereby releases Lender and its
officers, employees and designees from any liabilities arising from any act or
acts under this power of attorney and in furtherance thereof, whether of
omission or commission, except as a result of Lender's own gross negligence or
wilful misconduct as determined pursuant to a final non-appealable judgment of a
court of competent jurisdiction.
7.6 Right to Cure. Lender may, at its option, (a) cure any default by a
Borrower under any material agreement with a third party or pay or bond on
appeal any judgment entered against a Borrower, (b) discharge taxes, liens,
security interests or other encumbrances at any time levied on or existing with
respect to the Collateral and (c) pay any amount, incur any expense or perform
any act which, in Lender's judgment, is necessary or appropriate to preserve,
protect, insure or maintain the Collateral and the rights of Lender with respect
thereto. Lender may add any amounts so expended to the Obligations and charge
any Borrower's account therefor, such amounts to be repayable by Borrowers on
demand. Lender shall be under no obligation to effect such cure, payment or
bonding and shall not, by doing so, be deemed to have assumed any obligation or
liability of any Borrower. Any payment made or other action taken by Lender
under this Section shall be without prejudice to any right to assert an Event of
Default hereunder and to proceed accordingly.
7.7 Access to Premises. From time to time as requested by Lender, at the
cost and expense of Borrowers, (a) Lender or its designee shall have complete
access to all of Borrowers' premises during normal business hours and after
reasonable notice to Borrowers, or at any time and without notice to Borrowers
if an Event of Default exists or has occurred and is continuing, for the
purposes of inspecting, verifying and auditing the Collateral and all of
Borrowers' books and records, including the Records, and (b) Borrowers shall
promptly furnish to Lender such copies of such books and records or extracts
therefrom as Lender may request, and (c) use during normal business hours such
of Borrowers' personnel, equipment, supplies and premises as may be reasonably
necessary for the foregoing and if an Event of Default exists or has occurred
and is continuing for the collection of Accounts and realization upon other
Collateral.
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SECTION 8. REPRESENTATIONS AND WARRANTIES
Borrowers hereby, jointly and severally, represent and warrant to Lender
the following (which shall survive the execution and delivery of this
Agreement), the truth and accuracy of which are a continuing condition of the
making of Loans and providing Letter of Credit Accommodations by Lender to
Borrowers:
8.1 Corporate Existence, Power and Authority; Subsidiaries. Each Borrower
is a corporation duly organized and in good standing under the laws of its state
of incorporation and is duly qualified as a foreign corporation and in good
standing in all states or other jurisdictions where the nature and extent of the
business transacted by it or the ownership of assets makes such qualification
necessary, except for those jurisdictions in which the failure to so qualify
would not have a material adverse effect on such Borrower's financial condition,
results of operation or business or the rights of Lender in or to any of the
Collateral. The execution, delivery and performance of this Agreement, the other
Financing Agreements and the transactions contemplated hereunder and thereunder
are all within each Borrower's corporate powers, have been duly authorized and
are not in contravention of law or the terms of each Borrower's certificate of
incorporation, by-laws, or other organizational documentation, or any indenture,
agreement or undertaking to which any Borrower is a party or by which any
Borrower or its property or properties are bound. This Agreement and the other
Financing Agreements constitute legal, valid and binding obligations of
Borrowers enforceable in accordance with their respective terms. Borrowers do
not have any subsidiaries except as set forth on the Information Certificate.
Electronic Voting Systems Inc. has no assets and maintains no operations.
8.2 Financial Statements; No Material Adverse Change. All financial
statements relating to Borrowers which have been or may hereafter be delivered
by Borrowers to Lender have been prepared in accordance with GAAP and fairly
present the financial condition and the results of operation of Borrowers as at
the dates and for the periods set forth therein. Except as disclosed in any
interim financial statements furnished by Borrowers to Lender prior to the date
of this Agreement, there has been no material adverse change in the assets,
liabilities, properties and condition, financial or otherwise, of any Borrower
since the date of the most recent audited financial statements furnished by
Borrowers to Lender prior to the date of this Agreement.
8.3 Chief Executive Office; Collateral Locations. The chief executive
office of each Borrower is located at its address set forth below, and each
Borrower's Records are located at its address set forth below and its only other
places of business and the only other locations of Collateral, if any, are the
addresses set forth in the Information Certificate, subject to the right of
Borrowers to establish new locations in accordance with Section 9.2 below. The
Information Certificate correctly identifies any of such locations which are not
owned by Borrowers and sets forth the owners and/or operators thereof.
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8.4 Priority of Liens; Title to Properties. The security interests and
liens granted to Lender under this Agreement and the other Financing Agreements
constitute valid and perfected first priority liens and security interests in
and upon the Collateral subject only to the liens indicated on Schedule 8.4
hereto and the other liens permitted under Section 9.8 hereof. Each Borrower has
good and marketable title to all of its properties and assets subject to no
liens, mortgages, pledges, security interests, encumbrances or charges of any
kind, except those granted to Lender and such others as are specifically listed
on Schedule 8.4 hereto or permitted under Section 9.8 hereof.
8.5 Tax Returns. Each Borrower has filed, or caused to be filed, in a
timely manner all tax returns, reports and declarations which are required to be
filed by it (without requests for extension except as previously disclosed in
writing to Lender). All information in such tax returns, reports and
declarations is complete and accurate in all material respects. Each Borrower
has paid or caused to be paid all taxes due and payable or claimed due and
payable in any assessment received by it, except taxes the validity of which are
being contested in good faith by appropriate proceedings diligently pursued and
available to such Borrower and with respect to which adequate reserves have been
set aside on its books. Adequate provision has been made for the payment of all
accrued and unpaid Federal, State, county, local, foreign and other taxes
whether or not yet due and payable and whether or not disputed.
8.6 Litigation. Except as set forth on the Information Certificate, there
is no present investigation by any governmental agency pending, or to the best
of any Borrower's knowledge threatened, against or affecting any Borrower, its
assets or business and there is no action, suit, proceeding or claim by any
Person pending, or to the best of any Borrower's knowledge threatened, against
any Borrower or its assets or goodwill, or against or affecting any transactions
contemplated by this Agreement, which if adversely determined against any
Borrower would result in any material adverse change in the assets, business or
prospects of any Borrower, or would impair the ability of any Borrower to
perform its Obligations hereunder or under any of the other Financing Agreements
to which it is a party or of Lender to enforce any Obligations or realize upon
any Collateral.
8.7 Compliance with Other Agreements and Applicable Laws. No Borrower is in
default in any material respect under, or in violation in any material respect
of any of the terms of, any agreement, contract, instrument, lease or other
commitment to which it is a party or by which it or any of its assets are bound
and Borrowers are in compliance in all material respects with all applicable
provisions of laws, rules, regulations, licenses, permits, approvals and orders
of any foreign, Federal, State or local governmental authority.
8.8 Bank Accounts. All of the deposit accounts, investment accounts or
other accounts in the name of or used by Borrowers maintained at any bank or
other financial institution are set forth on Schedule 8.8 hereto, subject to the
right of Borrower to establish new accounts in accordance with Section 9.13
below.
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8.9 Environmental Compliance.
(a) Except as set forth on Schedule 8.9 hereto, no Borrower or,
to the best of Borrowers' knowledge, any other person, has generated, used,
stored, treated, transported, manufactured, handled, produced or disposed of any
Hazardous Materials, on or off its premises (whether or not owned by it) in any
manner which at any time violates, in any material respect, any applicable
Environmental Law or any license, permit, certificate, approval or similar
authorization thereunder and the operations of Borrowers comply in all material
respects with all Environmental Laws and all licenses, permits, certificates,
approvals and similar authorizations thereunder.
(b) Except as set forth on Schedule 8.9 hereto, there has been no
investigation, proceeding, complaint, order, directive, claim, citation or
notice by any governmental authority or any other person nor is any pending or
to the best of any Borrower's knowledge threatened, with respect to any
non-compliance with or violation of the requirements of any Environmental Law by
Borrowers or the release, spill or discharge, threatened or actual, of any
Hazardous Material or the generation, use, storage, treatment, transportation,
manufacture, handling, production or disposal of any Hazardous Materials or any
other environmental, health or safety matter, which affects any Borrower or its
business, operations or assets or any properties at which any Borrower has
transported, stored or disposed of any Hazardous Materials.
(c) To the best of Borrowers' knowledge, no Borrower has any
material liability (contingent or otherwise) in connection with a release, spill
or discharge, threatened or actual, of any Hazardous Materials or the
generation, use, storage, treatment, transportation, manufacture, handling,
production or disposal of any Hazardous Materials.
(d) To the best of Borrowers' knowledge, Borrowers have all
licenses, permits, certificates, approvals or similar authorizations required to
be obtained or filed in connection with the operations of Borrowers under any
Environmental Law and all of such licenses, permits, certificates, approvals or
similar authorizations are valid and in full force and effect.
8.10 Employee Benefits.
(a) Borrowers have not engaged in any transaction in connection
with which Borrowers or any of their ERISA Affiliates could be subject to either
a civil penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed by
Section 4975 of the Code, including any accumulated funding deficiency described
in Section 8.10(c) hereof and any deficiency with respect to vested accrued
benefits described in Section 8.10(d) hereof.
