<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: March 31, 1998
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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
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Commission file number: 0-13121
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HMG Worldwide Corporation
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(Exact name of registrant as specified in its charter)
Delaware 13-3402432
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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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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 12, 1998
- ---------------------------- ---------------------------
Common Stock, $.01 par value 8,924,150
1
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Part I. Financial Information
Item 1.
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31,
March 31, 1998 1997
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(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 6,695 $ 6,439
Accounts receivable - less allowance
for doubtful
accounts of $229 and $273 10,325 8,445
Inventory 10,096 6,671
Prepaid expenses 488 414
Other current assets 241 317
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Total current assets 27,845 22,286
Property and equipment - net 4,612 4,682
Excess of cost over fair market value
of assets acquired less accumulated
amortization of $1,703 and $1,615 6,456 6,544
Other assets 135 133
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$39,048 $33,645
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term
obligations $14,338 $10,942
Accounts payable 10,606 8,729
Accrued employee compensation
and benefits 1,363 1,418
Deferred revenue 513 604
Accrued expenses 676 673
Other current liabilities 397 346
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Total current liabilities 27,893 22,712
Pension obligation 1,142 1,175
Convertible debentures 2,200 2,200
Term loans 631 678
Other long-term liabilities 410 410
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32,276 27,175
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Stockholders' equity:
Common stock, par value $.01;
50,000,000 shares authorized;
8,924,150 and 8,924,150 issued
and outstanding 89 89
Additional paid-in capital 34,645 34,645
Accumulated deficit (27,962) (28,264)
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6,772 6,470
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$39,048 $33,645
======= =======
See accompanying notes to consolidated financial statements.
2
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HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
(unaudited)
Three Months Ended March 31,
----------------------------
1998 1997
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Net revenues $12,866 $10,200
Cost of revenues 8,892 7,464
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Gross profit 3,974 2,736
Selling, general and
administrative expenses 3,368 2,826
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Income (loss) from operations 606 (90)
Interest income 77 73
Interest expense (370) (220)
Other income - 267
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Income before provision
for income taxes 313 30
Provision for income taxes (11) (5)
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Net income $ 302 $ 25
======= =======
Basic earnings per share
Net income per common and
common equivalent shares $ 0.03 $ -
======= =======
Weighted average number of common and common
equivalent shares outstanding 8,924,150 8,383,755
========= =========
Diluted earnings per share
Net income per common and common
equivalent shares and assumed conversions $ 0.03
=======
Weighted average number of common and common
equivalent shares and assumed conversions 11,162,471
==========
See accompanying notes to consolidated financial statements.
3
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HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended March 31,
----------------------------
1998 1997
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Cash flows from operating activities:
Cash received from customers $10,899 $ 8,973
Interest received 60 73
Cash paid to suppliers (11,231) (8,341)
Cash paid to employees (2,389) (2,215)
Income taxes paid (3) (4)
Interest paid (370) (220)
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Net cash used in operating
activities (3,034) (1,734)
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Cash flows from investing activities:
Proceeds from the sale of
an investment 356
Capital expenditures (59) (103)
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Net cash provided by
(used in) investing
activities (59) 253
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Cash flows from financing activities:
Net proceeds from the sale of common
stock as part of a private placement 372
Proceeds derived from a credit
agreement, net 3,396 885
Principal payments of
outstanding debt obligations (47) (97)
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Net cash provided by
financing activities 3,349 1,160
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Effect of exchange rate changes - (3)
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Net increase (decrease) in cash and
cash equivalents 256 (324)
Cash and cash equivalents
at beginning of year 6,439 6,950
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Cash and cash equivalents
at March 31 $ 6,695 $ 6,626
======= =======
See accompanying notes to consolidated financial statements.
4
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HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
(in thousands)
(unaudited)
Three Months Ended March 31,
----------------------------
1998 1997
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Reconciliation of net income
to net cash used in
operating activities:
Net income $ 302 $ 25
Adjustments to reconcile net
income to net cash used in
operating activities:
Depreciation and amortization 218 225
Other income (267)
Decrease (increase) in assets:
Accounts receivable (1,880) (457)
Inventory (3,425) 316
Prepaid expenses (74) (32)
Other assets 74 11
Increase (decrease) in liabilities:
Accounts payable 1,877 (145)
Deferred revenue (91) (767)
Accrued expenses (52) (601)
Pension obligation (33) (42)
Other liabilities 50 -
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Net cash used in operating
activities ($3,034) ($1,734)
======= =======
See accompanying notes to consolidated financial statements.
