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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One) FORM 10-K
1
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
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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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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
8,924,150 (as of 3/19/98) The aggregate market value of the voting stock held by
non-affiliated stockholders of the Registrant is $5,818,288 (as of 3/19/98)
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 fixture and 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
directly to mass merchandisers, chain drugstores and supermarkets.
The Company's operations are conducted principally through four
wholly-owned subsidiaries being, respectively, HMG Worldwide In-Store Marketing,
Inc. ("HMG"), HMG Intermark Worldwide Manufacturing, Inc. ("HMG Intermark"),
Display Depot, Inc. and HMG Griffith Worldwide In-Store Marketing, Inc. with
facilities in New York, Pennsylvania, Illinois and Toronto, Canada.
Recent Developments
The Company implemented a series of strategic initiatives in 1997 whereby the
Company (i) completed its consolidation of its principal manufacturing
operations in Reading, Pennsylvania, (ii) acquired strategic new manufacturing
equipment to further improve operational efficiencies, (iii) opened a full
service office in Toronto, Canada, (iv) continued to eliminate redundant and
other overhead costs and (v) continued its efforts to expand the client revenue
and service base. The cumulative effect of the Company's 1997 initiatives
brought the Company back to profitability for the year ended December 31, 1997
whereby the Company generated revenues of $46.3 million and realized net income
of approximately $529,000, or $0.06 basic earnings per share.
For the year ended December 31, 1997, the Company accomplished the following:
(i) consolidated its principal manufacturing operations in Reading in
January 1997;
(ii) acquired certain wire and metal fabrication equipment and opened a
21,000 square foot wire and metal fabrication facility in Brooklyn, New York in
April 1997;
(iii) opened a full service office in Toronto through the acquisition of
certain assets of Griffith Communications, Inc. effective July 1997; (iv) full
conversion to and implementation of a new management information system tailored
to the Company's
operations;
(v) exercised its option to purchase a previously leased 72,500 square foot
secondary manufacturing and warehousing facility in Reading for approximately
$1.2 million in November 1997;
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(vi) consummated a new term loan facility with a financial institution
whereby the Company obtained a $600,000 secured term loan for the purchase of
the 72,500 square foot Reading facility in November 1997. This term loan, which
expires in November 1999, bears interest at the lending institution's prime rate
plus 1% per annum and is secured by the acquired real estate;
(vii) consummation of a private placement ("HMG Private Placement") whereby
the Company offered for sale up to 2.0 million shares of Common Stock at $1.00
per share. Pursuant to the terms of the HMG Private Placement, as of December
31, 1997, the Company sold an aggregate of 1,012,500 shares of its Common Stock
from which it derived net proceeds of approximately $917,000. 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; and
(viii) 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 by the
respective purchasers thereof absent registration under the Securities Act or
the availability of an applicable exemption from such registration.
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.
Executive Offices
The Company's executive offices 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.
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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.
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 merchandising 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, 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 fixture or 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
components 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 fixture or 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,
fabricate wire and metal components and to assemble its merchandising systems,
as compared to many of its competitors which have no injection molding, wire or
metal fabrication, or assembly facilities and must outsource to third parties.
Once the Company enters into a contract with a client to manufacture fixture and
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 merchandising 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, or through a third
party contractor, 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.
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Suppliers
The Company uses and has available a variety of outside sources to supply the
raw materials and fabricated components used in its merchandising 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
Effective July 1, 1997, the Company opened a full service office in Toronto,
Canada. For the six months ended December 31, 1997, net revenues in Canada were
approximately $494,000 and the Company incurred a net loss of approximately
$31,000.
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.
Custom Displays
The Company designs, assembles and markets in-store custom fixture and
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
lines. 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" system designed and
produced by the Company is the Bali(R) Boutique located in a variety of
department stores and Wal*Mart Stores ("Wal*Mart") 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
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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 Procter & Gamble
("P&G"), both of which have been clients for more than 20 years, as well as
Clairol Corporation ("Clairol"), CVS/Pharmacy ("CVS"), Foster Grant Group LLP
("FGG"), Hallmark Cards, Inc. ("Hallmark"), Motorola, The Pillsbury Company,
Target Stores, Inc. and Wal*Mart.
With the greater availability of information regarding in-store product
turnover, the Company is increasingly providing its products and services
directly to mass merchandisers, 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
systems with the intention of leasing portions thereof to yet other consumer
products companies.
For the year ended December 31, 1997, Bristol Meyers Squibb, P&G and Wal*Mart
accounted for approximately 12%, 12% and 11%, respectively, of the Company's net
revenues. 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. Although the Company's relationship with many of its larger accounts
spans several years, none of these accounts is contractually bound to purchase
the Company's products or services. The loss of any one such client would have a
material adverse effect on the Company.
Backlog
At December 31, 1997, the Company's aggregate backlog was $32.0 million, as
compared to $15.6 million and $23.8 million at December 31, 1996 and 1995,
respectively. Of such aggregate backlog at December 31, 1997, approximately 52%
was attributable to three clients. The Company anticipates that substantially
all such backlog at December 31, 1997, will be filled during the next twelve
months. In addition to the $32.0 million backlog at December 31, 1997, 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, 1997 was $26.8 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 34 other
sales employees. The Company typically sells its in-store fixture 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.
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Warranties
The Company generally does not warrant its merchandising systems to be free
from defects in materials or workmanship but generally replaces any 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 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.
Competition
The custom fixture and 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 fixture and 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, 1997, the Company employed 253 persons, including 4
executive officers, 125 in production and assembly, 20 in design, 28 in
purchasing and engineering, 34 in marketing and sales and 42 in administration.
Approximately 76 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. Approximately
22 of the Company's employees are covered by a collective bargaining agreement
between the Company and Local 810 of the Alloys and Hardware Fabricators and
Warehousemen, which expires April 30, 2000. The Company believes that its
current labor relations are good.
Financial Information about Foreign Operations and Export Sales
Reference is made to Note 10 in Notes to Consolidated Financial Statements
included in Item 8 hereof.
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Item 2. Facilities.
The Company's executive offices are located at 475 Tenth Avenue, New York,
New York 10018, where it leases approximately 48,000 square feet pursuant to two
leases that expire in October 2002. The aggregate annual base rentals for such
floors is approximately $482,000. The Company sublets 8,750 square feet of such
space for approximately $92,000 annually, expiring in October 2002. The Company
also leases approximately 4,500 square feet of office space at 230 East Ohio
Street in Chicago, Illinois at an annual base rental of approximately $70,000
pursuant to a lease which expires in June 2000. The Company leases approximately
10,500 square feet of office and warehouse space on a month to month basis in
Toronto, Canada, while the Company continues to evaluate its local Canadian
space requirements.
The Company operates two production and assembly facilities located in
Reading, Pennsylvania. The Company's Reading, Pennsylvania facilities are owned
by the Company and are comprised of (i) a 140,000 square foot multi-story
production facility on three acres of property and (ii) a 72,500 square foot
single story production facility on five acres of property.