(b) Except as set forth on Schedule 8.10, no liability to the
Pension Benefit Guaranty Corporation has been or is expected by Borrowers to be
incurred with respect to any employee benefit plan of Borrowers or any of their
ERISA Affiliates. There has been no reportable event (within the meaning of
Section 4043(b) of ERISA) or any other event or condition with respect to any
employee
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pension benefit plan of Borrowers or any of their ERISA Affiliates which
presents a risk of termination of any such plan by the Pension Benefit Guaranty
Corporation.
(c) Except as set forth on Schedule 8.10, full payment has been
made of all amounts which Borrowers or any of their ERISA Affiliates is required
under Section 302 of ERISA and Section 412 of the Code to have paid under the
terms of each employee benefit plan as contributions to such plan as of the last
day of the most recent fiscal year of such plan ended prior to the date hereof,
and no accumulated funding deficiency (as defined in Section 302 of ERISA and
Section 412 of the Code), whether or not waived, exists with respect to any
employee benefit plan, including any penalty or tax described in Section 8.10(a)
hereof and any deficiency with respect to vested accrued benefits described in
Section 8.10(d) hereof.
(d) Except as set forth on Schedule 8.10 hereto, the current
value of all vested accrued benefits under all employee benefit plans maintained
by Borrowers that are subject to Title IV of ERISA does not exceed the current
value of the assets of such plans allocable to such vested accrued benefits,
including any penalty or tax described in Section 8.10(a) hereof and any
accumulated funding deficiency described in Section 8.10(c) hereof. The terms
"current value" and "accrued benefit" have the meanings specified in ERISA.
(e) Except as set forth on Schedule 8.10, no Borrower nor any of
its ERISA Affiliates is or has ever been obligated to contribute to any
"multiemployer plan" (as such term is defined in Section 4001(a)(3) of ERISA)
that is subject to Title IV of ERISA.
8.11 Accuracy and Completeness of Information. All information furnished
by or on behalf of any Borrower in writing to Lender in connection with this
Agreement or any of the other Financing Agreements or any transaction
contemplated hereby or thereby, including all information on the Information
Certificate, is true and correct in all material respects and does not omit any
material fact necessary in order to make such information not misleading. No
event or circumstance has occurred which has had or could reasonably be expected
to have a material adverse affect on the business, assets or prospects of any
Borrower, which has not been fully and accurately disclosed to Lender in
writing.
8.12 Interrelated Business. HMG Worldwide is the direct and beneficial
owner and holder of all the issued and outstanding shares of capital stock of
HMG In-Store and Intermark and Intermark is the direct and beneficial owner and
holder of all the issued and outstanding shares of capital stock of HMG
Manufacturing. Borrowers share an identity of interest such that any benefit
received by one Borrower benefits the others. Each Borrower sells goods or
renders services to or for the benefit of the other Borrowers. Each Borrower
makes loans and advances and provides other financial accommodations to or for
the benefit of the other Borrowers (including, inter alia, the payment and/or
guarantees by one Borrower of indebtedness of the other Borrowers). HMG
Worldwide obtains and/or provides administrative, legal, marketing, payroll and
management services to or for the benefit of the other
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Borrowers. Borrowers have centralized purchasing, collection, distribution,
accounting, legal and other services and are engaged in a common business
enterprise.
8.13 Survival of Warranties; Cumulative. All representations and
warranties contained in this Agreement or any of the other Financing Agreements
shall survive the execution and delivery of this Agreement and shall be deemed
to have been made again to Lender on the date of each additional borrowing or
other credit accommodation hereunder and shall be conclusively presumed to have
been relied on by Lender regardless of any investigation made or information
possessed by Lender. The representations and warranties set forth herein shall
be cumulative and in addition to any other representations or warranties which
any Borrower shall now or hereafter give, or cause to be given, to Lender.
SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS
9.1 Maintenance of Existence. Each Borrower shall at all times preserve,
renew and keep in full, force and effect its corporate existence and rights and
franchises with respect thereto and maintain in full force and effect all
permits, licenses, trademarks, tradenames, approvals, authorizations, leases and
contracts necessary to carry on the business as presently or proposed to be
conducted. Each Borrower shall give Lender thirty (30) days prior written notice
of any proposed change in its corporate name, which notice shall set forth the
new name and such Borrower shall deliver to Lender a copy of the amendment to
the Certificate of Incorporation of such Borrower providing for the name change
certified by the Secretary of State of the jurisdiction of incorporation of such
Borrower as soon as it is available. HMG Worldwide shall not permit its
subsidiaries, Electronic Voting Systems Inc. and HMG Europe, B.V., to engage in
any active business operations, other than to the extent required in winding
down the business operations of HMG Europe, B.V., or acquire any additional
assets other than cash to pay liabilities.
9.2 New Collateral Locations. A Borrower may open any new location within
the continental United States provided such Borrower (a) gives Lender thirty
(30) days prior written notice of the intended opening of any such new location,
except in the case of new locations consisting of a subcontractor's or
processor's premises at which Inventory having a value of up to $25,000 is to be
kept, in which case only ten (10) days prior written notice shall be required
(b) executes and delivers, or causes to be executed and delivered, to Lender
such agreements, documents, and instruments as Lender may deem reasonably
necessary or desirable to protect its interests in the Collateral at such
location, including UCC financing statements.
9.3 Compliance with Laws, Regulations, Etc.
(a) Each Borrower shall, at all times, comply in all material
respects with all laws, rules, regulations, licenses, permits, approvals and
orders applicable to it and duly observe all requirements of any Federal, State
or local governmental authority, including the Employee Retirement Security Act
of 1974, as amended,
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the Occupational Safety and Hazard Act of 1970, as amended, the Fair Labor
Standards Act of 1938, as amended, and all statutes, rules, regulations, orders,
permits and stipulations relating to environmental pollution and employee health
and safety, including all of the Environmental Laws.
(b) Each Borrower shall establish and maintain, at its expense, a
system to assure and monitor its continued compliance with all Environmental
Laws in all of its operations, which system shall include annual reviews of such
compliance by employees or agents of such Borrower who are familiar with the
requirements of the Environmental Laws. Copies of all environmental surveys,
audits, assessments, feasibility studies and results of remedial investigations
shall be promptly furnished, or caused to be furnished, by Borrowers to Lender.
Borrowers shall take prompt and appropriate action to respond to any
non-compliance with any of the Environmental Laws and shall regularly report to
Lender on such response.
(c) Each Borrower shall give both oral and written notice to
Lender immediately upon such Borrower's receipt of any notice of, or such
Borrower's otherwise obtaining knowledge of, (i) the occurrence of any event
involving the release, spill or discharge, threatened or actual, of any
Hazardous Material or (ii) any investigation, proceeding, complaint, order,
directive, claims, citation or notice with respect to: (A) any non-compliance
with or violation of any Environmental Law by any Borrower or (B) the release,
spill or discharge, threatened or actual, of any Hazardous Material or (C) the
generation, use, storage, treatment, transportation, manufacture, handling,
production or disposal of any Hazardous Materials or (D) any other
environmental, health or safety matter, which adversely affects any Borrower or
its business, operations or assets or any properties at which any Borrower
transported, stored or disposed of any Hazardous Materials.
(d) Without limiting the generality of the foregoing, whenever
Lender reasonably determines that there is non-compliance, or any condition
which requires any action by or on behalf of a Borrower in order to avoid any
material non-compliance, with any Environmental Law, Borrowers shall, at
Lender's request and Borrowers' expense: (i) cause an independent environmental
engineer acceptable to Lender to conduct such tests of the site where such
Borrower's non-compliance or alleged non-compliance with such Environmental Laws
has occurred as to such non-compliance and prepare and deliver to Lender a
report as to such non-compliance setting forth the results of such tests, a
proposed plan for responding to any environmental problems described therein,
and an estimate of the costs thereof and (ii) provide to Lender a supplemental
report of such engineer whenever the scope of such non-compliance, or such
Borrower's response thereto or the estimated costs thereof, shall change in any
material respect.
(e) Borrowers shall indemnify and hold harmless Lender, its
directors, officers, employees, agents, invitees, representa tives, successors
and assigns, from and against any and all losses, claims, damages, liabilities,
costs, and expenses (including attorneys' fees and legal expenses) directly or
indirectly arising
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out of or attributable to the use, generation, manufacture, reproduction,
storage, release, threatened release, spill, discharge, disposal or presence of
a Hazardous Material, including, without limitation, the costs of any required
or necessary repair, cleanup or other remedial work with respect to any property
of Borrowers and the preparation and implementation of any closure, remedial or
other required plans. All representations, warranties, covenants and
indemnifications in this Section 9.3 shall survive the payment of the
Obligations and the termination or non-renewal of this Agreement.