5
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HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 - Consolidated Financial Statements
HMG Worldwide Corporation (the "Company") conducts its operations
principally through four operating wholly-owned subsidiaries being,
respectively, HMG Worldwide In-Store Marketing, Inc. ("HMG"), HMG Intermark
Worldwide Manufacturing, Inc. ("HMG Intermark"), Display Depot, Inc. ("DDI") and
HMG Griffith Worldwide In-Store Marketing, Inc. ("HMG Griffith") with facilities
in New York, Illinois, Pennsylvania and Toronto, Canada.
The Consolidated Balance Sheet as of March 31, 1998, and the Consolidated
Statements of Operations and Cash Flows for the three months ended March 31,
1998 and 1997, have been prepared by the Company without audit. In the opinion
of management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position, results of operations and
cash flows at March 31, 1998 and for all periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These consolidated financial statements should
be read in conjunction with the consolidated financial statements and notes
thereto included in the Company's December 31, 1997 annual report to
shareholders. The results of operations for the period ended March 31, 1998 are
not necessarily indicative of the operating results for the full year.
Note 2 - Inventory
Inventory consisted of the following components at March 31, 1998 and
December 31, 1997.
March 31, December 31,
1998 1997
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(in thousands)
Finished goods $ 1,745 $1,210
Work in process 2,316 1,015
Raw materials 6,035 4,446
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$10,096 $6,671
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Note 3 - Income Taxes
At December 31, 1997, the Company had net operating loss carryforwards of
approximately $27.6 million which expire during the years 2001 through 2012.
Components of income tax expense for the three months ended March 31, 1998
and 1997 are as follows:
Three Months Ended March 31,
----------------------------
1998 1997
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(in thousands)
State and local
income taxes $11 $ 5
=== ===
6
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HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
Note 4 - Convertible Debentures
Effective September 30, 1997, the Company issued $2.2 million 10%
Convertible Debentures due September 30, 2000 ("Debentures") through a private
placement ("Private Placement"). The Debentures bear interest at the rate of 10%
per annum and are convertible, at the option of the holder at any time, into
shares of the Company's Common Stock ("Conversion Shares"), $0.01 par value,
based upon the conversion price of $1.25 per share. The Company may prepay the
Debentures, on 30 days prior notice, at such time as the average closing price
of the Common Stock exceeds $1.75 per share for a 30 day period prior to notice
of such prepayment provided that the Conversion Shares have been registered
under the Securities Act at the time of such prepayment. The Debentures and
Conversion Shares which may be acquired upon the conversion have been issued
without registration by reason of the private offering exemption under Section
4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder.
Accordingly, the Debentures and the Conversion Shares may not be resold absent
registration under the Securities Act or the availability of an applicable
exemption from such registration.
7
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HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 as Compared to the
Three Months Ended March 31, 1997
Net revenues increased $2.7 million to $12.9 million for the three months
ended March 31, 1998 as compared to $10.2 million for the three months ended
March 31, 1997. The $2.7 million increase in net revenues from period to period
was due principally to (i) the addition of net revenues from the Company's new
Toronto office of approximately $949,000, (ii) the shipment of a new national
rollout of a merchandising system developed by the Company of approximately $1.0
million and (iii) a net increase in marketing expenditures of the Company's
clients during the period.
Gross profit for the three months ended March 31, 1998 was $4.0 million as
compared to $2.7 million for the three months ended March 31, 1997. The increase
in gross profit of $1.2 million was principally a result of the increase in net
revenues and an increase in gross margin. For the three months ended March 31,
1998 and 1997, the Company's gross margin was 30.9% and 26.8%, respectively. The
gross margin increase of 4.1% was due principally to a favorable production
revenue mix resulting in a 4.0% increase, reflecting the Company's efforts of
more direct, internal production of its merchandising systems, lower labor costs
and increased production volume and purchasing efficiencies. The favorable
production revenue mix was principally the result of an increase in the number
of programs manufactured and assembled at the Company's Pennsylvania and
Brooklyn facilities and the increased operational efficiencies on the specific
programs shipped.
