SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One) FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-13121
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HMG WORLDWIDE CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3402432
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
475 Tenth Avenue, New York, New York 10018
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 736-2300
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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
11,083,205 (as of 3/19/99). The aggregate market value of the voting stock held
by non-affiliated stockholders of the Registrant is $26,375,207 (as of 3/19/99).
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 five
wholly-owned subsidiaries being, respectively, HMG Worldwide In-Store Marketing,
Inc. ("HMG"), HMG Intermark Worldwide Manufacturing, Inc. ("HMG Intermark"), HMG
Schutz International, Inc. ("HMG Schutz"), Display Depot, Inc. and HMG Griffith
Worldwide In- Store Marketing, Inc. ("HMG Griffith") with facilities in New
York, Pennsylvania, Illinois and Toronto, Canada.
Recent Developments
The Company continued to expand in 1998 as its strategy to expand its
existing client base through organic growth and to strategically acquire
complementary businesses has resulted in the Company's eighth consecutive
quarterly profit. Net revenues increased 47.8% to $68.5 million for the year
ended December 31, 1998. The Company generated net income of $1.9 million, or
$0.21 basic earnings per share, in 1998 as compared to $529,000, or $0.06 basic
earnings per share, for the year ended December 31, 1997.
For the year ended December 31, 1998, the Company accomplished the
following: (i) consummated the acquisition of the business of Schutz
International, Inc., now known as HMG Schutz, a Chicago-based point-of-purchase
company, effective August 1, 1998, (ii) issued a Promissory Note for $1.6
million, net of imputed interest of $278,000, and issued 100,000 shares of its
Common Stock valued at $110,000 for the purchase of HMG Schutz and the Company
agreed to make certain future contingency payments based upon revenues generated
by HMG Schutz, (iii) acquired an option to purchase for $2.3 million the HMG
Schutz office and warehouse facilities, (iv) further expanded the Company's
Reading, Pennsylvania manufacturing facilities to include a third 60,000 square
foot warehouse and distribution center, (v) relocated and expanded the Canadian
operations through HMG Griffith, to a new 25,000 square foot office, production
and distribution center and (vi) continued to focus on retail innovation and
client service to expand the revenue base with both retailers and brand
manufacturers.
In addition, in February 1999, the Company's convertible debenture holders
elected to convert the outstanding $2.2 million of debentures into Common Stock
at $1.25 per share pursuant to the terms of the debentures. As a consequence of
the conversion, the Company issued 1,728,000 shares of Common Stock and retired
the convertible debentures. In addition, on February 24, 1999, the Company
issued $5.0 million 7% Convertible Notes Due February 24, 2002 to two
institutional investors. The principal amount of the Notes is convertible into
shares of the Company's Common Stock at a conversion price of the lesser of
$4.00 per share or a price based on the prevailing market price of the Common
Stock, subject to a maximum issuance of 2,160,000 shares upon conversion of the
Notes, taken together. The Notes were issued through a private placement;
however, the Company has undertaken to register, for resale by the holders of
the Notes, the shares which may be acquired upon the conversion of the Notes
under the Securities Act of 1933.
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Furthermore, during the fourth quarter of 1998 the Company engaged BNY
Capital Markets ("BNY Capital"), a division of The Bank of New York, and an
independent financial consultant to assist the Company in targeting and
financing new, strategic acquisitions. The Company, in conjunction with BNY
Capital, currently is seeking to refinance its existing revolving line of credit
and term loans under more favorable terms and to provide a source of acquisition
financing in the form of debt. The Company is seeking a $35.0 million credit
facility. As part of the acquisition and refinancing activities sponsored by the
Company, the Company recorded a $221,000 increase to additional paid in capital,
using the Black Scholes option pricing model, for the issuance of 650,000
warrants to acquire the Company's Common Stock at an average exercise price of
$1.10 per share.
Management believes that each of the above accomplishments positions HMG
well as a leading, innovative, client service oriented company in the in-store
marketing industry. Furthermore, HMG will continue to seek to acquire strategic
businesses which will expand the Company's products and services, provide
improved distribution and reduce operating and manufacturing costs.
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 $12.7 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. With
consumers making so many decisions at the point of sale, retailers and consumer
products companies are paying greater attention to how products and brand
categories are organized and presented in-store. Point-of-purchase merchandising
systems attract and influence consumers at the time when the majority of
purchase decisions are made.
The Company believes retailers are also driving the growth of in-store
marketing. Computerized bar-coding and scanner systems have enabled retailers to
identify high-margin, high-turnover products and more effectively allocate floor
or shelf space to such products. Concurrently, consumer products companies have
been faced with an increasing number of competitive products, including
private-label offerings of retailers. As a result, many consumer products
companies have sought to maximize the appeal and efficiency of their allocated
space in retail stores. In-store merchandising systems are designed to increase
retail sales by attracting and influencing consumers at the point of sale. Such
systems also are designed to improve retail space utilization and product
organization, facilitate retail inventory management and reduce retail labor
costs. In-store merchandising systems also become an important component of
merchandising products and brand categories to create competitive points of
differentiation between each retail chain.
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Operations
General
The Company identifies the strategic, 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 strategic in nature, "solutions oriented" and 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
Auto-CAD and Solid Works equipment which, among other things, enables the
Company to design proprietary 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, assemble its merchandising
systems, and warehouse and distribute its products, as compared to many of its
competitors which have no injection molding, wire or metal fabrication, or
assembly facilities, and warehouse or distribution capacity and must outsource
to third parties. Once the Company enters into a contract with a client to
manufacture merchandising 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 customer
service number to call for assistance in connection with on-site assembly.
Suppliers
The Company uses and has available a variety of outside sources to supply
the raw materials and fabricated components used in its 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
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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, HMG
Griffith, in Toronto, Canada. For the year ended December 31, 1998 and the six
months ended December 31, 1997, net revenues in Canada were approximately $3.5
million and $494,000, respectively, and the Company realized income from
operations of $218,000 and a loss from operations of approximately $31,000,
respectively.