The Company operates a production facility located in Brooklyn, New York. The
Company leases approximately 21,000 square feet, which expires in April 2002, at
an annual base rent of $63,000. Additionally, the Company has an option to renew
this lease for an additional five year term subject to a rental increase based
upon the change in the Consumer Price Index from the base year of 1997.
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, 1997.
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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, markdown or commission and may not necessarily represent actual
transactions.
High Low
1997
First quarter .. . . . . . . . . $ 1-7/16 $ 1
Second quarter . . . . . . . . . 1-1/2 7/8
Third quarter . . . . . . . . . 2 7/8
Fourth quarter . . . . . . . . . 1-1/2 31/32
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
At March 19, 1998, there were 1,059 holders of record and approximately 3,177
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 4 in Notes to the Consolidated Financial Statements included in Item 8
hereof.
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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, 1997, 1996 and 1995 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, 1997, 1996 and 1995 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,
----------------------------------------------------
1997 1996 (b) 1995 (b) 1994 (b) 1993(a, b)
---- -------- -------- -------- ----------
(in thousands, except per share data)
Statement of
Operations Data
Net revenues $46,311 $45,552 $47,641 $55,578 $20,375
Income (loss)
from operations 1,079 (5,040) (10,009) (795) (290)
Net income (loss) $ 529 ($ 5,535) ($10,118) ($ 963) ($ 528)
======= ======== ======= ======= ========
Basic earnings per
share data
Net income (loss)
per common and
common equivalent
shares $ 0.06 ($ 0.73) ($ 1.34) ($0.17) ($ 0.13)
======= ========= ========= ======== =======
Weighted average
number of common
and common
equivalent shares
outstanding 8,638 7,614 7,568 5,643 4,052
======= ======= ======= ====== ======
Diluted earnings
per share data
Net income (loss)
per common and
common equivalent
shares and assumed
conversions $ 0.05
=======
Weighted average
number of common
and common
equivalent shares
and assumed
conversions 11,206
======
December 31,
----------------------------------------------------
1997 1996 1995 1994 1993(a)
---- ---- ---- ---- -------
Balance Sheet Data: (in thousands)
Cash and cash
equivalents $ 6,439 $ 6,950 $ 8,139 $ 6,469 $ 5,205
Working capital (426) (3,236) 2,624 14,119 2,579
Total assets 33,645 28,755 32,648 36,718 33,022
Long-term debt 2,878 266 - 3,182 6,330
Stockholders' equity 6,470 5,191 10,076 20,223 3,191
(a) Amounts reflect the consummation of the acquisition of three business units
from Saatchi & Saatchi PLC and certain of its subsidiaries on October 1, 1993.
(b) Not included because effect is anti-dilutive.
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Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations.
General
The Company implemented a series of strategic initiatives in 1997 whereby the
Company (i) completed its consolidation of its principal manufacturing
operations in Reading, Pennsylvania, (ii) acquired strategic new manufacturing
equipment to further improve operational efficiencies, (iii) opened a full
service office in Toronto, Canada, (iv) continued to eliminate redundant and
other overhead costs and (v) continued its efforts to expand the client revenue
and service base. The cumulative effect of the Company's 1997 initiatives
brought the Company back to profitability for the year ended December 31, 1997
whereby the Company generated revenues of $46.3 million and realized net income
of approximately $529,000, or $0.06 basic earnings per share.
For the year ended December 31, 1997, the Company accomplished the
following; (i) consolidated its principal manufacturing operations in Reading in
January 1997, (ii) acquired certain wire and metal fabrication equipment and
opened a 21,000 square foot wire and metal fabrication facility in Brooklyn, New
York in April 1997,(iii) opened a full service office in Toronto through the
acquisition of certain assets of Griffith Communications, Inc. effective July
1997, (iv) full conversion to and implementation of a new management information
system tailored to the Company's operations, (v) exercised its option to
purchase a previously leased 72,500 square foot secondary manufacturing and
warehousing facility in Reading for approximately $1.2 million in November 1997,
(vi) consummated a new term loan facility with a financial institution whereby
the Company obtained a $600,000 secured term loan for the purchase of the 72,500
square foot Reading facility in November 1997 (this term loan, which expires in
November 1999, bears interest at the lending institution's prime rate plus 1%
per annum and is secured by the acquired real estate), (vii) consummation of a
private placement ("HMG Private Placement") whereby the Company sold an
aggregate of 1,012,500 shares of its Common Stock from which it derived net
proceeds of approximately $917,000 and (viii) 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.
Results of Operations
Year Ended December 31, 1997 as Compared to
Years Ended December 31, 1996 and 1995
Net revenues increased by approximately $759,000 to $46.3 million for the
year ended December 31, 1997 from $45.6 million for the year ended December 31,
1996. This 2% increase in net revenues from 1996 to 1997 was principally the net
effect of (i) an increase of net revenues from the Company's new Toronto office
of approximately $494,000, (ii) an increase of net revenues from a more
diversified client base of $2.6 million and (iii) a decrease in the combined net
revenues of the Company's top three clients of 1997 versus 1996 of $2.3 million
due to the timing of marketing expenditures by major clients in addition to the
timing of national rollouts of merchandising systems developed by the Company.
Net revenues decreased $2.1 million for the year ended December 31, 1996 from
$47.8 million for the year ended December 31, 1995. The decrease in net revenues
from 1995 to 1996 was principally due to the net effect of (i) a reduction in
marketing expenditures of one significant client of $6.1 million, offset by (ii)
an increase in revenues of $3.3 million derived from the operations of HMG
Intermark.
12
<PAGE>
Gross profit increased $5.1 million to $13.0 million for the year ended
December 31, 1997 from $7.9 million for the year ended December 31, 1996 due to
the increase in the Company's net revenues and an increase in gross margin. For
the year ended December 31, 1997, the gross margin was 28.1% as compared to
17.5% for the comparable 1996 period. The 10.6% increase in gross margin was
principally due to a favorable production revenue mix resulting in an 11.7%
increase, reflecting the Company's efforts of more direct, internal production
of its merchandising systems, lower labor costs and the elimination of the
Company's high cost New Jersey plant and the underabsorption of fixed overhead
expenses as a percentage of net revenues of 1.2%. 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.
Gross profit decreased $1.3 million to $7.9 million for the year ended December
31, 1996 from $9.2 million for the comparable 1995 period 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
comparable 1995 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
underabsorption 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 operation of 4.6% and (ii) a decrease in fixed
overhead expenses at the Company's New Jersey facility of 2.6%.
Selling, general and administrative expenses ("SG&A") decreased $1.0 million
to $12.0 million for the year ended December 31, 1997 as compared to $13.0
million for the year ended December 31, 1996. The decrease in SG&A from 1996 to
1997 was principally a result of (i) the continuing effect of the consolidation
of manufacturing facilities, (ii) a reduction in personnel cost of $532,000,
(iii) expenses of $175,000 related to the discontinued European operation and
(iv) a decrease spending in other general expenses. SG&A decreased to $13.0
million for the year ended December 31, 1996 as compared to $16.0 million for
the comparable 1995 period. The decrease in SG&A expenses of $3.0 million was
principally a result of the Company's efforts to reduce its expenses and
restructure its operations, including the consolidation of manufacturing
facilities which resulted 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.