Selling, general and administrative expenses ("SG&A") for the three months
ended March 31, 1998 was $3.4 million as compared to $2.8 million for the
comparable period in 1997. The increase in SG&A of $542,000 from period to
period was principally due to the addition of HMG Griffith SG&A of $200,000 and
increased spending in other general expenses of $287,000.
For the three months ended March 31, 1998, the Company generated interest
income of $77,000 as compared to $73,000 for the three months ended March 31,
1997. The increase was principally attributable to an increase in cash and cash
equivalents invested in interest-bearing marketable securities and commercial
paper from period and period.
Interest expense was $370,000 for the three months ended March 31, 1998 as
compared to $220,000 for the three months ended March 31, 1997. The increase in
interest expense was principally due to the increased average borrowings from
period to period.
As a consequence of the foregoing factors, the Company generated net income
of $302,000, or $0.03 basic earnings per share for the three months ended March
31, 1998 as compared to a net income of $25,000 for the three months ended March
31, 1997.
Stockholders' Equity
Stockholders' equity increased $302,000 to $6.8 million at March 31, 1998
from $6.5 million at December 31, 1997. The increase in stockholders' equity was
due to net income of $302,000.
Income Taxes
At December 31, 1997, the Company had net operating loss carryforwards of
approximately $27.6 million which expire during the years 2001 through 2012.
The Company's income tax provision for the three months ended March 31,
1998 was $11,000 as compared to $5,000 for the three months ended March 31,
1997. The income tax provision for the three months ended March 31, 1998 and
1997 was principally from state and local taxes.
8
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HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -continued
Inflation
The effect of inflation on the Company's operations has not been
significant to date.
Backlog
At March 31, 1998, the Company's aggregate backlog was approximately $24.7
million as compared to $32.0 million and $15.2 million at December 31, 1997 and
March 31, 1997, respectively. Of such aggregate backlog at March 31, 1998,
approximately 57.6% was attributable to three clients. The Company anticipates
that substantially all such backlog at March 31, 1998 will be filled during the
next twelve months. In addition to the $24.7 million backlog at March 31, 1998,
the Company's supply contract with the Foster Grant Group L.P. ("Foster Grant")
requires Foster Grant, subject to certain limitations, to purchase at least 70%
of its in-store merchandising displays from the Company with average annual
purchases to aggregate no less than $2.5 million. The aggregate value of the
Foster Grant supply contract at March 31, 1998 was $25.6 million, of which the
Company anticipates that $2.5 million will be shipped within the next twelve
months. Due to quarter to quarter fluctuations in the Company's backlog levels,
attributable to the timing, nature and size of its merchandising system programs
for its clients, such backlog levels are not necessarily an indicator of future
net revenue levels.
Liquidity and Capital Resources
Cash and cash equivalents at March 31, 1998 and December 31, 1997
aggregated $6.7 million and $6.4 million, respectively. The Company's increase
in cash and cash equivalents of approximately $256,000 for the three months
ended March 31, 1998 was due principally to the net effects of (i) net cash used
in operations of $3.0 million, (ii) capital expenditures of $59,000 and (iii)
reductions of debt obligations of $47,000, offset by (iv) proceeds from
borrowings under the Company's revolving line of credit with its bank lender of
$3.4 million. The Company's negative cash flows from operations for the three
months ended March 31, 1998 resulted principally from (i) an increase in
accounts receivable and inventory of $5.3 million offset by (ii) an increase in
general liabilities of $1.8 million.
The Company has secured a $13.0 million Credit Agreement with a financial
institution in the form of a revolving credit and term loan facility. The Credit
Agreement provides for a secured revolving credit facility which advances up to
the sum of (i) 85% of eligible accounts receivable, (ii) the lesser of 60% of
eligible finished goods inventory or $750,000 and (iii) the Company's cash, cash
equivalents and marketable securities. The Credit Agreement is secured by a lien
on and a security interest in the Company's cash, cash equivalents, marketable
securities, accounts receivable, inventory, and equipment and all other tangible
and intangible assets and a pledge of the common stock of each of the Company's
wholly-owned subsidiaries. Due to the Company's increase in working capital
needs to meet its increased production requirements, the Company has obtained a
temporary increase in its secured line of credit to $15.0 million from its bank
lender as of March 31, 1998. The Company and its bank lender will continue to
periodically review the working capital financing requirements of the Company to
determine if the secured line of credit should be permanently increased to
finance the Company's working capital growth.