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 merchandising
fixtures 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 systems 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 Thom McAn shoe centers located in
Kmart Corporation ("Kmart") stores and Wal*Mart Stores ("Wal*Mart") electronic
centers.
Stock Displays
Although many of the Company's clients require custom merchandising
systems, certain components therein can frequently be used in other systems. As
a result, the Company has accumulated tools and molds for component parts and
displays which are included in a catalogue and marketed to existing and new
clients. Since the investment in time and money for the development and
production of the tooling for the components and displays has already been made,
the Company can provide many of its clients with a timely, low-cost solution to
certain of their in-store merchandising needs. For example, the Company's System
35 is a freestanding display that can be ordered in 30 different size variations
with multiple shelf configurations. The System 35 addresses consumer products
companies' and retailers' needs for permanent island displays that, through
color, size, number of shelves and header treatments, can be customized for a
multitude of consumer products. The Company also markets a variety of
standardized on-shelf modifications such as extrusions and dividers. These
modifications offer the ability to differentiate display space by identifying
brand or category space and provide an area for communication of information.
Interactive Systems
The Company's interactive display systems include shelf-edge and
freestanding flip-charts, mechanical demonstration units and battery-powered and
touchscreen computer systems. Computer-based systems are useful both as a
point-of-purchase merchandising tool and an effective means of collecting and
disseminating information. The interactive computer-based systems ask consumers
to respond to a series of questions. After analyzing the consumer's responses,
the system makes recommendations of appropriate products which are immediately
available for purchase on the surrounding display. Computer-based systems also
enable consumer products companies to retrieve market research information based
upon consumers' responses, give consumers comprehensive and accurate product
information and assist consumers when sales personnel are unavailable. The
Company's sales of computer-based systems are directed toward large consumer
products companies and mass merchandisers, which potentially can use such
systems in quantities of 250 or more units.
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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"), Kmart, Microsoft, The Pillsbury
Company, Target Stores, Inc., Walgreen 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, 1998, P&G and CVS accounted for
approximately 12% and 11%, respectively, of the Company's net revenue. 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.
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, 1998, the Company's aggregate backlog was $48.8 million, as
compared to $32.0 million and $15.6 million at December 31, 1997 and 1996,
respectively. Of such aggregate backlog at December 31, 1998, no one client
exceed 10% of such backlog. The Company anticipates that substantially all such
backlog at December 31, 1998, will be filled during the next twelve months. In
addition to the $48.8 million backlog at December 31, 1998, 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, 1998 was $23.9 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 43
other sales and account management 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 various 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 merchandising 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 merchandising fixture and display business. As a result, the Company is
one of the largest participants in this field. 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 March 19, 1999, the Company employed 425 persons, including 4
executive officers, 214 in production and assembly, 38 in design, 55 in
purchasing and engineering, 43 in marketing and sales and 71 in administration.
Approximately 102 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
60 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 11 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 under a sublease 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 35,000 square feet of space at 8710 Ferris Avenue
in Morton Grove, IL on a month to month basis while the Company evaluates its
option to purchase such facility for $2.3 million. The purchase option expires
no earlier than March 2000. The Company leases approximately 25,000 square feet
of office and warehouse space at 9 City View Drive in Toronto, Canada, for
approximately $63,000 annually expiring in August 2003.
The Company operates three production and assembly facilities located in
Reading, Pennsylvania. Two of 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 third production
and assembly facility is comprised of 60,000 square feet of space at current
annual base rental of approximately $165,000 annually which expires in June
2003.
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.
The Company's Annual Meeting of shareholders was held on November 10, 1998.
The following matters were submitted to a vote of stockholders of the Company:
1. The Company's stockholders elected seven directors for the ensuing year
as follows:
Ivan Berkowitz For: 7,380,821 Withheld: 5,780
Robert V. Cuddihy, Jr. For: 7,380,821 Withheld: 5,780
Herbert F. Kozlov For: 7,380,821 Withheld: 5,780
L. Randy Riley For: 7,380,821 Withheld: 5,780
Lawrence J. Twill, Sr. For: 7,380,821 Withheld: 5,780
Andrew Wahl For: 7,380,821 Withheld: 5,780
Michael Wahl For: 7,380,821 Withheld: 5,780
2. The Company's stockholders ratified and approved the Company's 1998
Stock Option Plan with 2,603,003 votes for, 889,000 against, and
3,894,598 abstain.
3. The Company's stockholders ratified and approved the selection of
Friedman Alpren & Green LLP as the Company's independent auditors for
the fiscal year ending December 31, 1998. This motion was approved with
7,366,787 votes for, 10,500 against and 9,314 abstain.
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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
1998
First quarter . . . . . . . . . . . . . . . . . .$ 1-3/8 $ 1
Second quarter . . . . . . . . . . . . . . . . . 2-1/16 1-1/8
Third quarter . . . . . . . . . . . . . . . . . 1-7/8 1-15/16
Fourth quarter . . . . . . . . . . . . . . . . . 2-7/16 3/4
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
At March 19, 1999, there were 225 holders of record and approximately 1,325
beneficial stockholders of the Company's Common Stock and the closing bid
quotation of the Common Stock on Nasdaq was $3-7/8 per share.
Dividend Policy
The Company has not paid dividends on the Common Stock since its inception.
The Company intends to reinvest any earnings in its business to finance future
growth. Accordingly, the Board of Directors does not anticipate declaring any
cash dividends in the foreseeable future. In addition, under the terms of its
revolving credit facility, the Company is prohibited from paying cash dividends.
See Note 5 in Notes to the Consolidated Financial Statements included in Item 8
hereof.
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Item 6. Selected Historical Financial Data.
The selected historical financial data presented below as of December 31,
1998 and 1997 and for each of the years in the three year period ended December
31, 1998, 1997 and 1996 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. All of such
selected financial data of the Company has been derived from the Consolidated
Financial Statements of the Company, which have been audited by Friedman Alpren
& Green LLP, Independent Certified Public Accountants. The selected historical
financial data, which include Balance Sheet data at December 31, 1996, 1995 and
1994 and Statement of Operations data for the years ended December 31, 1995 and
1994 has been derived from Consolidated Financial Statements not presented
herein.