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. The restructuring costs
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 cost reduction
programs.
For the year ended December 31, 1997, the Company generated interest income
of $323,000 as compared to $351,000 and $578,000, for the comparable 1996 and
1995 periods, respectively. The decrease in interest income of approximately
$28,000 from 1996 to 1997 and the decrease of $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.
Interest expense was $1.1 million for the year ended December 31, 1997 as
compared to $834,000 and $793,000 for the comparable 1996 and 1995 periods,
respectively. The increase in interest expense of approximately $264,000 from
1996 to 1997 and $41,000 from 1995 to 1996 was principally due to the increased
average borrowings in the respective years.
Other income of $267,000 for the year ended December 31, 1997 was the result
of Common Stock received by the Company from a client in lieu of payment for
services rendered to such client. In March 1997, the Company sold the shares of
Common Stock and generated a net gain of $267,000.
As a consequence of the foregoing factors, the Company realized a net gain of
approximately $529,000, or $0.06 basic earnings per share, for the year ended
December 31, 1997 as compared to a net loss of $5.5 million, or $0.73 per share,
for the year ended December 31, 1996. For the year ended December 31, 1995, the
Company incurred a net loss of $10.1 million, or $1.34 per share.
13
<PAGE>
Stockholders' Equity
Stockholders' equity increased $1.3 million to $6.5 million at December 31,
1997 from $5.2 million at December 31, 1996. The net increase in stockholders'
equity was principally due to (i) net income of $529,000, (ii) proceeds derived
from the HMG Private Placement of common stock whereby the Company issued
635,000 shares of Common Stock for an aggregate value of $540,000 and (iii) the
issuance of 159,561 shares of Common Stock by the Company to the HMG Worldwide
Corporation Capital Accumulation Plan valued at $160,000.
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, 1997 the
Company sold an aggregate of 1,012,500 shares of its Common Stock at $1.00 per
share from which it derived net proceeds of approximately $917,000. 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.
Income Taxes
At December 31, 1997, the Company had available $27.6 million of net
operating loss carryforwards which expire during the years 2001 through 2012. A
benefit of approximately $139,000 from these loss carryforwards has been
reflected in the consolidated financial statements for the year ended December
31, 1997.
The Company's income tax provision for the year ended December 31, 1997 was
$42,000 as compared to $12,000 and $14,000 for the years ended December 31, 1996
and December 31, 1995, respectively, and resulted principally from state and
local alternative minimum taxes.
Backlog
At December 31, 1997, the Company's aggregate backlog was $32.0 million, as
compared to $15.6 million and $23.8 million at December 31, 1996 and 1995,
respectively. Of such aggregate backlog at December 31, 1997, approximately 52%
was attributable to three clients The Company anticipates that substantially all
such backlog at December 31, 1997, will be filled during the next twelve months.
In addition to the $32.0 million backlog at December 31, 1997, 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, 1997 was $26.8 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.
14
<PAGE>
Liquidity and Capital Resources
Cash and cash equivalents at December 31, 1997, 1996 and 1995 aggregated
approximately $6.4 million, $6.9 million and $8.1 million, respectively. For the
years ended December 31, 1997, 1996 and 1995 the Company's cash flows from
operating, investing and financing activities are summarized below:
Year Ended December 31,
-------------------------
1997 1996 1995
---- ---- ----
(in millions)
Net cash used in operating activities ($3.3) ($2.0) ($7.7)
---- ---- ----
Investing activities:
Redemption of marketable securities 6.8
Acquisition, net of cash acquired (0.2)
Proceeds from sale of an investment 0.4
Capital expenditures (1.8) (1.6) (0.4)
----- ---- -----
Net cash provided by (used in)
investing activities (1.4) (1.6) 6.2
----- ---- -----
Financing activities:
Net proceeds from sale of common stock 0.5 0.4
Proceeds from exercise of stock options 0.3
Proceeds from issuance of notes, net 0.7
Proceeds derived from the sale of convertible
debentures 2.2
Net increase in indebtedness 1.5 1.7 2.5
---- ---- -----
Net cash provided by financing activities 4.2 2.4 3.2
---- ---- -----
Net increase (decrease) in cash and cash
equivalents ($0.5) ($1.2) $1.7
==== ==== ====
The Company's decrease in cash and cash equivalents of $511,000 for the year
ended December 31, 1997 was principally due to (i) net cash used in operating
activities of $3.3 million, used principally to finance increases in the
Company's accounts receivable and inventory levels, (ii) capital expenditures of
$1.8 million, offset by, (iii) net borrowings under the Company's credit
facility of $1.5 million, (iv) proceeds from the sale of an investment of
$356,000, (v) net proceeds derived from the HMG Private Placement of $540,000
and (vi) proceeds from the sale of Debentures of $2.2 million.
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.
15
<PAGE>
The Company 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, equipment and certain real estate
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, 1997, 1996 and 1995 was approximately $10.8 million, $8.8 million and $5.1
million , respectively, at the weighted average interest rate of 9.6%, 8.6% and
9.8%, 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, 1997, and 1996 the balance
outstanding on the term loan component of the Credit Agreement was $866,000 and
$334,000 respectively.
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 by the
respective purchasers thereof absent registration under the Securities Act or
the availability of an applicable exemption from such registration.
The Company's working capital at December 31, 1997 was a deficit of $426,000,
inclusive of borrowings of $10.9 million pursuant to the three year Credit
Agreement. The working capital deficit was due principally to (i) negative cash
flows from operations during 1997 through the building of higher accounts
receivable and inventory levels and (ii) increased borrowing under the Company's
credit facilities whereby such proceeds were used in part to finance capital
expenditures of $1.8 million, inclusive of $1.2 million purchase of its
secondary 72,500 square foot production facility in Reading. From time to time,
the Company experiences temporary liquidity problems due to the timing of cash
flows while the Company is in production and building inventory. However
management believes that significant cost savings will be realized through the
implementation of its 1996 and 1997 strategic plans whereby the Company moved
and consolidated its manufacturing facilities in Reading, Pennsylvania,
restructured the Company's New York and Chicago offices, upgraded the Company's
injection molding division, expanded its internal wire fabrication capabilities
and closed its European office. Furthermore, management believes that its
current cash and cash equivalents, its backlog, anticipated future cash flows
from operations, availability under its Credit Agreement and the proceeds
derived from the HMG Private Placement and issuance of Debentures will be
sufficient to support its debt service requirements and its other capital and
operating needs for the next fiscal year. Management believes that each of the
above cost reduction components, 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.
16
<PAGE>
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium ("Year 2000") approaches. The Year
2000 problem is pervasive and complex as virtually every computer operation will
be affected in some way by the rollover of the two digit year value to 00. The
issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail.
The Company is utilizing both internal and external resources to identify,
correct or reprogram and test the systems for the Year 2000 compliance. It is
anticipated that the project will be completed by early of 1999. Management does
not believe the Year 2000 compliance expense and related potential effect on the
Company's earnings will be material. However, there can be no assurance that the
systems of other companies on which the Company's systems rely also will be
timely converted or that any such failure to convert by another company would
not have an adverse effect on the Company's systems.