9.4 Payment of Taxes and Claims. Each Borrower shall duly pay and
discharge all taxes, assessments, contributions and governmental charges upon or
against it or its properties or assets, except for taxes the validity of which
are being contested in good faith by appropriate proceedings diligently pursued
and available to such Borrower and with respect to which adequate reserves have
been set aside on its books. Each Borrower shall be liable for any tax or
penalties imposed on Lender as a result of the financing arrangements provided
for herein and Borrowers agree to indemnify and hold Lender harmless with
respect to the foregoing, and to repay to Lender on demand the amount thereof,
and until paid by Borrowers such amount shall be added and deemed part of the
Loans, provided, that, nothing contained herein shall be construed to require
Borrowers to pay any income or franchise taxes attributable to the income of
Lender from any amounts charged or paid hereunder to Lender. The foregoing
indemnity shall survive the payment of the Obligations and the termination or
non-renewal of this Agreement.
9.5 Insurance. Each Borrower shall, at all times, maintain with
financially sound and reputable insurers insurance with respect to the
Collateral against loss or damage and all other insurance of the kinds and in
the amounts customarily insured against or carried by corporations of
established reputation engaged in the same or similar businesses and similarly
situated. Said policies of insurance shall be satisfactory to Lender as to form,
amount and insurer. Each Borrower shall furnish certificates, policies or
endorsements to Lender as Lender shall require as proof of such insurance, and,
if any Borrower fails to do so, Lender is authorized, but not required, to
obtain such insurance at the expense of Borrowers. All policies shall provide
for at least thirty (30) days prior written notice to Lender of any cancellation
or reduction of coverage and that Lender may act as attorney for Borrowers in
obtaining, and at any time an Event of Default exists or has occurred and is
continuing, adjusting, settling, amending and canceling such insurance. Each
Borrower shall cause Lender to be named as a loss payee and an additional
insured (but without any liability for any premiums) under such insurance
policies and each Borrower shall obtain non-contributory lender's loss payable
endorsements to all insurance policies in form and substance satisfactory to
Lender. Such lender's loss payable endorsements shall specify that the proceeds
of such insurance shall be payable to Lender as its interests may appear and
further specify that Lender shall be paid regardless of any act or omission by
any Borrower or any of its affiliates. At its option, Lender may apply any
insurance proceeds received by Lender at any time to the cost of repairs or
replacement of Collateral
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and/or to payment of the Obligations, whether or not then due, in any order and
in such manner as Lender may determine or hold such proceeds as cash collateral
for the Obligations.
9.6 Financial Statements and Other Information.
(a) Each Borrower shall keep proper books and records in which
true and complete entries shall be made of all dealings or transactions of or in
relation to the Collateral and the business of such Borrower and its
subsidiaries (if any) in accordance with GAAP and such Borrower shall furnish or
cause to be furnished to Lender: (i) within thirty (30) days after the end of
each fiscal month, except within sixty (60) days after the end of each December
and forty-five (45) days after the end of each January, March, June and
September, monthly unaudited consolidated and consolidating financial statements
(including in each case balance sheets, statements of income and loss,
statements of cash flow, and statements of shareholders' equity), all in
reasonable detail, fairly presenting in all material respects the financial
position and the results of the operations of Borrowers and each of their
subsidiaries as of the end of and through such fiscal month, and (ii) within
ninety (90) days after the end of each fiscal year, unaudited consolidating
financial statements and audited consolidated financial statements (including in
each case balance sheets, statements of income and loss, statements of cash flow
and statements of shareholders' equity), and the accompanying notes thereto, all
in reasonable detail, fairly presenting in all material respects the financial
position and the results of the operations of HMG Worldwide and its subsidiaries
as of the end of and for such fiscal year, together with, as such audited
financial statements, the unqualified report of independent certified public
accountants, which accountants shall be an independent accounting firm selected
by Borrowers and reasonably acceptable to Lender (it being agreed by Lender
that, as of the date hereof, Friedman, Alpren & Green is acceptable to Lender),
that such consolidated financial statements have been prepared in accordance
with GAAP, and present fairly in all material respects the results of operations
and financial condition of HMG Worldwide and its subsidiaries as of the end of
and for the fiscal year then ended.
(b) Each Borrower shall promptly notify Lender in writing of the
details of (i) any loss, damage, investigation, action, suit, proceeding or
claim relating to the Collateral or any other property which is security for the
Obligations having a value in excess of $25,000 or which would result in any
material adverse change in such Borrower's business, properties, assets,
goodwill or condition, financial or otherwise and (ii) the occurrence of any
Event of Default or event which, with the passage of time or giving of notice or
both, would constitute an Event of Default.
(c) HMG Worldwide shall promptly after the sending or filing
thereof furnish or cause to be furnished to Lender copies of all reports which
HMG Worldwide sends to its stockholders generally and copies of all reports and
registration statements which any Borrower files with the Securities and
Exchange Commission (including all reports on Forms 8-K, 10-K and 10-Q), any
national securities exchange or the National Association of Securities Dealers,
Inc.
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(d) Borrowers shall furnish or cause to be furnished to Lender
such budgets, forecasts, projections and other information respecting the
Collateral and the business of Borrowers, as Lender may, from time to time,
reasonably request. Lender is hereby authorized to deliver a copy of any
financial statement or any other information relating to the business of
Borrowers to any court or other government agency or to any participant or
assignee or prospective participant or assignee. Borrowers hereby irrevocably
authorize and direct all accountants or auditors to deliver to Lender, at
Borrowers' expense, copies of the financial statements of Borrowers and any
reports or management letters prepared by such accountants or auditors on behalf
of Borrowers and to disclose to Lender such information as they may have
regarding the business of Borrowers. Any documents, schedules, invoices or other
papers delivered to Lender may be destroyed or otherwise disposed of by Lender
one (1) year after the same are delivered to Lender, except as otherwise
designated by Borrowers to Lender in writing.
9.7 Sale of Assets, Consolidation, Merger, Dissolution, Etc. No Borrower
shall, directly or indirectly, (a) merge into or with or consolidate with any
other Person or permit any other Person to merge into or with or consolidate
with it, or (b) sell, assign, lease, transfer, abandon or otherwise dispose of
any stock or indebtedness to any other Person or any of its assets to any other
Person (except for (i) sales of Inventory in the ordinary course of business,
(ii) sales or other dispositions of Inventory samples and other items of
inventory not saleable in the ordinary course of business, provided, that, the
Value of such Inventory so sold by all Borrowers on a combined basis does not
exceed $150,000 in the aggregate in any one fiscal year, (iii) the disposition
of worn-out or obsolete Equipment or Equipment no longer used in the business of
such Borrower so long as (A) all proceeds are paid to Lender and (B) such sales
do not involve Equipment having an aggregate fair market value in excess of
$20,000 for all such Equipment disposed of in any fiscal year of Borrowers, (iv)
trade-ins and other exchanges of telephone and other office equipment in
exchange for similar equipment having a fair market value greater than such
equipment exchanged), or (c) form or acquire any subsidiaries, or (d) wind up,
liquidate or dissolve or (e) agree to do any of the foregoing.
9.8 Encumbrances. No Borrower shall create, incur, assume or suffer to
exist any security interest, mortgage, pledge, lien, charge or other encumbrance
of any nature whatsoever on any of its assets or properties, including the
Collateral, except: (a) liens and security interests in favor of Lender; (b)
liens securing the payment of taxes, either not yet overdue or the validity of
which are being contested in good faith by appropriate proceedings diligently
pursued and available to such Borrower and with respect to which adequate
reserves have been set aside on its books and Availability Reserves have been
established if required by Lender hereunder in the amount of such taxes plus
interest and possible penalties thereon; (c) non-consensual statutory liens
(other than liens securing the payment of taxes) arising in the ordinary course
of such Borrower's business to the extent: (i) such liens secure indebtedness
which is not overdue or (ii) such liens secure indebtedness relating to claims
or liabilities which are fully
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insured and being defended at the sole cost and expense and at the sole risk of
the insurer or being contested in good faith by appropriate proceedings
diligently pursued and available to such Borrower, in each case prior to the
commencement of foreclosure or other similar proceedings and with respect to
which adequate reserves have been set aside on its books; (d) subject to the
provisions of the Mortgages, zoning restrictions, easements, licenses, covenants
and other restrictions affecting the use of Real Property which do not interfere
in any material respect with the use of such Real Property or ordinary conduct
of the business of Borrower as presently conducted thereon or materially impair
the value of the Real Property which may be subject thereto; (e) purchase money
security interests in Equipment (including capital leases) not to exceed $50,000
in the aggregate at any time outstanding so long as such security interests do
not apply to any property of Borrowers other than the Equipment so acquired, and
the indebtedness secured thereby does not exceed the cost of the Equipment so
acquired; (f) a mortgage lien granted by HMG Manufacturing upon only the Real
Property located at 234 South 8th Street, Reading, Pennsylvania in favor of a
financial institution or government agency to secure permitted indebtedness set
forth in Section 9.9(f) hereof, provided, that, Lender receives a written
agreement, in form and substance satisfactory to Lender, from such lender
permitting Lender, without charge, access to and the right to remain on such
Real Property for a period of not less than one hundred twenty (120) days after
notice from such lender directing removal of Collateral located on such Real
Property, which notice is given following acceleration of the indebtedness
secured by such mortgage lien; (g) a mortgage lien, subordinate in priority to
the liens of Lender, granted by HMG Manufacturing upon only the Eligible
Additional Real Property to secure subordinated indebtedness under certain of
the PIDA Loans, to the extent permitted under Section 9.9(g) hereof; provided,
that, Lender receives a written subordination and intercreditor agreement and a
subordination instrument, in recordable form, all in form and substance
satisfactory to Lender, as further described in Section 9.9(g) hereof; and (h)
the security interests and liens set forth on Schedule 8.4 hereto.