<TABLE>
Year Ended December 31,
----------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Net revenues ........................ $ 68,457 $ 46,311 $ 45,552 $ 47,641 $ 55,578
Income (loss) from operations ....... 3,299 1,079 (5,040) (10,009) (795)
Net income (loss) ................... $ 1,904 $ 529 ($ 5,535) ($10,118) ($ 963)
======== ======== ======== ======== ========
Basic earnings per share data
Net income (loss) per common shares $ 0.21 $ 0.06 ($ 0.73) ($ 1.34) ($ 0.17)
======== ======== ======== ======== ========
Weighted average number of
common shares outstanding ........ 9,094 8,638 7,614 7,568 5,643
======== ======== ======== ======== ========
Diluted earnings per share data
Net income (loss) per common and
common equivalent shares ......... $ 0.19 $ 0.05 ($ 0.73) ($ 1.34) ($ 0.17)
======== ======== ======== ======== ========
Weighted average number of common
and common equivalent shares ..... 10,712 11,206 7,614 7,568 5,643
======== ======== ======== ======== ========
</TABLE>
<TABLE>
December 31,
------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Balance Sheet Data: (in thousands)
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents. . . . . . . .$ 5,730 $ 6,439 $ 6,950 $ 8,139 $ 6,469
Working capital. . . . . . . . . . . . . 804 (426) (3,236) 2,624 14,119
Total assets. . . . . . . . . . . . . . 51,729 33,645 28,755 32,648 36,718
Long-term debt. . . . . . . . . . . . . 4,251 2,878 266 - 3,182
Stockholders' equity. . . . . . . . . . 9,068 6,470 5,191 10,076 20,223
</TABLE>
10
<PAGE>
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations.
General
The Company continued to expand in 1998 as its strategy to expand its
existing client base through organic growth and to strategically acquire
complementary businesses has resulted in the Company's eighth consecutive
quarterly profit. Net revenues increased 47.8% to $68.5 million for the year
ended December 31, 1998. The Company generated net income of $1.9 million, or
$0.21 basic earnings per share, in 1998 as compared to $529,000, or $0.06 basic
earnings per share, for the year ended December 31, 1997.
For the year ended December 31, 1998, the Company accomplished the
following: (i) consummated the acquisition of the business of Schutz
International, Inc., now known as HMG Schutz, a Chicago-based point-of-purchase
company, effective August 1, 1998, (ii) issued a Promissory Note for $1.6
million, net of imputed interest of $278,000, and issued 100,000 shares of its
Common Stock valued at $110,000 for the purchase of HMG Schutz and the Company
agreed to make certain future contingency payments based upon revenues generated
by HMG Schutz, (iii) acquired an option to purchase for $2.3 million the HMG
Schutz office and warehouse facilities, (iv) further expanded the Company's
Reading, Pennsylvania manufacturing facilities to include a third 60,000 square
foot warehouse and distribution center, (v) relocated and expanded the Canadian
operations through HMG Griffith, to a new 25,000 square foot office, production
and distribution center and (vi) continued to focus on retail innovation and
client service to expand the revenue base with both retailers and brand
manufacturers.
In addition, in February 1999, the Company's convertible debenture holders
elected to convert the outstanding $2.2 million of debentures into Common Stock
at $1.25 per share pursuant to the terms of the debentures. As a consequence of
the conversion, the Company issued 1,728,000 shares of Common Stock and retired
the convertible debentures. In addition, on February 24, 1999, the Company
issued $5.0 million 7% Convertible Notes Due February 24, 2002 to two
institutional investors. The principal amount of the Notes is convertible into
shares of the Company's Common Stock at a conversion price of the lesser of
$4.00 per share or a price based on the prevailing market price of the Common
Stock, subject to a maximum issuance of 2,160,000 shares upon conversion of the
Notes, taken together. The Notes were issued through a private placement;
however, the Company has undertaken to register, for resale by the holders of
the Notes, the shares which may be acquired upon the conversion of the Notes
under the Securities Act of 1933.
Furthermore, during the fourth quarter of 1998, the Company engaged BNY
Capital Markets ("BNY Capital"), a division of The Bank of New York and an
independent financial consultant, to assist the Company in targeting and
financing new, strategic acquisitions. The Company, in conjunction with BNY
Capital, is currently seeking to refinance its exsisting revolving line of
credit and term loans under more favorable terms and to provide a source of
acquisition financing in the form of debt. The Company is seeking a $35.0
million credit facility. As part of the acquisition and refinancing activities
sponsored by the Company, the Company recorded a $221,000 increase to additional
paid in capital, using the Black Scholes option pricing model, for the issuance
of 650,000 warrants to acquire the Company's Common Stock at an average exercise
price of $1.10 per share.
Management believes that each of the above accomplishments positions HMG
well as a leading, innovative, client service oriented company in the in-store
marketing industry. Furthermore, HMG will continue to seek to acquire strategic
businesses which will expand the Company's products and services, provide
improved distribution and reduce operating and manufacturing costs.
11
<PAGE>
Results of Operations
Year Ended December 31, 1998 as Compared to
Years Ended December 31, 1997 and 1996
Net revenues increased by approximately $22.2 million to $68.5 million for
the year ended December 31, 1998 from $46.3 million for the year ended December
31, 1997. This 47.8% increase in net revenues from 1997 to 1998 was principally
due to the effects of (i) the net revenues from HMG Schutz, acquired effective
August 1, 1998 of approximately $8.9 million, (ii) an increase of net revenues
from HMG Griffith, acquired effective July 1, 1997 of approximately $3.0
million, and (iii) an increase of net revenues of approximately $10.2 million
from a more diversified client base and through the national roll out of several
new retailer sponsored merchandising programs. Net revenues increased
approximately $759,000 million 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 approximately $2.6 million and (iii) a decrease in the combined net revenues
of the Company's top three clients of 1997 versus 1996 of approximately $2.3
million due to the timing of marketing expenditures by major clients in addition
to the timing of national roll-outs of merchandising systems developed by the
Company.