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.
17
<PAGE>
Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES PAGE
Independent Auditors' Report 18
Consolidated Balance Sheets at December 31, 1997 and 1996 19
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995 20
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995 21
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1997, 1996 and 1995 23
Notes to Consolidated Financial Statements 24
18
<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, 1997 and 1996, and the related
consolidated statements of operations, cash flows and changes in stockholders'
equity for each of the three years in the period ended December 31, 1997. These
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, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
FRIEDMAN ALPREN & GREEN LLP
New York, New York
March 20, 1998
19
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31,
----------------
1997 1996
---- ----
ASSETS
Current assets:
Cash and cash equivalents (Note 1) $ 6,439 $ 6,950
Accounts receivable - less allowance
for doubtful accounts of $273 and $577 (Note 14) 8,445 6,454
Inventory (Notes 1 and 2) 6,671 4,214
Prepaid expenses 414 95
Other current assets 317 240
------- -------
Total current assets 22,286 17,953
Property and equipment - net (Notes 1 and 3) 4,682 3,349
Excess of cost over fair value
of assets acquired, less accumulated
amortization of $1,615 and $1,207 (Note 1) 6,544 6,952
Other assets 133 501
------- -------
$33,645 $28,755
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term
obligations (Note 4) $10,942 $ 9,439
Note payable 338
Accounts payable 8,729 5,803
Accrued employee compensation and benefits 1,418 1,033
Deferred revenue (Note 1) 604 1,835
Accrued expenses 673 1,566
Restructuring costs (Note 12) 623
Other current liabilities 346 552
------- -------
Total current liabilities 22,712 21,189
Pension obligation (Notes 1 and 5) 1,175 1,684
Convertible debentures (Note 4) 2,200
Term loans (Note 4) 678 266
Other long-term liabilities (Note 5) 410 425
------- -------
27,175 23,564
------- -------
Stockholders' equity:
Common stock, par value $0.01; 50,000,000 shares
authorized; 8,924,150 and 8,129,589 shares
issued and outstanding (Note 7) 89 81
Additional paid-in capital (Note 7) 34,645 33,903
Accumulated deficit (28,264) (28,793)
------- -------
6,470 5,191
------- -------
$33,645 $28,755
======= =======
See accompanying notes to consolidated financial statements.
20
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
Year Ended December 31,
-----------------------------
1997 1996 1995
---- ---- ----
Net revenues (Notes 1 and 9) $46,311 $45,552 $47,641
Cost of revenues 33,273 37,589 38,479
------- ------- -------
Gross profit 13,038 7,963 9,162
Selling, general and administrative
expenses 11,959 13,003 15,996
Restructuring costs (Note 12) 3,175
------- ------- -------
Income (loss) from operations 1,079 (5,040) (10,009)
Interest income 323 351 578
Interest expense (Note 4) (1,098) (834) (793)
Other income 267 30
Gain from foreign currency
translation (Note 1) 90
------- ------- -------
Income (loss) before provision for income
taxes 571 (5,523) (10,104)
Provision for income taxes (Note 6) (42) (12) (14)
------- ------- -------
Net income (loss) $ 529 ($ 5,535) ($10,118)
======= ======= =======
Basic earnings per share
Net income (loss) per common and
common equivalent shares $ 0.06 ($ 0.73) ($ 1.34)
======= ======= =======
Weighted average number of common
and common equivalent shares
outstanding 8,637,528 7,614,356 7,567,517
========= ========= =========
Diluted earnings per share
Net income (loss) per common and
common equivalent shares
and assumed conversions $ 0.05
=======
Weighted average number of common
and common equivalent shares
and assumed conversions 11,206,460
==========
See accompanying notes to consolidated financial statements.
21
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
-------------------------------
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Cash received from customer $43,091 $48,930 $46,275
Interest received 321 351 578
Cash paid to suppliers (36,481) (39,739) (42,326)
Cash paid to employees (9,112) (10,671) (11,400)
Income taxes paid (30) (12) (14)
Interest paid (1,098) (816) (793)
------- ------- -------
Net cash used in operating
activities (3,309) (1,957) (7,680)
------- ------- -------
Cash flows from investing activities:
Acquisitions, net of cash acquired (176)
Proceeds from redemption
of marketable securities 6,828
Proceeds from the sale of an investment 356
Capital expenditures (1,807) (1,654) (419)
------- ------- -------
Net cash provided by (used in)
investing activities (1,451) (1,654) 6,233
------- ------- -------
Cash flows from financing activities:
Net proceeds from the sale of common
stock as part of a private placement 540 377
Net proceeds from exercise of stock
options 273 10
Proceeds derived from a term loan 600 340
Proceeds derived from the sale of
convertible debentures 2,200
Proceeds derived from a credit
agreement, net 1,315 1,814 6,483
Proceeds from issuance of notes, net 714
Principal payments of outstanding debt
obligations (406) (382) (4,161)
------- ------- -------
Net cash provided by financing
activities 4,249 2,422 3,046
------- ------- -------
Effect of exchange rate changes 71
------- ------- -------
Net increase (decrease) in cash
and cash equivalents (511) (1,189) 1,670
Cash and cash equivalents
at beginning of year 6,950 8,139 6,469
------- ------- -------
Cash and cash equivalents
at end of year $ 6,439 $ 6,950 $ 8,139
======== ======= =======
See accompanying notes to consolidated financial statements.
22
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(in thousands)
Year Ended December 31,
----------------------------
1997 1996 1995
---- ---- ----
Reconciliation of net income (loss) to net
cash used in operating activities:
Net income (loss) $ 529 ($5,535) ($10,118)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 882 856 1,283
Restructuring costs - non-cash 1,146
Other income 267
Gain on foreign currency translation (90)
Decrease (increase) in assets, net of effects
of acquisition:
Accounts receivable (1,991) 2,227 (760)
Inventory (2,457) 1,040 202
Prepaid expenses (319) 345 286
Other assets (77) (110) 285
Increase (decrease) in liabilities, net of
effects of acquisition:
Accounts payable 2,926 1,472 (46)
Deferred revenue (1,231) 1,139 (678)
Accrued expenses (1,329) (1,760) 810
Restructuring costs (1,350)
Pension obligation (509) (281)
------ ------ -------
Net cash used in operating activities ($3,309) ($1,957) ($ 7,680)
====== ====== =======
Non-cash investing and financing activities:
Fair value of assets acquired in
connection with an acquisition $ 2,218
Fair value of liabilities assumed
in connection with an acquisition $ 3,226
Common stock issued in connection
with an employee benefit plan $ 160
Warrants issued as part of a
consulting agreement $ 50
See accompanying notes to consolidated financial statements.
23
<PAGE>
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 Accumlated Translation holders'
Shares Amount Capital Deficit Adjustments Equity
------ ------ ------- ------- ----------- ------
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
Shares sold as
part of a private
placement 635,000 6 534 540
Issuance of
warrants as part
of a consulting
agreement 50 50
Issuance of
shares as a
contribution
to HMG Worldwide
Corporation
Capital
Accumulation
Plan 159,561 2 158 160
Net income 529 529
--------- --- ------- -------- ----- -------
Balance at
December 31,
1997 8,924,150 $89 $34,645 ($28,264) $ - $ 6,470
========= === ======= ======= ===== ========
See accompanying notes to consolidated financial statements.