9.9 Indebtedness. No Borrower shall incur, create, assume, become or be
liable in any manner with respect to, or permit to exist, any obligations or
indebtedness, except:
(a) the Obligations;
(b) trade obligations and normal accruals in the ordinary course
of business not yet due and payable, or with respect to which any Borrower is
contesting in good faith the amount or validity thereof by appropriate
proceedings diligently pursued and available to such Borrower and with respect
to which adequate reserves have been set aside on its books;
(c) purchase money indebtedness (including capital leases) to the
extent not incurred or secured by liens (including capital leases) in violation
of any other provision of this Agreement;
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(d) obligations or indebtedness of one Borrower to another
Borrower (other than HMG Worldwide) for (i) inventory purchases, overhead
allocations and other trade obligations and related intercompany accounts, in
the ordinary course of business consistent with past practices and subject to
the provisions of Section 9.12 hereof and in accordance with the Requirements
Agreement referred to in Section 9.12 hereof and (ii) short term loans and
advances in the ordinary course of business consistent with past practices in
the aggregate amount not to exceed, at any time outstanding, for all Borrowers
on a combined basis, the amount of $250,000; provided, that, in each case under
clause (ii), as of the date of such incurrence of debt, no Event of Default, or
condition or event which, with notice or passage of time, or both, would
constitute an Event of Default, shall exist or have occurred and be continuing;
(e) unsecured indebtedness of Borrowers for borrowed money
incurred after the date hereof, which indebtedness is subject and subordinate in
right of payment to the right of Lender to receive the prior indefeasible
payment and satisfaction in full payment of all of the Obligations; provided,
that, (i) Lender shall have received not less than thirty (30) days prior
written notice of the intention to incur such indebtedness, which notice shall
set forth in reasonable detail satisfactory to Lender, the amount of such
indebtedness, the person or persons to whom such indebtedness will be owed, the
interest rate, the schedule of repayments and maturity date with respect thereto
and such other information as Lender may reasonably request with respect
thereto, (ii) Lender shall have received true, correct and complete copies of
all agreements, documents and instruments evidencing or otherwise related to
such indebtedness, (iii) after giving effect to the incurrence of such
indebtedness, no Event of Default or condition or event which, with the passage
of time, or both, would constitute an Event of Default, shall exist or have
occurred and be continuing, (iv) such indebtedness shall be incurred by
Borrowers at commercially reasonable rates and terms in an arm's length
transaction, and if such borrowing is from an affiliate of Borrowers, then at
rates and on terms no less favorable to Borrowers than Borrowers would obtain in
a comparable arm's length transaction with a person who is not an affiliate, (v)
such indebtedness shall not at any time include terms and conditions which in
any manner adversely affect Lender or any rights of Lender as determined in good
faith by Lender, (vi) the terms of such indebtedness, upon which Lender shall
expressly be permitted to rely, shall only require regularly scheduled payments
of principal and interest in respect of such indebtedness, and shall only
require such payments to be made or accepted so long as (A) no Event of Default
or condition or event which, with notice or passage of time, or both, would
constitute an Event of Default shall exist or have occurred and be continuing
and (B) Borrower shall have Excess Availability of at least $700,000 at all
times during the thirty (30) day period immediately prior to any such payment
and immediately after giving effect thereto, (vii) Borrowers shall not, directly
or indirectly, (A) amend, modify, alter or change the terms of such indebtedness
or any agreement, document or instrument related thereto in any material
respect, or (B) redeem, retire, defease, purchase or otherwise acquire such
indebtedness, or set aside or otherwise deposit or invest any sums
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for such purpose, except to convert such indebtedness into common stock of
Borrowers (subject, nevertheless, to Section 10.1(j) hereof) and (viii)
Borrowers shall furnish to Lender all notices or demands in connection with such
indebtedness either received by a Borrower or on its behalf, promptly after the
receipt thereof, or sent by a Borrower or on its behalf, concurrently with the
sending thereof, as the case may be;
(f) indebtedness of HMG Manufacturing incurred after the date
hereof for money borrowed from a financial institution or government agency in
an amount not to exceed the principal amount of $600,000, secured only by the
Real Property located at 234 South 8th Street, Reading, Pennsylvania to the
extent such mortgage lien is permitted pursuant to Section 9.8(f), provided,
that, (i) Lender shall have received not less than thirty (30) days prior
written notice of the intention to incur such indebtedness, which notice shall
set forth in reasonable detail satisfactory to Lender, the amount of such
indebtedness, the person or persons to whom such indebtedness will be owed, the
interest rate, the schedule of repayments and maturity date with respect thereto
and such other information as Lender may reasonably request with respect
thereto, (ii) Lender shall have received true, correct and complete copies of
all agreements, documents and instruments evidencing or otherwise related to
such indebtedness, (iii) after giving effect to the incurrence of such
indebtedness, no Event of Default, or condition or event which with the passage
of time or both would constitute an Event of Default, shall exist or have
occurred and be continuing, (iv) such indebtedness shall be incurred by HMG
Manufacturing at commercially reasonable rates and terms of repayment (which
Lender hereby agrees would include rates of three and three quarters (3.75%)
percent per annum and monthly amortization in equal installments over fifteen
(15) years), (v) such indebtedness shall not at any time include terms and
conditions which in any manner adversely affect Lender or any rights of Lender
as determined in good faith by Lender (except that such terms shall require the
subordination of Lender's lien upon such Real Property to the extent provided in
Section 5.2 hereof), (vi) Borrowers shall not, directly or indirectly, (A)
amend, modify, alter or change the terms of such indebtedness or any agreement,
document or instrument related thereto in any material respect, or (B) redeem,
retire, defease, purchase or otherwise acquire such indebtedness, or set aside
or otherwise deposit or invest any sums for such purpose, (vii) Borrowers shall
furnish to Lender all notices or demands in connection with such indebtedness
either received by a Borrower or on its behalf, promptly after the receipt
thereof, or sent by a Borrower or on its behalf, concurrently with the sending
thereof, as the case may be;
(g) unsecured indebtedness of HMG Manufacturing under the PIDA
Loans, other than those PIDA Loans described in Section 9.9(f) hereof, which
indebtedness is subordinate in right of payment to the right of Lender to
receive full and indefeasible payment of the Obligations; provided, that: (i)
HMG Manufacturing shall not, directly or indirectly, make any payments in
respect of such indebtedness, including, but not limited to, any prepayments or
other non-mandatory payments, except that until an Event of Default, or event
which with notice or passage of time or both would constitute an Event of
Default, shall exist or have occurred
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and be continuing, HMG Manufacturing may make regularly scheduled payments of
principal and interest at commercially reasonable rates and terms in accordance
with the terms of such agreement or instrument as in effect on the date of
execution or issuance thereof, (ii) HMG Manufacturing shall not, directly or
indirectly, (A) amend, modify, alter or change any terms of such indebtedness or
any agreement, document or instrument related thereto, or (B) redeem, retire,
defease, purchase or otherwise acquire such indebtedness, or set aside or
otherwise deposit or invest any sums for such purpose, (iii) HMG Manufacturing
shall furnish to Lender all notices, demands or other materials concerning such
indebtedness either received by HMG Manufacturing or on its behalf, promptly
after receipt thereof, or sent by HMG Manufacturing or on its behalf,
concurrently with the sending thereof, as the case may be, and (iv) Lender shall
have entered into an intercreditor and subordination agreement, in form and
substance satisfactory to Lender, with the holder(s) of such indebtedness and
PIDA providing for among other things (A) the subordination of the indebtedness
of HMG Manufacturing described in this Section 9.9(g), (B) the absolute and
unconditional subordination in favor of Lender of the mortgage lien upon the
Eligible Additional Real Property securing such indebtedness under the PIDA
Loans, (C) restrictions on enforcement actions with respect to such subordinate
indebtedness and subordinate mortgage lien, (D) release provisions requiring
such mortgage lien to be released in the event the Eligible Additional Real
Property is to be sold or otherwise disposed of by Lender or by HMG
Manufacturing with the consent of Lender, and (E) other provisions for the
protection of the security interests and liens of Lender in the Collateral; and
(h) the indebtedness set forth on Schedule 9.9 hereto; provided,
that, (i) the applicable Borrowers indebted thereon may only make regularly
scheduled payments of principal and interest in respect of such indebtedness in
accordance with the terms of the agreement or instrument evidencing or giving
rise to such indebtedness as in effect on the date hereof, (ii) Borrowers shall
not, directly or indirectly, (A) amend, modify, alter or change the terms of
such indebtedness or any agreement, document or instrument related thereto as in
effect on the date hereof, or (B) redeem, retire, defease, purchase or otherwise
acquire such indebtedness, or set aside or otherwise deposit or invest any sums
for such purpose, and (iii) Borrowers shall furnish to Lender all notices or
demands in connection with such indebtedness either received by a Borrower or on
its behalf, promptly after the receipt thereof, or sent by a Borrower or on its
behalf, concurrently with the sending thereof, as the case may be.