Gross profit increased approximately $6.2 million to $19.2 million for the
year ended December 31, 1998 from $13.0 million for the year ended December 31,
1997 due to the increase in the Company's net revenues. For the years ended
December 31, 1998 and 1997, the gross margin remained stable at 28.1%. Gross
margins remained stable principally due to the Company's emphasis in more
direct, internal production of its merchandising systems. Gross profit increased
approximately $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 under absorption 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.
Selling, general and administrative expenses ("SG&A") increased
approximately $3.9 million to $15.9 million for the year ended December 31, 1998
as compared to $12.0 million for the year ended December 31, 1997. The increase
in SG&A from 1997 to 1998 was principally a result of (i) the addition of HMG
Schutz SG&A, $2.7 million, (ii) the expansion of HMG Griffith, $607,000
increase, and (iii) an increase in other general expenses. SG&A decreased
approximately $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) decreased spending in other general expenses
For the year ended December 31, 1998, the Company generated interest income
of $274,000 as compared to $323,000 and $351,000, for the comparable 1997 and
1996 periods, respectively. The decrease in interest income of approximately
$49,000 from 1997 to 1998 and the decrease of $28,000 from 1996 to 1997 was
attributable principally to a reduction in cash and cash equivalents invested in
interest bearing marketable securities and commercial paper.
Interest expense was $1.7 million for the year ended December 31, 1998 as
compared to $1.1 million and $834,000 for the comparable 1997 and 1996 periods,
respectively. The increase in interest expense of approximately $553,000 from
1997 to 1998 and $264,000 from 1996 to 1997 was principally due to the increased
average borrowing in the respective years.
12
<PAGE>
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 net income
of approximately $1.9 million, or $0.21 basic earnings per share, for the year
ended December 31, 1998 as compared to net income of $529,000, or $0.06 basic
earnings per share, for the year ended December 31, 1997. For the year ended
December 31, 1996, the Company incurred a net loss of $5.5 million, or $0.73 per
share.
Stockholders' Equity
Stockholders' equity increased approximately $2.6 million to $9.1 million
at December 31, 1998 from $6.5 million at December 31, 1997. The net increase in
stockholders' equity was principally due to (i) net income of $1.9 million, (ii)
proceeds derived from the HMG Private Placement of Common Stock whereby the
Company issued 150,000 shares of Common Stock for an aggregate value of
$169,000, (iii) the issuance of 100,000 shares of Common Stock pursuant to the
acquisition of HMG Schutz valued at $110,000, (iv) the issuance of warrants
valued at $221,000 and (v) the issuance of 123,055 shares of Common Stock by the
Company to the HMG Worldwide Corporation Capital Accumulation Plan valued at
$154,000.
Income Taxes
At December 31, 1998, the Company had available $34.6 million of net
operating loss carry forwards which expire during the years 2001 through 2013.
The Company's income tax provision for the year ended December 31, 1998 was
$31,000 as compared to $42,000 and $12,000 for the years ended December 31, 1997
and December 31, 1996, respectively, and resulted principally from state and
local alternative minimum taxes.
Backlog
At December 31, 1998, the Company's aggregate backlog was approximately
$48.8 million, as compared to $32.0 million and $15.6 million at December 31,
1997 and 1996, respectively. Of such aggregate backlog at December 31, 1998, no
one client exceeded 10% of such backlog. The Company anticipates that
substantially all such backlog at December 31, 1998, will be filled during the
next twelve months. In addition to the $48.8 million backlog at December 31,
1998, 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, 1998 was $23.9 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.
13
<PAGE>
Liquidity and Capital Resources
Cash and cash equivalents at December 31, 1998, 1997 and 1996 aggregated
approximately $5.7 million, $6.4 million and $6.9 million, respectively. For the
years ended December 31, 1998, 1997 and 1996 the Company's cash flows from
operating, investing and financing activities are summarized below:
<TABLE>
Year Ended December 31,
-----------------------------
1998 1997 1996
---- ---- ----
(in millions)
<S> <C> <C> <C>
Net cash used in operating activities ........................ ($ 3.2) ($ 3.3) ($ 2.0)
------ ------ ------
Investing activities:
Acquisition, net of cash acquired .......................... 0.1
Proceeds from sale of an investment ........................ 0.4
Capital expenditures ....................................... (1.5) (1.8) (1.6)
---- ---- ----
Net cash provided by (used in) investing activities ....... (1.4) (1.4) (1.6)
---- ---- ----
Financing activities:
Net proceeds from sale of common stock ..................... 0.2 0.5 0.4
Proceeds from exercise of stock options .................... 0.3
Proceeds derived from the sale of convertible debentures ... 2.2
Net increase in indebtedness ............................... 3.7 1.5 1.7
--- --- ---
Net cash provided by financing activities ................ 3.9 4.2 2.4
--- --- ---
Net increase (decrease) in cash and cash equivalents ....... ($ 0.7) ($ 0.5) ($1.2)
===== ===== ====
</TABLE>
The Company's decrease in cash and cash equivalents of approximately
$709,000 for the year ended December 31, 1998 was principally due to (i) net
cash used in operating activities of $3.2 million, used principally to finance
increases in the Company's accounts receivable and inventory levels, (ii)
capital expenditures of $1.5 million, offset by, (iii) net borrowing under the
Company's credit facility of $3.7 million and (iv) net proceeds derived from the
HMG Private Placement of $169,000.
The Company's decrease in cash and cash equivalents of approximately
$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 borrowing 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 borrowing 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 maintains a $17.0 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
14
<PAGE>
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.