24
<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 fixture and display systems. The Company's
operations are conducted 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"). The Company conducts its operations in New York, Illinois,
Pennsylvania and Toronto, Canada.
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 Note 11).
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.
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 2).
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.
25
<PAGE>
HMG WORLDWIDE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 1 - Organization and Significant Accounting Policies (continued)
Excess of Cost Over Fair Value of Assets Acquired: The excess of cost over
fair 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, $408,000 and $363,000 for the years ended December
31, 1997, 1996 and 1995, 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 value of assets acquired relates. The excess of cost over fair
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, note payable, term loans and convertible debentures approximates
carrying value due to the short maturities.
Foreign Currency Translation: The functional currency of HMG Griffith
is the Canadian Dollar. 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 1997, 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.
Reclassifications: 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 6). 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 are based on the weighted average
number of common shares outstanding during each period. Common shares issuable
upon exercise of stock options and warrants are included in the earnings per
share computation unless they are immaterial in amount or anti-dilutive (see
Note 7), in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 128.
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 SFAS No. 87
"Employers' Accounting for Pensions" and SFAS No. 106 "Employers' Accounting for
Postretirement Benefits Other Than Pensions" (see Note 5).
26
<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
No. 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 No. 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
No. 123 had 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: In February 1997, SFAS No. 128,
"Earnings per Share" established standards for computing and presenting earnings
per share ("EPS"). The Statement simplifies the standards for computing EPS,
replaces the presentation of primary EPS with a presentation of basic EPS and
requires dual presentation of basic and diluted EPS on the face of the
Consolidated Statement of Operations. SFAS No. 128 was effective for financial
statements issued for the periods ending after December 15, 1997 and required
restatement of all prior period EPS data presented. The adoption of SFAS No. 128
did not have a material impact on previously reported EPS data.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income", which requires a statement of comprehensive
income to be included in the financial statement for fiscal years beginning
after December 15, 1997. The Company is presently designing such statement and,
accordingly, will include the required information beginning with the first
quarter of 1998.
In addition, in June 1997, the Financial Accounting Standards Board issued
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information". SFAS No. 131 requires disclosure of certain information about
operating segments and about products and services, geographic areas in which a
company operates, and their major customers. The Company is presently in the
process of evaluating the effect that this new standard will have on disclosures
in the Company's financial statements and the required information will be
reflected in the December 31, 1998 financial statements.
Note 2 - Inventory
Inventory consisted of the following components at December 31, 1997 and 1996:
December 31,
-------------------
1997 1996
---- ----
(in thousands)
Finished goods $1,210 $1,312
Work-in-progress 1,015 653
Raw materials 4,446 2,249
------ ------
$6,671 $4,214
====== ======
27
<PAGE>
HMG WORLDWIDE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 3 - Property and Equipment
The following is a summary of property and equipment, estimated useful lives
and accumulated depreciation and amortization at December 31, 1997 and 1996:
December 31,
--------------------
Description 1997 1996 Estimated Useful Life
----------- ---- ---- ---------------------
(in thousands)
Land $ 528 $ 103
Buildings 2,829 1,755 40 years
Equipment 1,511 1,143 3-7 years
Furniture and fixtures 243 192 5 years
Leasehold improvements 483 586 Lesser of lease term
or eight years
Tooling 952 960 3-7 years
------- ------
6,546 4,739
Less: accumulated
depreciation and
amortization 1,864 1,390
------- ------
$ 4,682 $3,349
====== ======
Depreciation and amortization expense for property and equipment for the
years ended December 31, 1997, 1996 and 1995 was approximately $474,000,
$448,000 and $920,000, respectively.
Note 4 - Long-term Obligations
Long-term obligations at December 31, 1997 and 1996 are as follows:
December 31,
----------------
1997 1996
---- ----
(in thousands)
Revolving credit facility $10,754 $9,371
Term loan 866 334
Convertible debentures 2,200
------- ------
13,820 9,705
Less: current maturities 10,942 9,439
------- ------
$ 2,878 $ 266
======= ======
Revolving Credit Facility
On November 22, 1996, the Company consummated a $13.0 million three year Loan
and Security Agreement, as amended, ("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.
28
<PAGE>
HMG WORLDWIDE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 4 - Long-term Obligations (continued)
Borrowings under the Credit Agreement bear interest at the institution's
prime rate plus 1% per annum. The Company is required to pay a quarterly
commitment fee at the rate of one half of 1% per annum of the average daily
unused amount of funds available. Additionally, the Credit Agreement contains
certain customary affirmative and negative covenants which require the Company
to maintain certain financial ratios, and, among other things, restrict (i) the
declaration or payment of dividends, (ii) the incurrence of additional
indebtedness and (iii) the sale of certain assets.
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. The balance outstanding on the term loan component
of the Credit Agreement at December 31, 1997 and 1996 was $866,000 and $334,000,
respectively.
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 bank's 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 one 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, 1997, 1996 and 1995 was approximately $10.9 million,
$8.8 million and $5.1 million, respectively, at the weighted average interest
rate of 9.6%, 8.6% and 9.8% , respectively.
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.
29
<PAGE>
HMG WORLDWIDE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 5 - 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.
Pursuant to the terms of the Pension Plan, HMG Intermark's union employees,
with dates of hire prior to April 1, 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 are 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 defined benefit pension costs
for the periods ending December 31, 1997, 1996 and 1995 and the accumulated
pension obligation of HMG Intermark at December 31, 1997 and 1996:
For the Period
October 1, 1995
For the Years Ended (date of acquisition)
December 31, through December 31,
1997 1996 1995
---- ---- ----
Net periodic cost
Service cost - benefits
earned during the
period with interest $ 41 $ 45 $ 9
Interest cost on accumulated
benefit obligation 342 341 89
Actual return on assets (613) (270) (102)
Net amortization and deferral 356 55 52
----- ----- -----
Net periodic pension cost $126 $171 $ 48
===== ===== =====
30
<PAGE>
HMG WORLDWIDE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 5 - Employee Benefit Plans (continued)
December 31,
--------------
1997 1996
---- ----
Accumulated pension obligation:
Vested benefits obligation ($5,129) ($5,083)
Fair market value of plan assets 3,829 3,228
------ ------
Funded status of projected benefit obligation (1,300) (1,855)
Unrecognized net loss 148 170
Adjustment to recognized minimum liability (148) (170)
------ ------
Accrued pension benefit obligation (1,300) (1,855)
Less: current portion 125 171
------ ------
Pension obligation - long-term ($1,175) ($1,684)
====== ======
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, 1997 and 1996, the Company has
included as a component of other long-term liabilities approximately $329,000
and $334,000, 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
for the periods ended December 31, 1997, 1996 and 1995 and the accumulated
health care obligation of HMG Intermark at December 31, 1997 and 1996:
For the Period
October 1, 1995
For the Years Ended (date of acquisition)
December 31, through December 31,
----------------- --------------------
1997 1996 1995
---- ---- ----
Service cost - benefits
earned during the period $ 45 $ 44 $ 13
==== ==== ====
Net premiums paid
during the period $ 50 $ 49 $ 12
==== ==== ====
Net periodic cost:
Service cost - benefits
earned during the
period with interest $ 6 $ 5 $ 2
Interest cost on
accumulated benefit
obligation 32 33 9
Actual loss on benefit
payments 7 6 2
---- ---- ----
Net periodic health
care cost $ 45 $ 44 $ 13
==== ==== ====
31
<PAGE>
HMG WORLDWIDE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 5 - Employee Benefit Plans (continued)
December 31,
--------------
1997 1996
---- ----
Accumulated health care obligation:
Accumulated benefit obligation and
projected benefit obligation ($327) ($489)
---- ----
Funded status of projected benefit obligation (327) (489)
Unrecognized net (gain) loss (52) 104
---- ----
Health care obligation (379) (385)
Less: current portion 50 51
---- ----
Health care obligation - long-term ($329) ($334)
==== ====
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 subject to Internal Revenue
Code limitations. 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 $149,000, $155,000, and $114,000 were
made and charged to operations for the years ended December 31, 1997, 1996 and
1995 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 $154,000, $160,000 and $155,000 were made and
charged to operations for the years ended December 31, 1997, 1996, and 1995,
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 and $99,000, were made and charged to operations for the years ended
December 31, 1996 and 1995, 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 and $187,000 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 participating in these
plans.