9.10 Loans, Investments, Guarantees, Etc. No Borrower shall, directly or
indirectly, make any loans or advance money or property to any person, or invest
in (by capital contribution, dividend or otherwise) or purchase or repurchase
the stock or indebtedness or all or a substantial part of the assets or property
of any person, or guarantee, assume, endorse, or otherwise become responsible
for (directly or indirectly) the indebtedness, performance, obligations or
dividends of any Person or agree to do any of the foregoing, except: (a) the
endorsement of instruments for collection or deposit in the ordinary course of
business; (b) investments in Cash Equivalents; provided, that, as to any of the
foregoing, unless
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waived in writing by Lender, Borrowers shall take such actions as are deemed
necessary by Lender to perfect the security interest of Lender in such
investments, including with respect to the Custodial Account as provided herein;
(c) loans and advances by one Borrower to another Borrower constituting
permitted indebtedness of the recipient Borrower under Section 9.9 hereof; (d)
investments by HMG Worldwide in and advances to HMG Europe, B.V. in an amount
not to exceed $200,000 to cover costs and expenses incurred by HMG Europe, B.V.
in connection with winding down its business operations; (e) investments by HMG
Worldwide in and advances to Creative Displays, Inc. in an amount not to exceed
$30,000 per month to cover real property lease obligations of Creative Displays,
Inc. through July 31, 1997; (f) advance payments (including commissions) to
providers of goods and services to a Borrower in the ordinary course of such
Borrower's business and subject to the terms and conditions set forth in Section
9.12 hereof; and (g) the existing loans, advances and guarantees set forth on
Schedule 9.10 hereto; provided, that, as to such loans, advances and guarantees
identified on Schedule 9.10, (i) Borrowers shall not, directly or indirectly,
(A) increase the principal amount of such loans from the amounts set forth on
Schedule 9.10, reduce the interest rates applicable to such loans, or forgive or
cancel any indebtedness in respect of such loans, or (B) as to matters not
covered by clause (A), after an Event of Default that is continuing or condition
or event which with notice or passage of time or both would constitute an Event
of Default, amend, modify, alter or change the terms of such loans, advances or
guarantees or any agreement, document or instrument related thereto, or (C) as
to such guarantees, redeem, retire, defease, purchase or otherwise acquire the
obligations arising pursuant to such guarantees (other than in accordance with
the terms of such instruments), or set aside or otherwise deposit or invest any
sums for such purpose, and (ii) Borrowers shall furnish to Lender all notices,
demands or other material in connection with such loans, advances or guarantees
or other indebtedness subject to such guarantees either received by a Borrower
or on its behalf, promptly after the receipt thereof, or sent by a Borrower or
on its behalf, concurrently with the sending thereof, as the case may be.
9.11 Dividends and Redemptions. No Borrower shall, directly or
indirectly, declare or pay any dividends on account of any shares of class of
capital stock of any Borrower now or hereafter outstanding, or set aside or
otherwise deposit or invest any sums for such purpose, or redeem, retire,
defease, purchase or otherwise acquire any shares of any class of capital stock
(or set aside or otherwise deposit or invest any sums for such purpose) for any
consideration other than common stock or apply or set apart any sum, or make any
other distribution (by reduction of capital or otherwise) in respect of any such
shares or agree to do any of the foregoing.
9.12 Transactions with Affiliates. No Borrower shall, directly or
indirectly, (a) purchase, acquire or lease any property from, or sell, transfer
or lease any property to, any officer, director, agent or any other affiliate of
such Borrower, except for sales of finished goods Inventory to HMG In-Store by
HMG Manufacturing or Intermark in the ordinary course of and pursuant to the
reasonable requirements of such Borrower's business for fair consideration and
upon commercially reasonable terms and in
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accordance with the Requirements Agreement, dated of even date herewith, between
HMG In-Store and HMG Manufacturing (as in effect on the date hereof), or (b)
make any payments of management, consulting or other fees for management or
similar services, or of any indebtedness owing to any officer, employee,
shareholder, director or other person affiliated with such Borrower except (i)
repayments of short term loans and advances by one Borrower to another Borrower
otherwise permitted hereunder, (ii) reasonable compensation to officers,
employees and directors for services rendered to Borrower in the ordinary course
of business, and (iii) payments of reasonable fees and expenses for legal
services or financial advisory services rendered to Borrowers by an affiliated
law or financial advisory firm (as the case may be) of any director of any
Borrower, (iv) payments by one Borrower (other than HMG Worldwide) to HMG
Worldwide for corporate overhead allocations of legal, audit, insurance and
other like expenses, incurred in the ordinary course of business for the benefit
of the other Borrowers, in the aggregate not to exceed, for all Borrowers, other
than HMG Worldwide, the amount of $1,000,000 for all such payments in any one
fiscal year of Borrowers; provided, that, as of the date of each such payment,
no Event of Default, or condition or event which, with notice or passage of
time, or both, would constitute an Event of Default, shall exist or have
occurred and be continuing.
9.13 Custodial Account; Additional Bank Accounts.
(a) HMG Worldwide shall at all times maintain the Custodial
Account and Custodial Account Agreement in full force and effect.
(b) No Borrower shall, directly or indirectly, open, establish or
maintain any deposit account, investment account or any other account with any
bank or other financial institution, other than the Blocked Accounts and the
accounts set forth in Schedule 8.8 hereto, except: (c) as to any new or
additional Blocked Accounts and other such new or additional accounts which
contain any Collateral or proceeds thereof, with the prior written consent of
Lender and subject to such conditions thereto as Lender may establish and (d) as
to any accounts used by Borrowers to make payments of payroll, taxes or other
obligations to third parties, after prior written notice to Lender.
9.14 Compliance with ERISA. Borrowers shall not, with respect to any
"employee benefit plans" maintained by Borrower or any of its ERISA Affiliates:
(a) (i) terminate any of such employee benefit plans so as to
incur any liability to the Pension Benefit Guaranty Corporation established
pursuant to ERISA, (ii) allow or suffer to exist any prohibited transaction
involving any of such employee benefit plans or any trust created thereunder
which would subject Borrowers or such ERISA Affiliate to a tax or penalty or
other liability on prohibited transactions imposed under Section 4975 of the
Code or ERISA, (iii) fail to pay to any such employee benefit plan any
contribution which it is obligated to pay under Section 302 of ERISA, Section
412 of the Code or the terms of such plan, (iv) except as set forth on Schedule
8.10 hereto, allow or suffer to exist any accumulated funding deficiency,
whether or not waived,
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with respect to any such employee benefit plan, (v) except as set forth on
Schedule 8.10 hereto, allow or suffer to exist any occurrence of a reportable
event or any other event or condition which presents a material risk of
termination by the Pension Benefit Guaranty Corporation of any such employee
benefit plan that is a single employer plan, which termination could result in
any liability to the Pension Benefit Guaranty Corporation or (vi) incur any
withdrawal liability with respect to any multiemployer plan.
(b) As used in this Section 9.14, the terms "employee benefit
plans", "accumulated funding deficiency" and "reportable event" shall have the
respective meanings assigned to them in ERISA, and the term "prohibited
transaction" shall have the meaning assigned to it in Section 4975 of the Code
and ERISA.
9.15 Tangible Net Worth. Borrowers shall, at all times, during each of
the respective periods set forth in the table below, maintain Tangible Net Worth
in an amount not less than the dollar amount set forth below for such period:
Amount Period
(a) negative $600,000 from the date hereof to
and including May 31,
1997
(b) $0 from June 1, 1997 to and
including November 30,
1997
(c) $250,000 from December 1, 1997 and
at all times thereafter
9.16 Costs and Expenses. Borrowers shall pay to Lender on demand all
costs, expenses, filing fees and taxes paid or payable in connection with the
preparation, negotiation, execution, delivery, recording, administration,
collection, liquidation, enforcement and defense of the Obligations, Lender's
rights in the Collateral, this Agreement, the other Financing Agreements and all
other documents related hereto or thereto, including any amendments, supplements
or consents which may hereafter be contemplated (whether or not executed) or
entered into in respect hereof and thereof, including: (a) all costs and
expenses of filing or recording (including Uniform Commercial Code financing
statement filing taxes and fees, documentary taxes, intangibles taxes and
mortgage recording taxes and fees, if applicable); (b) costs and expenses and
fees for title insurance (if applicable) and other insurance premiums,
environmental audits, surveys, assessments, engineering reports and inspections,
appraisal fees and search fees; (c) costs and expenses of remitting loan
proceeds, collecting checks and other items of payment, and establishing and
maintaining the Blocked Accounts, together with Lender's customary charges and
fees with respect thereto; (d) charges, fees or expenses charged by any bank or
issuer in connection with the Letter of Credit Accommodations; (e) costs and
expenses of preserving and protecting the Collateral; (f) costs and expenses
paid or incurred in connection with obtaining payment of the Obligations,
enforcing the security interests and liens of Lender,
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selling or otherwise realizing upon the Collateral, and otherwise enforcing the
provisions of this Agreement and the other Financing Agreements or defending any
claims made or threatened against Lender arising out of the transactions
contemplated hereby and thereby (including preparations for and consultations
concerning any such matters); (g) all out-of-pocket expenses and costs heret
ofore and from time to time hereafter incurred by Lender during the course of
periodic field examinations of the Collateral and Borrowers' operations, plus a
per diem charge at the rate of $600 per person per day for Lender's examiners in
the field and office; and (h) the fees and disbursements of counsel (including
legal assistants) to Lender in connection with any of the foregoing.