Borrowing under the Credit Agreement bear interest at the institution's
prime rate plus 3/4% 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, 1998, 1997 and 1996 was approximately $17.2 million, $10.8 million and $8.8
million, respectively, at the weighted average interest rate of 9.7%, 9.6% and
8.6%, 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, 1998, 1997, and 1996 the balance
outstanding on the term loan component of the Credit Agreement was $772,000,
$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 were converted in February 1999 at the conversion price of $1.25
per share. As a consequence of the conversion, the Company issued 1,728,000
shares of Common Stock and retired the convertible debentures.
On February 24, 1999, the Company issued $5.0 million 7% Convertible Notes
Due February 24, 2002 to two institutional investors. The principal amount of
the Notes is convertible into shares of the Company's Common Stock at a
conversion price of the lesser of $4.00 per share or a price based on the
prevailing market price of the Common Stock, subject to a maximum issuance of
2,160,000 shares upon conversion of the Notes, taken together. The Notes were
issued through a private placement; however, the Company has undertaken to
register, for resale by the holders of the Notes, the shares which may be
acquired upon the conversion of the Notes under the Securities Act of 1933.
The Company's working capital at December 31, 1998 was $729,000, inclusive
of borrowing of $14.8 million pursuant to the three-year Credit Agreement. 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 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 Convertible Notes will be sufficient to support its debt service
requirements and its other capital and operating needs for the next fiscal year.
Furthermore, during the fourth quarter of 1998 the Company engaged BNY Capital
to assist the Company in refinancing its current revolving line of credit and
term loans under more favorable terms and to provide a source of acquisition
financing in the form of debt. The Company is seeking a $35.0 million credit
facility. Management believes its pending financing, an expanded client base and
future cash flows from operations developed 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.
15
<PAGE>
Year 2000
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 Year 2000 compliance. The
Company's Year 2000 strategy includes the evaluation of all critical Company
software applications, client/server applications, PC's and workstations, vendor
supplied software, equipment and clients and suppliers. An inventory and
assessment of all areas have been completed and the Company has inspected,
remediated and performed testing of each of its systems for Year 2000
compliance.
As of January 31, 1999, the Company believes that it has successfully
remediated its client/server business applications for the millennium change.
The Year 2000 project is now in its final verification testing which is due to
be completed at the end of the first quarter of 1999. During the second quarter
of 1999, the Company is scheduled to bring HMG Schutz and HMG Griffith on line
with its client/server business applications such that all Company operations
will be tied together and data can be accessed and exchanged through a common
shared technology platform. The Company's suppliers are also engaged in their
Year 2000 testing and the Company is monitoring their progress. In addition, in
the event that a supplier is unable to become Year 2000 compliant, the Company's
supplier network is sufficient, and material and services are available to the
Company to adjust to a change in a production supply without compromising the
manufacturing schedule established by the Company. 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.
It is anticipated that the Year 2000 project will be completed by mid-1999.
To date, the Company has incurred expenses of approximately $375,000 in hardware
upgrades and software enhancements. The Company projects that the total cost of
the Year 2000 project will approximate $475,000 to $550,000.
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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to the impact of interest rate, market risks and
currency fluctuations. In the normal course of business, the Company employs
internal processes to manage its exposure to interest rate, market risks and
currency fluctuations. The Company's objective in managing its interest rate
risk is to limit the impact of interest rate changes on earnings and cash flows
and to lower its overall borrowing costs. To achieve these objectives, the
company refinances debt when advantageous. The Company is exposed to the impact
of currency fluctuations because of its international operations. At the present
time, the Company does not swap or hedge its foreign currency obligations, but
will review its policy on hedging on a continuous basis. The Company does not
hold or issue derivative or other financial instruments for trading purposes.
16
<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, 1998 and 1997 19
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996 20
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996 21
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1998, 1997 and 1996 23
Notes to Consolidated Financial Statements 24
17
<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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998 in conformity with generally accepted
accounting principles.
FRIEDMAN ALPREN & GREEN LLP
New York, New York
March 24, 1999
18
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31,
-------------------
1998 1997
---- ----
ASSETS
Current assets:
Cash and cash equivalents (Note 1) ................... $ 5,730 $ 6,439
Accounts receivable - less allowance
for doubtful accounts of $453 and $273 (Note 14) ... 15,505 8,445
Inventory (Notes 1 and 3) ............................ 15,335 6,671
Prepaid expenses ..................................... 816 414
Other current assets ................................. 263 317
------- --------
Total current assets .............................. 37,649 22,286
Property and equipment - net (Notes 1 and 4) ........... 6,319 4,682
Excess of cost over fair value
of assets acquired, less accumulated
amortization of $2,053 and $1,615 (Notes 1 and 2) .... 7,528 6,544
Other assets ........................................... 233 133
------- -------
$51,729 $33,645
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations (Note 5) ..$14,801 $10,942
Accounts payable ...................................... 15,933 8,729
Accrued employee compensation and benefits ............ 1,353 1,418
Deferred revenue (Note 1) ............................. 2,970 604
Accrued expenses ...................................... 1,575 673
Other current liabilities ............................. 213 346
------- -------
Total current liabilities ........................... 36,845 22,712
Pension obligation (Notes 1 and 6) ...................... 1,147 1,175
Convertible debentures (Notes 5 and 15) ................. 2,160 2,200
Promissory note (Note 2) ................................ 1,600
Term loans (Note 5) ..................................... 491 678
Other long-term liabilities (Note 6) .................... 418 410
------- -------
42,661 27,175
------- -------
Stockholders' equity:
Common stock, par value $0.01; 50,000,000 shares
authorized; 9,329,205 and 8,924,150 shares
issued and outstanding (Note 8) ..................... 93 89
Additional paid-in capital (Note 8) ................... 35,335 34,645
Accumulated deficit ...................................(26,360) (28,264)
------- -------
9,068 6,470
------- -------
$51,729 $33,645
======= =======
See accompanying notes to consolidated financial statements.