32
<PAGE>
HMG WORLDWIDE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 6 - Income Taxes
The components of the provisions for income taxes are as follows:
Year Ended December 31,
------------------------
1997 1996 1995
---- ---- ----
(in thousands)
Current:
Federal - current provision $139 $ - $ -
Federal - current benefit (139)
State and local 42 12 14
---- ----- ----
42 12 14
---- ----- ----
Deferred:
Federal - - -
State and local - - -
---- ----- ----
- - -
---- ----- ----
$ 42 $ 12 $ 14
==== ===== ====
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.
The following is a summary of the significant components of the Company's
deferred taxes:
December 31,
-----------------
1997 1996
---- ----
(in thousands)
Deferred taxes:
Net operating loss carryforwards $10,662 $10,316
Accruals not currently deductible 138 441
Inventory capitalization 9 83
Depreciation 434 744
Other 149 136
------- -------
Subtotal 11,392 11,720
Less: Valuation allowance (11,392) (11,720)
------- -------
Net deferred 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.
33
<PAGE>
HMG WORLDWIDE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 6 - Income Taxes (continued)
A reconciliation of the tax provisions and amounts computed by applying the
federal income tax rate of 35% to the loss before income taxes is as follows:
Year Ended December 31,
-------------------------
1997 1996 1995
---- ---- ----
(in thousands)
Computed tax benefit, net of
valuation allowance $ - $ - $ -
State and local income taxes 42 12 14
---- ---- ----
$ 42 $ 12 $ 14
==== ==== ====
Note 7 - Common Stock
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, 1997 the Company sold an aggregate of 1,012,500
shares of its Common Stock at $1.00 per share from which it derived net proceeds
of approximately $917,000. The Company also contributed 159,561 shares of Common
Stock valued at $1.00 per share to the HMG Worldwide Corporation Capital
Accumulation Plan during 1997. All stock issued pursuant to the terms of the HMG
Private Placement and the Capital Accumulation Plan contribution 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.
The Company maintains four stock option 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. During 1997, the
Company issued an additional 210,000 incentive-based stock options and 250,000
stock warrants outside of the four stock option plans. The stock options were
granted to certain employees and directors of the Company. The Company issued
50,000 warrants exercisable at $1.00 per warrant in connection with the purchase
of certain assets for the Company's Canadian office. Additionally, the Company
issued 113,000 warrants exercisable at $1.25 per warrant to each of Ivan
Berkowitz and Louis Perlman in connection with the Company's Private Placement
of the Debentures and other financial consulting services performed on behalf of
the Company.
34
<PAGE>
HMG WORLDWIDE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 7 - Common Stock (continued)
The following is a summary of stock option and warrant transactions for the
years ended December 31, 1997, 1996 and 1995:
1997 1996 1995
---- ---- ----
Options outstanding at January 1 2,427,328 2,031,450 2,157,225
Incentive options granted at $ .875 480,950
Incentive options granted at $1.250 599,450
Incentive options granted at $1.375 120,000
Warrants granted at $1.00 50,000
Warrants granted at $1.25 226,000
Warrants granted at $2.00 50,000
Options exercised (184,572) (10,166)
Options canceled (225,450) (69,000) (115,609)
--------- --------- ---------
3,078,828 2,427,328 2,031,450
========= ========= =========
At December 31, 1997, the Company has 469,450, 173,300, 75,900, 825,450,
120,000, 40,200, 1,324,528 and 50,000 options outstanding exercisable at $0.875,
$0.9375, $1.00, $1.25,$1.375, $1.56 and $1.625 per share, respectively. The
weighted average exercise price and period of exercise of all outstanding stock
options and warrants at December 31, 1997 and 1996 was $1.35 per share and 6.6
years, respectively, and $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 No. 123 and has been determined as if the Company had accounted for its
employee stock options under the fair value method of SFAS No. 123. The weighted
average fair value of options granted during 1997 and 1996 was $0.25 and $0.31
per share, respectively. 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 5.6%; volatility factor
of expected market price of the Company's common stock of 36% and a weighted
average expected life of the option of 6.6 years. Under the provisions of SFAS
No. 123, the Company's pro forma compensation expense arising from the grant of
stock options for the year ended December 31, 1997 was approximately $111,000
and pro forma net income and basic income per share would have been
approximately $418,000 and $0.05 per share, respectively. For the year ended
December 31, 1996 pro forma compensation expense 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.
35
<PAGE>
HMG WORLDWIDE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 7 - Common Stock (continued)
The following is the reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations for the year ended December
31, 1997:
For the Year Ended December 31, 1997
---------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
--------- ----------- --------
(in thousands, except per share data)
Net income $529
Basic earnings per share
Income available to
common stockholders $529 8,638 $0.06
=====
Effect of dilutive securities
Stock options & warrants - 2,568
---- -----
Diluted earning per share
Income available to common
stockholders & assumed
conversions $529 11,206 $0.05
==== ====== =====
Note 8 - 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, 1997, future minimum payments under noncancellable operating
leases are as follows:
Year Amount
---- ------
(in thousands)
1998 $ 705
1999 634
2000 572
2001 488
2002 369
Thereafter 31
------
$2,799
======
Rent expense for the years ended December 31, 1997, 1996 and 1995 was
approximately $800,000, $1.6 million and $2.1 million, respectively.