9.17 Further Assurances. At the request of Lender at any time and from
time to time, Borrowers shall, at Borrowers' expense, duly execute and deliver,
or cause to be duly executed and delivered, such further agreements, documents
and instruments, and do or cause to be done such further acts as may be
necessary or proper to evidence, perfect, maintain and enforce the security
interests and the priority thereof in the Collateral and to otherwise effectuate
the provisions or purposes of this Agreement or any of the other Financing
Agreements. Lender may at any time and from time to time request a certificate
from an officer of each Borrower representing that all conditions precedent to
the making of Loans and providing Letter of Credit Accommodations contained
herein are satisfied. In the event of such request by Lender, Lender may, at its
option, cease to make any further Loans or provide any further Letter of Credit
Accommodations until Lender has received such certificate and, in addition,
Lender has determined that such conditions are satisfied. Where permitted by
law, each Borrower hereby authorizes Lender to execute and file one or more UCC
financing statements signed only by Lender.
SECTION 10. EVENTS OF DEFAULT AND REMEDIES
10.1 Events of Default. The occurrence or existence of any one or more of
the following events are referred to herein individually as an "Event of
Default", and collectively as "Events of Default":
(a) any Borrower fails (i) to pay when due any of the Obligations
or fails to perform any of the terms, covenants, conditions or provisions
contained in this Agreement or any of the other Financing Agreements or (ii) to
perform any of the terms, covenants, conditions or provisions contained in this
Agreement or any of the other Financing Agreements other than as described in
Section 10.1(a)(i) and such failure shall continue for ten (10) days; provided,
that, such ten (10) day period shall not apply in the case of: (A) any failure
to observe any such term, covenant, condition or provision which is not capable
of being cured at all or within such ten (10) day period or which has been the
subject of a prior failure within a six (6) month period or (B) an intentional
breach by Borrower of any such term, covenant, condition or provision, or (C)
the failure to observe or perform any of the covenants or provisions contained
in Sections 6.3, 7.1, 7.2, 7.3, 7.4, 7.7, 9.1, 9.2, 9.4, 9.5, 9.7, 9.8, 9.9,
9.10, 9.11, 9.12, 9.13, 9.14 or 9.15 of this Agreement or any covenants or
agreements
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<PAGE>
covering substantially the same matter as such sections in any of
the other Financing Agreements;
(b) any representation, warranty or statement of fact made by any
Borrower to Lender in this Agreement, the other Financing Agreements or any
other agreement, schedule, confirmatory assignment or otherwise shall when made
or deemed made be false or misleading in any material respect;
(c) any Obligor revokes, terminates or fails to perform any of
the terms, covenants, conditions or provisions of any guarantee, endorsement or
other agreement of such party in favor of Lender;
(d) any judgment for the payment of money is rendered against any
Borrower or any Obligor in excess of $50,000 in any one case or in excess of
$100,000 in the aggregate and shall remain undischarged or unvacated for a
period in excess of forty-five (45) days or execution shall at any time not be
effectively stayed, or any judgment other than for the payment of money, or
injunction, attachment, garnishment or execution is rendered against any
Borrower or any Obligor or any of their assets;
(e) any Obligor (being a natural person or a general partner of an Obligor
which is a partnership) dies or any Borrower or any Obligor, which is a
partnership, limited liability company, limited liability partnership or a
corporation, dissolves (other than Electronic Voting Systems Inc. and Creative
Displays, Inc.) or suspends or discontinues doing business;
(f) any Borrower or any Obligor becomes insolvent (however
defined or evidenced), makes an assignment for the benefit of creditors, makes
or sends notice of a bulk transfer or calls a meeting of its creditors or
principal creditors;
(g) a case or proceeding under the bankruptcy laws of the United
States of America now or hereafter in effect or under any insolvency,
reorganization, receivership, readjustment of debt, dissolution or liquidation
law or statute of any jurisdiction now or hereafter in effect (whether at law or
in equity) is filed against any Borrower or any Obligor or all or any part of
its properties and such petition or application is not dismissed within thirty
(30) days after the date of its filing or any Borrower or any Obligor shall file
any answer admitting or not contesting such petition or application or indicates
its consent to, acquiescence in or approval of, any such action or proceeding or
the relief requested is granted sooner;
(h) a case or proceeding under the bankruptcy laws of the United
States of America now or hereafter in effect or under any insolvency,
reorganization, receivership, readjustment of debt, dissolution or liquidation
law or statute of any jurisdiction now or hereafter in effect (whether at a law
or equity) is filed by any Borrower or any Obligor or for all or any part of its
property; or
(i) any default by any Borrower or any Obligor under any
agreement, document or instrument relating to any indebtedness for borrowed
money owing to any person other than Lender, or any
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capitalized lease obligations, contingent indebtedness in connection with any
guarantee, letter of credit, indemnity or similar type of instrument in favor of
any person other than Lender, in any case in an amount in excess of $50,000,
which default continues for more than the applicable cure period, if any, with
respect thereto, or any default by any Borrower or any Obligor under any
material contract, lease, license or other obligation to any person other than
Lender, which default continues for more than the applicable cure period, if
any, with respect thereto;
(j) any change in the controlling ownership of any
Borrower (other than HMG Worldwide);
(k) the indictment or threatened indictment of any Borrower or
any Obligor under any criminal statute, or commencement or threatened
commencement of criminal or civil proceedings against any Borrower or any
Obligor, pursuant to which statute or proceedings the penalties or remedies
sought or available include forfeiture of any of the property of such Borrower
or such Obligor having a value in excess of $50,000;
(l) there shall be a material adverse change in the business,
assets or prospects of HMG Worldwide and its subsidiaries taken as a whole after
the date hereof; or
(m) there shall be an event of default under any of the
other Financing Agreements.
10.2 Remedies.
(a) At any time an Event of Default exists or has occurred and is
continuing, Lender shall have all rights and remedies provided in this
Agreement, the other Financing Agreements, the Uniform Commercial Code and other
applicable law, all of which rights and remedies may be exercised without notice
to or consent by any Borrower or any Obligor, except as such notice or consent
is expressly provided for hereunder or required by applicable law. All rights,
remedies and powers granted to Lender hereunder, under any of the other
Financing Agreements, the Uniform Commercial Code or other applicable law, are
cumulative, not exclusive and enforceable, in Lender's discretion,
alternatively, successively, or concurrently on any one or more occasions, and
shall include, without limitation, the right to apply to a court of equity for
an injunction to restrain a breach or threatened breach by any Borrower of this
Agreement or any of the other Financing Agreements. Lender may, at any time or
times, proceed directly against any Borrower or any Obligor to collect the
Obligations without prior recourse to the Collateral.
(b) Without limiting the foregoing, at any time an Event of
Default exists or has occurred and is continuing, Lender may, in its discretion
and without limitation, (i) accelerate the payment of all Obligations and demand
immediate payment thereof to Lender (provided, that, upon the occurrence of any
Event of Default described in Sections 10.1(g) and 10.1(h), all Obligations
shall automatically become immediately due and payable), (ii) with or without
judicial process or the aid or assistance of others, enter upon any premises on
or in which any of the Collateral may be
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located and take possession of the Collateral or complete processing,
manufacturing and repair of all or any portion of the Collateral, (iii) require
Borrowers, at Borrowers' expense, to assemble and make available to Lender any
part or all of the Collateral at any place and time designated by Lender, (iv)
collect, foreclose, receive, appropriate, setoff and realize upon any and all
Collateral, (v) remove any or all of the Collateral from any premises on or in
which the same may be located for the purpose of effecting the sale, foreclosure
or other disposition thereof or for any other purpose, (vi) sell, lease,
transfer, assign, deliver or otherwise dispose of any and all Collateral
(including entering into contracts with respect thereto, public or private sales
at any exchange, broker's board, at any office of Lender or elsewhere) at such
prices or terms as Lender may deem reasonable, for cash, upon credit or for
future delivery, with the Lender having the right to purchase the whole or any
part of the Collateral at any such public sale, all of the foregoing being free
from any right or equity of redemption of any Borrower, which right or equity of
redemption is hereby expressly waived and released by each Borrower and/or (vii)
terminate this Agreement. If any of the Collateral is sold or leased by Lender
upon credit terms or for future delivery, the Obligations shall not be reduced
as a result thereof until payment therefor is finally collected by Lender. If
notice of disposition of Collateral is required by law, five (5) days prior
notice by Lender to Borrowers designating the time and place of any public sale
or the time after which any private sale or other intended disposition of
Collateral is to be made, shall be deemed to be reasonable notice thereof to
Borrowers and each Borrower waives any other notice. In the event Lender
institutes an action to recover any Collateral or seeks recovery of any
Collateral by way of prejudgment remedy, each Borrower waives the posting of any
bond which might otherwise be required.