19
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
Year Ended December 31,
------------------------------
1998 1997 1996
---- ---- ----
Net revenues (Notes 1 and 10) ............. $ 68,457 $ 46,311 $ 45,552
Cost of revenues .......................... 49,220 33,273 37,589
-------- -------- --------
Gross profit ............................ 19,237 13,038 7,963
Selling, general and administrative
expenses ................................ 15,938 11,959 13,003
-------- -------- --------
Income (loss) from operations .......... 3,299 1,079 (5,040)
Interest income ........................... 274 323 351
Interest expense (Note 5) ................. (1,651) (1,098) (834)
Other income .............................. 13 267 -
-------- -------- ---------
Income (loss) before provision for income
taxes ................................. 1,935 571 (5,523)
Provision for income taxes (Note 7) ....... (31) (42) (12)
-------- -------- --------
Net income (loss) ....................... $ 1,904 $ 529 ($ 5,535)
======== ======== ========
Basic earnings per share (Note 8)
Net income (loss) per common shares ..... $ 0.21 $ 0.06 ($ 0.73)
======== ======== =======
Weighted average number of common
shares outstanding ...................... 9,093,715 8,637,528 7,614,356
========= ========= =========
Diluted earnings per share (Note 8)
Net income (loss) per common and
common equivalent shares ................ $ 0.19 $ 0.05 ($ 0.73)
======== ======== ======
Weighted average number of common
and common equivalent shares ............ 10,711,659 11,206,460 7,614,356
========== ========== =========
See accompanying notes to consolidated financial statements.
20
<PAGE>
<TABLE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
-------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers ........................... $ 64,536 $ 43,091 $ 48,930
Interest received ...................................... 282 321 351
Cash paid to suppliers ................................. (51,312) (36,481) (39,739)
Cash paid to employees ................................. (15,024) (9,112) (10,671)
Income taxes paid ...................................... (3) (30) (12)
Interest paid .......................................... (1,651) (1,098) (816)
-------- -------- --------
Net cash used in operating
activities ........................................ (3,172) (3,309) (1,957)
-------- -------- --------
Cash flows from investing activities:
Acquisition, net of cash acquired ...................... 138
Proceeds from the sale of an investment ................ 356
Capital expenditures ................................... (1,517) (1,807) (1,654)
-------- -------- --------
Net cash used in
investing activities .............................. (1,379) (1,451) (1,654)
-------- -------- --------
Cash flows from financing activities:
Net proceeds from the sale of common
stock as part of a private placement ................ 169 540 377
Net proceeds from exercise of stock options ............ 273
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 .......... 3,860 1,315 1,814
Principal payments of outstanding debt obligations ..... (187) (406) (382)
-------- -------- --------
Net cash provided by financing
activities ........................................ 3,842 4,249 2,422
-------- -------- --------
Net decrease in cash and cash equivalents ................ (709) (511) (1,189)
Cash and cash equivalents at beginning of year ........... 6,439 6,950 8,139
-------- -------- --------
Cash and cash equivalents at end of year ................. $ 5,730 $ 6,439 $ 6,950
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
<TABLE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(in thousands)
Year Ended December 31,
--------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Reconciliation of net income (loss) to net cash
used in operating activities:
Net income (loss) ............................... $1,904 $ 529 ($5,535)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization ................... 1,118 882 856
Other income .................................... 267
Decrease (increase) in assets, net of effects
of acquisition:
Accounts receivable ........................... (5,448) (1,991) 2,227
Inventory ..................................... (7,210) (2,457) 1,040
Prepaid expenses .............................. (347) (319) 345
Other assets .................................. (47) (77) (110)
Increase (decrease) in liabilities, net of effects
of acquisition:
Accounts payable .............................. 6,381 2,926 1,472
Deferred revenue .............................. 1,537 (1,231) 1,139
Accrued expenses .............................. (1,032) (1,329) (1,760)
Restructuring costs ........................... (1,350)
Pension obligation ............................ (28) (509) (281)
------- -------- --------
Net cash used in operating activities .......... ($3,172) ($3,309) ($1,957)
====== ====== ======
Non-cash investing and financing activities:
Fair value of assets acquired in
connection with an acquisition ................ $4,059
Fair value of liabilities assumed
in connection with an acquisition ............. $5,481
Common stock issued in connection
with an acquisition ........................... $ 110
Promissory note, net of imputed
interest, issued in connection with
an acquisition ................................ $1,600
Common stock issued in connection
with an employee benefit plan ................. $ 154 $ 160
Common stock issued in connection with
the conversion of a debenture ................. $ 40
Warrants issued as part of a consulting agreement $ 221 $ 50
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
<TABLE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except share data)
Additional Total
Common Stock Paid-in Accumulated Stockholders'
------------
Shares Amount Capital Deficit Equity
------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C>
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
Shares sold as part of a
private placement ................ 150,000 2 167 169
Issuance of shares as part of
an acquisition ................... 100,000 1 109 110
Issuance of shares pursuant
to conversion of debentures ...... 32,000 40 40
Issuance of warrants as part of a
consulting agreement ............. 221 221
Issuance of shares as a contribution
to HMG Worldwide Corporation
Capital Accumulation Plan ........ 123,055 1 153 154
Net income ......................... 1,904 1,904
--------- ---- ------ ------- -------
Balance at December 31, 1998 ....... 9,329,205 $ 93 $35,335 ($26,360) $ 9,068
========= ==== ======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
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 five operating wholly-owned
subsidiaries being respectively HMG Worldwide In-Store Marketing, Inc. ("HMG"),
HMG Intermark Worldwide Manufacturing, Inc. ("HMG Intermark"), Display Depot,
Inc. ("DDI"), HMG Schutz International, Inc. ("HMG Schutz") and HMG Griffith
Worldwide In-Store Marketing, Inc. ("HMG Griffith"). The Company conducts its
operations in New York, Illinois, Pennsylvania and Toronto, Canada.
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. Costs incurred in the design, development and
engineering of merchandising fixtures and display programs, including salaries
and preproduction expenses, are capitalized as part of work-in-process inventory
(see Note 3).
Property and Equipment: Property and equipment are stated at cost.
Equipment under capital leases are recorded at the present value of minimum
lease payments at the inception of the lease. Depreciation is computed based
upon the estimated useful lives of the assets using the straight-line method.