Borrowings under the Credit Agreement bear interest at the institution's
prime rate plus 1% per annum. The Company is required to pay a quarterly
commitment fee at the rate of one half of 1% per annum of the average daily
unused amount of funds available. Additionally, the Credit Agreement contains
certain customary affirmative and negative covenants which require the Company
to maintain certain financial ratios, and, among other things restrict, (i) the
declaration or payment of dividends, (ii) the incurrence of additional
indebtedness and (iii) the sale of certain assets. As of March 31, 1998, the
Company was in compliance with all financial covenants of the Credit Agreement,
as amended.
9
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HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
Pursuant to the terms of the Credit Agreement, the lender can advance up to
$1.6 million in the form of a term loan collateralized by the Company's current
and future real estate and equipment. The term loan portion of the Credit
Agreement is amortized on a sixty month basis with a final payment due upon the
termination of the Credit Agreement and bears interest at the institution's
prime rate plus 1% per annum. At March 31, 1998, the balance outstanding on the
term loan component of the Credit Agreement was approximately $819,000.
Effective September 30, 1997, the Company issued $2.2 million 10%
Convertible Debentures due September 30, 2000 ("Debentures") through a private
placement ("Private Placement"). The Debentures bear interest at the rate of 10%
per annum and are convertible, at the option of the holder at any time, into
shares of the Company's Common Stock ("Conversion Shares"), $0.01 par value,
based upon the conversion price of $1.25 per share. The Company may prepay the
Debentures, on 30 days prior notice, at such time as the average closing price
of the Common Stock exceeds $1.75 per share for a 30 day period prior to notice
of such prepayment provided that the Conversion Shares have been registered
under the Securities Act at the time of such prepayment. The Debentures and the
Conversion Shares which may be acquired upon the conversion have been issued
without registration by reason of the private offering exemption under Section 4
(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder.
Accordingly, the Debentures and the Conversion Shares may not be resold absent
registration under the Securities Act or the availability of an applicable
exemption from such registration.
The Company's working capital at March 31, 1998 was a deficit of
approximately $48,000, inclusive of borrowings of $14.3 million pursuant to the
three year Credit Agreement. The working capital deficit was due principally to
negative cash flows from operations during the first quarter of 1998 through the
building of higher accounts receivable and inventory levels. Due to the working
capital position, 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 its current cash and cash
equivalents, its backlog, anticipated future cash flows from operations and its
availability under its Credit Agreement will be sufficient to support its debt
service requirements and its other capital and operating needs for the next
fiscal year. Management believes that continued focus upon strategic cost
reductions and efficiencies, an expanded client base and future cash flows from
operations developed and/or implemented by the Company provide an important
basis for future profitability and liquidity, however, there can be no assurance
that such belief will prove to be correct, that additional financing will not be
required, or that any such financing will be available on commercially
reasonable terms or otherwise.
The above statements and certain other statements contained in this
quarterly report on Form 10-Q are based on current expectations. Such statements
are forward looking statements that involve a number of risks and uncertainties.
Factors that could cause actual results to differ materially include the
following (i) general economic conditions at retail, (ii) competitive market
influences, (iii) client budgetary restrictions, (iv) delays in shipment of
scheduled programs to clients, (v) delay in or inability to expand the Company's
client base and/or (vi) the loss of or reduction in spending of existing
clients.
10
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HMG Worldwide Corporation
-------------------------
(Registrant)
Date: May 12, 1998 /S/ Robert V. Cuddihy, Jr.
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Robert V. Cuddihy, Jr.
Chief Operating Officer and
Chief Financial Officer
11
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<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 6,695
<SECURITIES> 0
<RECEIVABLES> 10,554
<ALLOWANCES> 229
<INVENTORY> 10,096
<CURRENT-ASSETS> 27,845
<PP&E> 8,159
<DEPRECIATION> 1,703
<TOTAL-ASSETS> 39,048
<CURRENT-LIABILITIES> 27,893
<BONDS> 0
0
0
<COMMON> 89
<OTHER-SE> 6,683
<TOTAL-LIABILITY-AND-EQUITY> 39,048
<SALES> 12,866
<TOTAL-REVENUES> 12,866
<CGS> 8,892
<TOTAL-COSTS> 3,368
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 370
<INCOME-PRETAX> 313
<INCOME-TAX> 11
<INCOME-CONTINUING> 302
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 302
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