(c) Lender may apply the cash proceeds of Collateral actually
received by Lender from any sale, lease, foreclosure or other disposition of the
Collateral to payment of the Obligations, in whole or in part and in such order
as Lender may elect, whether or not then due. Each Borrower shall remain liable
to Lender for the payment of any deficiency with interest at the highest rate
provided for herein and all costs and expenses of collection or enforcement,
including attorneys' fees and legal expenses.
(d) Without limiting the foregoing, upon the occurrence of an
Event of Default or an event which with notice or passage of time or both would
constitute an Event of Default, Lender may, at its option, without notice, (i)
cease making Loans or arranging for Letter of Credit Accommodations or reduce
the lending formulas or amounts of Revolving Loans and Letter of Credit
Accommodations available to Borrowers and/or (ii) terminate any provision of
this Agreement providing for any future Loans or Letter of Credit Accommodations
to be made by Lender to Borrowers.
10.3 CONFESSION OF JUDGMENT AND WAIVERS.
(a) EACH BORROWER, TO THE EXTENT PERMITTED BY LAW, AND WITHOUT
THE FURTHER CONSENT OF OR NOTICE TO SUCH BORROWER, HEREBY IRREVOCABLY AND
UNCONDITIONALLY AUTHORIZES THE PROTHONOTARY, CLERK OF COURT, OR ANY ATTORNEY OF
ANY COURT OF RECORD IN THE
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COMMONWEALTH OF PENNSYLVANIA, OR ANY OTHER JURISDICTIONS, AS ATTORNEY FOR SUCH
BORROWER, TO APPEAR FOR SUCH BORROWER IN SUCH COURT AND CONFESS JUDGMENT AGAINST
SUCH BORROWER IN FAVOR OF LENDER, AND ITS SUCCESSORS AND ASSIGNS, AT ANY TIME
FOLLOWING THE OCCURRENCE OF AN EVENT OF DEFAULT, FOR ALL OR ANY PORTION OF THE
UNPAID PRINCIPAL BALANCE, UNPAID AND CONTINUING INTEREST, COSTS AND EXPENSES
(INCLUDING WITHOUT LIMITATION ATTORNEYS' FEES NOT TO EXCEED 10% OF THE UNPAID
PRINCIPAL BALANCE), AND ALL OTHER OBLIGATIONS UNDER THIS AGREEMENT, FOR WHICH A
VERIFIED COPY HEREOF SHALL BE SUFFICIENT WARRANT. THE AUTHORITY TO ENTER
JUDGMENT SHALL NOT BE EXHAUSTED BY ONE EXERCISE HEREOF, BUT, TO THE EXTENT
PERMITTED BY LAW, SHALL CONTINUE FROM TIME TO TIME UNTIL FULL PAYMENT OF ALL
OBLIGATIONS UNDER THIS AGREEMENT AND UNTIL THIS AGREEMENT HAS BEEN TERMINATED.
THE FOREGOING RIGHT AND REMEDY IS IN ADDITION TO AND NOT IN LIEU OF ANY OTHER
RIGHT OR REMEDY AVAILABLE TO LENDER UNDER THIS AGREEMENT OR OTHERWISE.
(b) EACH BORROWER, BEING FULLY AWARE OF ITS RIGHT TO NOTICE AND A
HEARING CONCERNING THE VALIDITY OF ANY AND ALL CLAIMS THAT MAY BE ASSERTED
AGAINST SUCH BORROWER BY LENDER BEFORE A JUDGMENT CAN BE ENTERED HEREUNDER OR
BEFORE EXECUTION MAY BE LEVIED ON SUCH JUDGMENT AGAINST ANY AND ALL PROPERTY OF
SUCH BORROWER, HEREBY WAIVES EACH OF THESE RIGHTS AND AGREES AND CONSENTS TO
JUDGMENT BEING ENTERED BY CONFESSION IN ACCORDANCE WITH THE TERMS HEREOF AND
EXECUTION BEING LEVIED ON SUCH JUDGMENT AGAINST ANY AND ALL PROPERTY OF SUCH
BORROWER, IN EACH CASE WITHOUT FIRST GIVING NOTICE AND THE OPPORTUNITY TO BE
HEARD ON THE VALIDITY OF THE CLAIM OR CLAIMS UPON WHICH SUCH JUDGMENT IS
ENTERED.
SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS
AND CONSENTS; GOVERNING LAW
11.1 Governing Law; Choice of Forum; Service of Process; Jury
Trial Waiver.
(a) The validity, interpretation and enforcement of this
Agreement and the other Financing Agreements and any dispute arising out of the
relationship between the parties hereto, whether in contract, tort, equity or
otherwise, shall be governed by the internal laws of the State of New York
(without giving effect to principles of conflicts of law), except with respect
to Section 10.3 hereof, and any other provision of any of the other Financing
Agreements providing for the right and remedy of confession of judgment, which
shall be governed by the laws of the Commonwealth of Pennsylvania.
(b) Each Borrower and Lender irrevocably consents and submits to
the non-exclusive jurisdiction of the Supreme Court of the State of New York,
County of New York and the United States District Court for the Southern
District of New York and waive any objection based on venue or forum non
conveniens with respect to any action instituted therein arising under this
Agreement or any of the other Financing Agreements or in any way connected with
or related or incidental to the dealings of the parties hereto in respect of
this Agreement or any of the other Financing Agreements or the transactions
related hereto or thereto, in each case whether now existing or hereafter
arising, and whether in contract, tort,
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equity or otherwise, and agrees that any dispute with respect to any such
matters shall be heard only in the courts described above (except that Lender
shall have the right to bring any action or proceeding against any Borrower or
its property in the courts of any other jurisdiction which Lender deems
necessary or appropriate in order to realize on the Collateral or to otherwise
enforce its rights against such Borrower or its property).
(c) Each Borrower hereby waives personal service of any and all
process upon it and consents that all such service of process may be made by
certified mail (return receipt requested) directed to its address set forth on
the signature pages hereof and service so made shall be deemed to be completed
five (5) days after the same shall have been so deposited in the U.S. mails, or,
at Lender's option, by service upon such Borrower in any other manner provided
under the rules of any such courts. Within thirty (30) days after such service,
such Borrowers shall appear in answer to such process, failing which Borrowers
shall be deemed in default and judgment may be entered by Lender against such
Borrower for the amount of the claim and other relief requested.
(d) EACH BORROWER AND LENDER HEREBY WAIVES ANY RIGHT TO TRIAL BY
JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (i) ARISING UNDER THIS
AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR (ii) IN ANY WAY CONNECTED
WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO IN RESPECT
OF THIS AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR THE TRANSACTIONS
RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER
ARISING, AND WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE. EACH BORROWER AND
LENDER HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE
OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT ANY BORROWER
OR LENDER MAY FILE AN ORIGINAL COUNTERPART OF A COPY OF THIS AGREEMENT WITH ANY
COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF
THEIR RIGHT TO TRIAL BY JURY.
(e) Lender shall not have any liability to any Borrower (whether
in tort, contract, equity or otherwise) for losses suffered by any Borrower in
connection with, arising out of, or in any way related to the transactions or
relationships contemplated by this Agreement, or any act, omission or event
occurring in connection herewith, unless it is determined by a final and
non-appealable judgment binding on Lender, that the losses were the result of
Lender's own acts or omissions constituting gross negligence or willful
misconduct. In any such litigation, Lender shall be entitled to the benefit of
the rebuttable presumption that it acted in good faith and with the exercise of
ordinary care in the performance by it of the terms of this Agreement.
11.2 Waiver of Notices. Each Borrower hereby expressly waives demand,
presentment, protest and notice of protest and notice of dishonor with respect
to any and all instruments and commercial paper, included in or evidencing any
of the Obligations or the Collateral, and any and all other demands and notices
of any kind or nature whatsoever with respect to the Obligations, the Collateral
and this Agreement, except such as are expressly provided for herein. No notice
to or demand on any Borrower which Lender may elect to give shall entitle any
Borrower to any other or
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<PAGE>
further notice or demand in the same, similar or other circumstances.
11.3 Amendments and Waivers. Neither this Agreement nor any provision
hereof shall be amended, modified, waived or discharged orally or by course of
conduct, but only by a written agreement signed by an authorized officer of
Lender. Lender shall not, by any act, delay, omission or otherwise be deemed to
have expressly or impliedly waived any of its rights, powers and/or remedies
unless such waiver shall be in writing and signed by an authorized officer of
Lender. Any such waiver shall be enforceable only to the extent specifically set
forth therein. A waiver by Lender of any right, power and/or remedy on any one
occasion shall not be construed as a bar to or waiver of any such right, power
and/or remedy which Lender would otherwise have on any future occasion, whether
similar in kind or otherwise.