Equipment held under capital leases and leasehold improvements are amortized on
the straight-line method over the shorter of the lease term or estimated useful
life of the asset.
24
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
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 for acquisitions consummated
prior to 1998 and over fifteen years for the acquisition consummated in 1998.
Related amortization expense was approximately $438,000, $408,000 and $408,000,
for the years ended December 31,1998, 1997 and 1996, respectively (see Note 2).
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, promissory note, 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. Income and expense
items are translated at the average exchange rates during the respective
periods. All translation adjustments realized by the Company during 1998, which
in total were not material, were charged to operations.
Revenue Recognition: Revenue is recognized when a merchandise fixture or
display system is shipped and when marketing consulting services are performed.
Reclassifications: Certain reclassifications have been made to conform the
presentation of prior years to the current year presentation.
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 (loss) 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
computation of diluted earnings per share, unless they are anti-dilutive (see
Note 8), 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", SFAS No. 106 "Employers' Accounting for
Post-retirement Benefits Other Than Pensions" and SFAS No. 132 "Employers'
Disclosures About Pensions and Other Post-retirement Benefits" (see Note 6).
25
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 1 - Organization and Significant Accounting Policies (continued)
Accounting for Stock-Based Compensation: The Company accounts 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 (see Note 8).
Note 2 - Acquisition of HMG Schutz Operations
Effective August 1, 1998, the Company consummated the acquisition of the
business of HMG Schutz, a Chicago-based point-of-purchase company pursuant to an
Asset Purchase Agreement ("Purchase Agreement"). Pursuant to the terms of the
Purchase Agreement, the Company issued a $1.6 million Promissory Note, as
adjusted, net of imputed interest of $278,000, and issued 100,000 shares of the
Company's Common Stock, valued at $1.10 per share, in consideration for the
acquired assets. The payments required under the Promissory Note commence upon
the second anniversary of the Purchase Agreement after which the Company will
make 20 equal quarterly principal installments, plus accrued interest at the
prime rate per annum, over five years. In addition, the Company has agreed to
make certain future contingent payments based upon revenues generated by HMG
Schutz over the next three years. To date, the Company has recorded aggregate
contingent payments of $179,000 pursuant to the terms of the Purchase Agreement.
The Company also acquired an option to purchase at a future date yet to be
determined, the office and warehouse facilities and related land currently
occupied by HMG Schutz for approximately $2.3 million.
The Company recorded the assets and liabilities of HMG Schutz based upon
their estimated fair market values as of the acquisition date. Additionally, the
Company recorded $1.4 million as the excess of cost over the fair market value
of assets acquired. At August 1, 1998, the financing and the acquisition of the
fair market value of the assets acquired of HMG Schutz was as follows:
Amount
------
(in thousands)
Consideration:
Promissory note $1,600
Issuance of 100,000 shares of Common Stock 110
Contingent payments earned in 1998 179
Transaction costs and related expenses 778
------
2,667
Fair market value of assets acquired 1,245
-----
Excess cost over fair market value of assets acquired $1,422
======
26
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 2 - Acquisition of HMG Schutz Operations (continued)
The Pro Forma Statement of Operations of the Company, giving effect to the
acquisition, (i) for the year ended December 31, 1998 combine the unaudited
historical Statement of Operations of HMG Schutz and the Company for such period
as if the acquisition were consummated on January 1, 1998, and (ii) for the year
ended December 31, 1997 combine the historical Statement of Operations of HMG
Schutz and the Company for such period as if the acquisition were consummated on
January 1, 1997. These Pro Forma results have been prepared for comparative
purposes only and do not purport to be indicative of what would have occurred
had the acquisition been in effect for the periods indicated or the results
which may occur in the future.
Pro Forma for the Year Ended December 31,
-----------------------------------------
1998 1997
---- ----
(in thousands, except per share data)
Net revenues $77,205 $67,903
Cost of revenues 55,168 48,789
------- -------
Gross profit 22,037 19,114
Selling, general and
administrative expenses 19,926 20,696
------- -------
Income (loss) from operations 2,111 (1,582)
Interest income 274 323
Interest expense (1,718) (1,359)
Other income 13 267
------- -------
Income (loss) before income taxes 680 (2,351)
Provision for income taxes (27) -
------- -------
Net income (loss) $ 653 ($ 2,351)
======= =======
Basic earnings per share
Net income (loss) per common shares $ 0.07 ($ 0.27)
======= =======
Weighted averaged number of
common shares outstanding 9,152 8,738
======= =======
Diluted earnings per share
Net income (loss) per common and
common equivalent shares $ 0.07 ($ 0.27)
======= =======
Weighted average number of
common and common
equivalent shares 9,152 8,738
======= =======
27
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 3 - Inventory
Inventory consisted of the following components at December 31, 1998 and
1997:
December 31,
--------------------
1998 1997
---- ----
(in thousands)
Finished goods $ 3,549 $ 1,210
Work-in-process 3,789 1,015
Raw materials 7,997 4,446
------- -------
$15,335 $ 6,671
======= =======
Note 4 - Property and Equipment
The following is a summary of property and equipment, estimated useful
lives and accumulated depreciation and amortization at December 31, 1998 and
1997:
December 31,
------------
Description 1998 1997 Estimated Useful Life
----------- ---- ---- ---------------------
(in thousands)
Land $ 528 $ 528
Buildings and improvements 2,876 2,829 40 years
Equipment 2,047 1,511 3-7 years
Furniture and fixtures 911 243 5 years
Leasehold improvements 518 483 Lesser of lease term
or eight years
Tooling 1,983 952 3-10 years
------ -------
8,863 6,546
Less: accumulated
depreciation and
amortization 2,544 1,864
------- -------
$ 6,319 $ 4,682
======= =======
Depreciation and amortization expense for property and equipment for the
years ended December 31, 1998, 1997 and 1996 was approximately $680,000,
$474,000 and $448,000, respectively.