36
<PAGE>
HMG WORLDWIDE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 9 - Significant Clients
Net revenues from individual clients of the Company accounting for 10% or
more of net revenues for the years ended December 31, 1997, 1996 and 1995 are as
follows:
1997 1996 1995
---- ---- ----
Bristol Meyers Squibb, Co. 12%
Procter & Gamble Co. 12% 17% 11%
Wal*Mart Stores, Inc. 11% 11% 13%
Sara Lee Corporation 12% 24%
Note 10 - Foreign Operations
The Company opened an office in Toronto, Canada effective July 1, 1997. For
the six months ended December 31, 1997, the Company generated revenues of
approximately $494,000, incurred a net loss of $31,000 and had identifiable
assets of $447,000.
Note 11 - 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.
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.
37
<PAGE>
HMG WORLDWIDE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 12 - Restructuring Costs - (continued)
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
completed in 1997.
Note 13 - Related Party Transactions
For the years ended December 31, 1997, 1996, and 1995, the Company incurred a
total of approximately $433,000, $200,000 and $142,000, 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, 1997, 1996 and 1995, approximately
$26,000, $234,000 and $525,000, 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
31% of accounts receivable at December 31, 1997.
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, 1997.
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 60 Chairman of the Board and 1984
Chief Executive Officer
Andrew Wahl 37 President and Director 1984
Robert V. Cuddihy, Jr. 38 Chief Operating Officer, 1987
Chief Financial Officer
and Director
L. Randy Riley 46 Executive Vice President and 1993
Director
Herbert F. Kozlov 45 Secretary and Director 1988
Ivan Berkowitz 52 Director 1998
Louis Perlman 51 Director 1998
Lawrence J. Twill, Sr. 60 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.
39
<PAGE>
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.
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.
IVAN BERKOWITZ has been a director of the Company since January 1998.
Mr. Berkowitz has been the President of Great Court Holdings Corporation
since 1989. Mr. Berkowitz is also the Managing General Partner of Steib &
Company since 1993. From 1995 to 1997, Mr. Berkowitz served as the Chief
Executive Officer of PolyVision Corporation.
LOUIS PERLMAN has been a director of the Company since January 1998.
Mr. Perlman has been the President of Lazam Properties Limited for more
than the past five years. Additionally, Mr. Perlman has served as Director
since 1996 and as the Chairman of the Board of Multi Color Corp. since
February 1998.
LAWRENCE J. TWILL, SR. has been a director of the Company since July
1987. Mr. Twill has been Chairman 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.
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, 1997, all filing requirements applicable to its officers, directors and
greater than 10% beneficial owners were complied with.
40
<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, 1997, 1996
and 1995 by its chief executive officer and each of its executive officers whose
compensation exceeded $100,000 during its fiscal year ended December 31, 1997.
Summary Compensation Table
<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 1997 $250,000 $ - 35,000
Chief Executive 1996 $250,000 $ - 140,000
Officer 1995 $250,000 $100,000
Andrew Wahl 1997 $250,000 $ - 35,000
President 1996 $250,000 $ - 140,000
1995 $190,000 $ 76,500
Robert V. Cuddihy, Jr 1997 $250,000 $ - 35,000
Chief Operating Officer 1996 $200,000 $ - 70,000
Chief Financial Officer 1995 $150,000 $100,000
L. Randy Riley 1997 $250,000 $ - 35,000
Executive Vice 1996 $250,000 $ 70,000 129,450
President 1995 $210,000 $ -
</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, 1997 and prior
years under the Company's 1986, 1991 1993 and 1994 Stock Option Plans.
41
<PAGE>
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year End Option Values
Number of Securities
Underlying Unexercised Value of Unexercised
Number of Options at In-the-Money Options
Shares December 31, 1997 at December 31, 1997
Acquired ----------------------- ---------------------
on Value Unexer- Unexer-
Name Exercise Realized Exercisable cisable Exercisable cisable
- ---- -------- -------- ----------- ------- ----------- -------
Michael Wahl 634,828 $ 5,625
Andrew Wahl 556,750 $27,419
Robert V.
Cuddihy, Jr. 258,850 $22,550
L. Randy Riley 258,850 $ 7,275
Employment Agreements
The Company maintains an employment agreement ("Wahl Employment Agreement")
with Michael Wahl, Chairman of the Board and Chief Executive Officer, 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. The Wahl Employment Agreement expires December 31, 2002.
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 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.
Compensation levels afforded to Michael Wahl, 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.
42
<PAGE>
During 1997, the Board approved the grant of stock options, to a number of
employees, including executive officers. The 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 and the
Company's return to profitability. The Board noted that the Company's executive
officers accomplishments included (i) consolidated its principal manufacturing
operations in Reading in January 1997, (ii) acquired certain wire and metal
fabrication equipment and opened a 21,000 square foot wire and metal fabrication
facility in Brooklyn, New York in April 1997, (iii) opened a full service office
in Toronto through the acquisition of certain assets of Griffith Communications,
Inc. effective July 1997, (iv) full conversion to and implementation of a new
management information system tailored to the Company's operations, (v)
exercised its option to purchase a previously leased 72,500 square foot
secondary manufacturing and warehousing facility in Reading for $1.2 millio(vi)
consummated a new term loan facility with a financial institution whereby the
Company obtained a $600,000 secured term loan for the purchase of the 72,500
square foot Reading facility in November 1997. This term loan, which expires in
November 1999, bears interest at the lending institution's prime rate plus 1%
per annum and is secured by the acquired real estate, (vii) consummation of a
private placement ("HMG Private Placement") whereby the Company sold an
aggregate of 1,012,500 shares of its Common Stock from which it derived net
proceeds of approximately $917,000 and (viii) 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.
March 1, 1998
Michael Wahl - Chairman Herbert F. Kozlov
Andrew Wahl Robert V. Cuddihy, Jr
Ivan Berkowitz Louis Perlman
L. Randy Riley Lawrence J. Twill, Sr.
Performance Graph
The following graph compares the yearly 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.
1/1/93 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
--------------------------------------------------------
HMG Worldwide $100 $411 $142 $126 $ 47 $ 53
Nasdaq US $100 $115 $112 $159 $195 $240
Nasdaq Non-Financial $100 $115 $111 $155 $188 $221
43
<PAGE>
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.
In September 1997, Ivan Berkowitz and Louis Perlman, directors of the
Company, entered into a two year financial consulting agreement with the Company
through Lazam Properties Ltd ("Lazam"). Under the terms of the consulting
agreement, Mr. Berkowitz and Mr. Perlman shall provide to the Company with
financial consulting services relating to corporate finance matters. During the
term of the agreement, Lazam shall receive $260,000 in consideration of the
performance of services. Additionally, Lazam, or its designees, shall receive
warrants to purchase an aggregate of 200,000 shares of the Company's Common
Stock at an exercise price of $1.25 per share. The consulting agreement expires
September 30, 1999. Fees paid to Lazam by the Company in full satisfaction of
the consulting agreement for the year ended December 31, 1997 were approximately
$289,000. The Company issued warrants to purchase an aggregate of 113,000 shares
of the Company's Common Stock at an exercise price of $1.25 per share to each of
Mr. Berkowitz and Perlman.
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, 1997 were approximately $147,000.
Lawrence J. Twill, Sr., a director of the Company, is Chairman of Ashwood
Capital. Such firm, from time to time, also serves as an investment banking
advisor to the Company.