11.4 Waiver of Counterclaims. Each Borrower waives all rights to
interpose any claims, deductions, setoffs or counterclaims of any nature (other
then compulsory counterclaims) in any action or proceeding with respect to this
Agreement, the Obligations, the Collateral or any matter arising therefrom or
relating hereto or thereto.
11.5 Indemnification. Borrowers shall indemnify and hold Lender, and its
directors, agents, employees and counsel, harmless from and against any and all
losses, claims, damages, liabilities, costs or expenses imposed on, incurred by
or asserted against any of them in connection with any litigation,
investigation, claim or proceeding commenced or threatened related to the
negotiation, preparation, execution, delivery, enforcement, performance or
administration of this Agreement, any other Financing Agreements, or any
undertaking or proceeding related to any of the transactions contemplated hereby
or any act, omission, event or transaction related or attendant thereto,
including amounts paid in settlement, court costs, and the fees and expenses of
counsel. To the extent that the undertaking to indemnify, pay and hold harmless
set forth in this Section may be unenforceable because it violates any law or
public policy, Borrowers shall pay the maximum portion which they are permitted
to pay under applicable law to Lender in satisfaction of indemnified matters
under this Section. The foregoing indemnity shall survive the payment of the
Obligations and the termination or non-renewal of this Agreement.
SECTION 12. TERM OF AGREEMENT; MISCELLANEOUS
12.1 Term.
(a) This Agreement and the other Financing Agreements shall
become effective as of the date set forth on the first page hereof and shall
continue in full force and effect for a term ending on the date three (3) years
from the date hereof (the "Renewal Date"), and from year to year thereafter,
unless sooner terminated pursuant to the terms hereof; provided, that, Lender
may, at its option, extend the Renewal Date to the date four (4) years from the
date hereof by giving HMG Worldwide notice at least sixty (60) days prior to the
third anniversary of this Agreement.
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<PAGE>
Lender or Borrowers (subject to Lender's right to extend the Renewal Date as
provided above) may terminate this Agreement and the other Financing Agreements
effective on the Renewal Date or on the anniversary of the Renewal Date in any
year by giving to the other party at least sixty (60) days prior written notice;
provided, that, this Agreement and all other Financing Agreements must be
terminated simultaneously. Upon the effective date of termination or non-renewal
of the Financing Agreements, Borrowers shall pay to Lender, in full, all
outstanding and unpaid Obligations and shall furnish cash collateral to Lender
in such amounts as Lender determines in good faith are reasonably necessary to
secure Lender from loss, cost, damage or expense, including attorneys' fees and
legal expenses, in connection with any contingent Obligations, including issued
and outstanding Letter of Credit Accommodations and checks or other payments
provisionally credited to the Obligations and/or as to which Lender has not yet
received final and indefeasible payment. Such payments and cash collateral shall
be remitted by wire transfer in Federal funds to such bank account of Lender, as
Lender may, in its discretion, designate in writing to Borrowers for such
purpose. Interest shall be due until and including the next business day, if the
amounts so paid by Borrowers to the bank account designated by Lender are
received in such bank account later than 12:00 noon, New York City time.
(b) No termination of this Agreement or the other Financing
Agreements shall relieve or discharge any Borrower of its respective duties,
obligations and covenants under this Agreement or the other Financing Agreements
until all Obligations have been fully and finally discharged and paid, and
Lender's continuing security interest in the Collateral and the rights and
remedies of Lender hereunder, under the other Financing Agreements and
applicable law, shall remain in effect until all such Obligations have been
fully and finally discharged and paid.
(c) If for any reason this Agreement is terminated by Lender by
reason of an Event of Default or at Borrowers' request, and such termination
becomes effective prior to the end of the then current term or renewal term of
this Agreement, in view of the impracticality and extreme difficulty of
ascertaining actual damages and by mutual agreement of the parties as to a
reasonable calculation of Lender's lost profits as a result thereof, Borrowers
agree to pay to Lender, upon the effective date of such termination, an early
termination fee in the amount set forth below if such termination is effective
in the period indicated:
Amount Period
(i) 3% of Maximum Credit From the date hereof to and
including November 21, 1997.
(ii) 2% of Maximum Credit From November 22, 1997 to and
including November 21, 1998.
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<PAGE>
(iii) .5% of Maximum Credit From November 22, 1998 to and
including May 21, 1999, unless
this Agreement is renewed or
extended for a fourth year, in
which case, from November 22,
1998 to and including May 21,
2000.
(iv) .25% of Maximum Credit From May 22, 1999 to and
including November 21, 1999,
unless this Agreement is renewed
or extended for a fourth year, in
which case, from May 22, 2000 to
and including November 21, 2000.
Such early termination fee shall be presumed to be the amount of damages
sustained by Lender as a result of such early termination and Borrowers agree
that it is reasonable under the circumstances currently existing. In addition,
and without limiting the foregoing, Lender shall be entitled to such early
termination fee upon the occurrence of any Event of Default described in
Sections 10.1(g) and 10.1(h) hereof, even if Lender does not exercise its right
to terminate this Agreement, but elects, at its option, to provide financing to
any Borrower or permit the use of cash collateral under the United States
Bankruptcy Code. The early termination fee provided for in this Section 12.1
shall be deemed included in the Obligations.
12.2 Notices. All notices, requests and demands hereunder shall be in
writing and (a) made to Lender at its address set forth below and to HMG
Worldwide, on behalf of each Borrower, at its chief executive office set forth
below to the attention of the Chief Operating Officer, or to such other address
as either party may designate by written notice to the other in accordance with
this provision, and (b) deemed to have been given or made: if delivered in
person, immediately upon delivery; if by telex, telegram or facsimile
transmission, immediately upon sending and upon confirmation of receipt; if by
nationally recognized overnight courier service with instructions to deliver the
next business day, one (1) business day after sending; and if by certified mail,
return receipt requested, five (5) days after mailing.
12.3 Partial Invalidity. If any provision of this Agreement is held to be
invalid or unenforceable, such invalidity or unenforceability shall not
invalidate this Agreement as a whole, but this Agreement shall be construed as
though it did not contain the particular provision held to be invalid or
unenforceable and the rights and obligations of the parties shall be construed
and enforced only to such extent as shall be permitted by applicable law.
12.4 Successors. This Agreement, the other Financing Agreements and any
other document referred to herein or therein shall be binding upon and inure to
the benefit of and be enforceable by Lender, Borrowers and their respective
successors and assigns, except that Borrowers may not assign their rights under
this Agreement, the other Financing Agreements and any other document referred
to herein or therein without the prior written
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<PAGE>
consent of Lender. Lender may, after notice to Borrowers, assign its rights and
delegate its obligations under this Agreement and the other Financing Agreements
and further may assign, or sell participations in, all or any part of the Loans,
the Letter of Credit Accommodations or any other interest herein to another
financial institution or other person, in which event, the assignee or
participant shall have, to the extent of such assignment or participation, the
same rights and benefits as it would have if it were the Lender hereunder,
except as otherwise provided by the terms of such assignment or participation.
12.5 Entire Agreement. This Agreement, the other Financing Agreements,
any supplements hereto or thereto, and any instruments or documents delivered or
to be delivered in connection herewith or therewith represents the entire
agreement and understanding concerning the subject matter hereof and thereof
between the parties hereto, and supersede all other prior agreements,
understandings, negotiations and discussions, representations, warranties,
commitments, proposals, offers and contracts concerning the subject matter
hereof, whether oral or written.
IN WITNESS WHEREOF, Lender and Borrowers have caused these presents to be
duly executed as of the day and year first above written.
LENDER: BORROWERS:
CONGRESS FINANCIAL CORPORATION HMG WORLDWIDE CORPORATION
By:___________________________ By:__________________________
Title:________________________ Title:_______________________
Address: Chief Executive Office:
1133 Avenue of the Americas 475 Tenth Avenue
New York, New York 10036 New York, New York 10018
[SIGNATURES CONTINUE ON FOLLOWING PAGE]
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<PAGE>
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
HMG WORLDWIDE IN-STORE
MARKETING, INC.
By:__________________________
Title:_______________________
Chief Executive Office:
475 Tenth Avenue
New York, New York 10018
HMG/INTERMARK WORLDWIDE
MANUFACTURING, INC.
By:__________________________
Title:_______________________
Chief Executive Office:
234 South Eighth Street
Reading, Pennsylvania 19603
INTERMARK CORP.
By:__________________________
Title:_______________________
Chief Executive Office:
475 Tenth Avenue
New York, New York 10018
S14\CONGRESS\HMG\LOANAGMT.Y12\cej
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<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000756680
<NAME> HMG Worldwide Corporation
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 6,950
<SECURITIES> 0
<RECEIVABLES> 7,031
<ALLOWANCES> 577
<INVENTORY> 4,214
<CURRENT-ASSETS> 17,953
<PP&E> 4,739
<DEPRECIATION> 1,390
<TOTAL-ASSETS> 28,755
<CURRENT-LIABILITIES> 21,189
<BONDS> 0
0
0
<COMMON> 81
<OTHER-SE> 5,110
<TOTAL-LIABILITY-AND-EQUITY> 28,755
<SALES> 45,552
<TOTAL-REVENUES> 45,552
<CGS> 37,589
<TOTAL-COSTS> 13,003
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