44
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth information as of March 19, 1998 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 1,297,875 (2) 13.6%
475 Tenth Avenue
New York, NY 10018
Andrew Wahl 890,203 (3) 9.3%
475 Tenth Avenue
New York, NY 10018
Robert V. Cuddihy, Jr. 385,308 (4) 4.2%
475 Tenth Avenue
New York, NY 10018
Herbert F. Kozlov 245,476 (5) 2.7%
529 Fifth Avenue
New York, NY 10017
L. Randy Riley 357,583 (6) 3.9%
475 Tenth Avenue
New York, NY 10018
Lawrence J. Twill, Sr. 126,150 (7) 1.4%
111 East 30th Street (16A)
New York, NY 10016
Gilmour 1994 Jersey Trust 972,222 (8, 9) 10.9%
7 Bond Street
St. Helier
Jersey, Channel Island
State of Wisconsin Investment Board 740,000 8.3%
P.O. Box 7842
Madison, WI 53707
Great Court Analysis 640,000 (10, 13) 7.2%
5150 Overland Avenue
Culver City, CA 90230
Wynnefield Partners Small Cap Value L.P. 617,000 (11) 6.8%
One Penn Plaza
Suite 4720
New York, NY 10119
Louis Perlman 141,000 (12) 1.7%
650 Madison Avenue
New York, NY 10022
Ivan Berkowitz 113,000 (10, 13) 1.0%
1790 Broadway
Suite 1500
New York, NY 10009
All executive officers 4,196,595 (14) 37.2%
and directors as a group
(8 persons)
45
<PAGE>
(1)Includes shares issuable pursuant to currently exercisable options and
options which will be exercisable within 60 days of March 19, 1998. Except as
otherwise indicated, the persons named herein have sole voting and
disposition power with respect to the shares beneficially owned.
(2)Includes 634,828 shares issuable upon exercise of options.
(3)Includes 551,750 shares issuable upon exercise of options and 40,000
shares issuable upon conversion of Debentures.
(4)Includes 258,850 shares issuable upon exercise of options.
(5)Includes 227,600 shares issuable upon exercise of options.
(6)Includes 258,850 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)Ivan Berkowitz, a director of the Company, is the President of Great Court
Analysis LLC which beneficially owned 640,000 shares
(11)Includes 160,000 shares issuable upon conversion of Debentures.
(12)Includes 113,000 shares issuable upon exercise of warrants and 28,000
shares issuable upon conversion of Debentures.
(13)Includes 113,000 shares issuable upon exercise of warrants. Ivan Berkowitz,
a director of the Company, is the President of Great Court Analysis LLC
which beneficially owned 640,000 shares
(14)Includes 2,341,278 shares issuable upon exercise of options and warrants
and 68,000 shares issuable upon the conversion of the Debentures 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,
1999. Unpaid amounts bear interest at a fluctuating rate equal to the six months
U.S. Treasury bill rate. In 1995, 1996 and 1997, Mr. Cuddihy made prepayments of
$66,422, $4,906 and $41,406, respectively, plus accrued interest. At December
31, 1997, the unpaid balance of such advance was $137,266.
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,
1999. Unpaid amounts bear interest at a fluctuating rate equal to the six months
U.S. Treasury bill rate. In 1995 and 1997, Mr. Wahl made a prepayments of
$25,000 and $20,000, respectively. At December 31, 1997, the unpaid principal
balance of such advance was $55,000 and no interest was paid during 1997.
In September 1997, Ivan Berkowitz and Louis Perlman, directors of the
Company, entered into a two year financial consulting agreement with the Company
through Lazam Properties Ltd ("Lazam"). Under the terms of the consulting
agreement, Mr. Berkowitz and Mr. Perlman shall provide to the Company with
financial consulting services relating to corporate finance matters. During the
term of the agreement, Lazam shall receive $260,000 in consideration of the
performance of services. Additionally, Lazam, or its designees, shall receive
warrants to purchase an aggregate of 200,000 shares of the Company's Common
Stock at an exercise price of $1.25 per share. The consulting agreement expires
September 30, 1999. Fees paid to Lazam by the Company in full satisfaction of
the consulting agreement for the year ended December 31, 1997 were approximately
$289,000. The Company issued warrants to purchase an aggregate of 113,000 shares
of the Company's Common Stock at an exercise price of $1.25 per share to each of
Mr. Berkowitz and Perlman.
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, 1997 were approximately $147,000.
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.
46
<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) Employment Agreement, dated April 30, 1993, between Registrant,
Marlboro Marketing, Inc., a New York corporation, and Michael Wahl(3)*
(g) 1994 Stock Option Plan (5)*
(h) Stock Purchase Agreement, dated as of September 30, 1995, between
Benson Eyecare Corporation and Intermark Corp (6)
(i) 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)
(j) 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 filed one report on Form 8-K during the last quarter of the
period ended December 31, 1997. Such report was filed in October 15, 1997 and
contained a item 5, Other Events, description of the Company recently completed
issuance of Debentures.
(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
47
<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 27, 1998 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 27, 1998
- ------------------------ Board and Chief
Michael Wahl Executive Officer
/s/Andrew Wahl President and March 27, 1998
- ------------------------ Director
Andrew Wahl
/s/Robert V. Cuddihy, Jr. Chief Operating March 27, 1998
- ------------------------- Officer, Chief
Robert V. Cuddihy, Jr. Financial Officer
and Director
/s/L. Randy Riley Executive Vice March 27, 1998
- ------------------------ President and
L. Randy Riley Director
- ------------------------ Director March 27, 1998
Ivan Berkowitz
/s/Herbert F. Kozlov Director March 27, 1998
- ------------------------
Herbert F. Kozlov
- ------------------------ Director March 27, 1998
Louis Perlman
- ------------------------ Director March 27, 1998
Lawrence J. Twill, Sr.
48
<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.
49
<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, 1998. 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, 1998
A - 2
<PAGE>
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
--------- ---------- --------- ------------- ---------
Year ended
December 31, 1997:
Allowance for
doubtful accounts $577 ($285) $ - ($ 19) $273
==== ==== ===== ==== ====
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
==== ==== ===== ==== ====
(a) Specified write-off of accounts receivable.
A-3
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 6,439
<SECURITIES> 0
<RECEIVABLES> 8,718
<ALLOWANCES> 273
<INVENTORY> 6,671
<CURRENT-ASSETS> 22,286
<PP&E> 6,546
<DEPRECIATION> 1,864
<TOTAL-ASSETS> 33,645
<CURRENT-LIABILITIES> 22,712
<BONDS> 0
0
0
<COMMON> 89
<OTHER-SE> 6,381
<TOTAL-LIABILITY-AND-EQUITY> 33,645
<SALES> 46,311
<TOTAL-REVENUES> 46,311
<CGS> 33,273
<TOTAL-COSTS> 11,959
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,098
<INCOME-PRETAX> 571
<INCOME-TAX> 42
<INCOME-CONTINUING> 529
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 529
<EPS-PRIMARY> .06
<EPS-DILUTED> .05
</TABLE>