28
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 5 - Long-term Obligations
Long-term obligations at December 31, 1998 and 1997 are as follows:
December 31,
------------------
1998 1997
---- ----
(in thousands)
Revolving credit facility $14,614 $10,754
Term loan 678 866
Promissory note 1,600 -
Convertible debentures 2,160 2,200
------- -------
19,052 13,820
Less: current maturitie 14,801 10,942
------- -------
$ 4,251 $ 2,878
======= =======
Revolving Credit Facility
On November 22, 1996, the Company consummated a $17.0 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 Credit Agreement is
secured by a lien on and a security interest in the Company's cash, cash
equivalents, marketable securities, accounts receivable, inventory and equipment
and all other tangible and intangible assets and a pledge of the common stock of
each of the Company's wholly-owned subsidiaries.
Borrowings under the Credit Agreement bear interest at the institution's
prime rate plus 3/4% 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, 1998 and 1997 was $678,000 and $866,000,
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. Borrowing 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, 1998, 1997 and 1996 was approximately $17.2
million, $10.9 million and, $8.8 million, respectively, at the weighted average
interest rate of 9.7%, 9.6% and 8.6%, respectively.
29
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 5 - Long-term Obligations (continued)
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. In December 1998,
$40,000 of Debentures were converted into 32,000 shares of Common Stock at the
election of the debenture holders. Subsequent to December 31, 1998, the balance
of the debentures were converted pursuant to their terms (see Note 15).
At December 31, 1998, future minimum payments under the Company's long term
obligations, excluding the effects of the conversion of the Debentures in
February 1999, are as follows:
Year Amount
---- ------
(in thousands)
1999 $ 187
2000 187
2001 277
2002 320
2003 320
Thereafter 800
------
$2,091
======
Note 6 - Employee Benefit Plans
The Company and its subsidiaries sponsor a series of defined benefit and
defined contribution employee benefit plans covering both union and non-union
personnel. A summary of each of these sponsored plans 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 6-3/4%. 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.
30
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 6 - Employee Benefit Plans (continued)
The following is a summary of the components of defined benefit pension
costs for the periods ending December 31, 1998, 1997 and 1996 and the
accumulated pension obligation of HMG Intermark at December 31, 1998 and 1997:
For the Years Ended December 31,
--------------------------------
1998 1997 1996
---- ---- ----
(in thousands)
Net periodic cost
Service cost - benefits earned during
the period with interest $ 42 $ 41 $ 45
Interest cost on accumulated
benefit obligation 345 342 341
Expected return on assets (302) (257) (215)
------ ----- -----
Net periodic pension cost $ 85 $126 $171
====== ===== ====
December 31,
------------
1998 1997
---- ----
(in thousdands)
Accumulated pension obligation:
Benefit obligation at beginning of year $5,129 $5,083
Service costs 42 41
Interest costs 345 342
Actuarial loss 86 38
Benefits paid (385) (375)
------ ------
Vested benefits obligation at end of year 5,217 5,129
------ ------
Fair value of plan assets at beginning of year 3,829 3,230
Actual return on plan assets 594 613
Employer contribution 302 361
Benefits paid (385) (375)
------- ------
Fair market value of plan assets at end of year 4,340 3,829
------- ------
Funded status (877) (1,300)
Unrecognized net actual gain (355) (148)
------- ------
Accrued pension benefit obligation (1,232) (1,448)
Less: current portion 85 273
------- ------
Pension obligation - long-term ($ 1,147) ($1,175)
======= ======
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, 1998 and 1997,
the Company has included as a component of other long-term liabilities
approximately $326,000 and $329,000, 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 6-3/4% and (iii)
a gross medical cost increase of an average of 9% for the next five years and 6%
increase thereafter.
31
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 6 - Employee Benefit Plans (continued)
The following is a summary of the components of the Health Care Plan costs
for the periods ended December 31, 1998, 1997 and 1996 and the accumulated
health care obligation of HMG Intermark at December 31, 1998 and 1997:
For the Years Ended December 31,
--------------------------------
1998 1997 1996
---- ---- ----
(in thousands)
Net periodic cost:
Service cost - benefits earned during
the period with interest $ 3 $ 6 $ 5
Interest cost on accumulated benefit obligation 21 32 33
Recognized net actuarial (gain) loss (2) 7 6
------ ------- ------
Net periodic health care cost $ 22 $ 45 $ 44
==== ===== ====
December 31,
------------
1998 1997
---- ----
(in thousands)
Accumulated health care obligation:
Benefit obligation at beginning of year $327 $489
Service costs 3 3
Interest costs 21 32
Actuarial gain (32) (150)
Benefits paid (37) (50)
---- ----
Benefit obligation at end of year 282 327
Employer contribution 37 50
Benefits paid (37) (50)
---- ----
Funded status (282) (327)
Unrecognized net actuarial gain (82) (52)
---- ----
Accrued health care obligation (364) (379)
Less: current portion 38 50
---- ----
Health care obligation - long-term ($326) ($329)
==== ====
At December 31, 1998, the effect of a 1% increase in the assumed health
care cost trend rates for each future year on the aggregate of the service and
interest components of net periodic post-retirement health care benefits cost
and the accumulated post-retirement benefit obligation is an increase of $2,000
and $17,000, respectively.
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 and Trust provides an employer matching provision whereby the Company
contributes fifty cents for every dollar of employee contribution up to 6% of
base compensation. Company contributions of approximately $145,000, $149,000 and
$155,000 were made and charged to operations for the years ended December 31
1998, 1997 and 1996 respectively.
32
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 6 - Employee Benefit Plans (continued)
The HMG Worldwide Corporation Capital Accumulation Plan also provides for a
fixed contribution provision whereby the Company annually contributes up to 3%
of base compensation for any plan participant employed on December 31. Company
contributions of approximately $161,000, $154,000 and $160,000 were made and
charged to operations for the years ended December 31, 1998, 1997 and 1996,
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
For the year ended December 31, 1996, 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 were made and charged to
operations for the year ended December 31, 1996. 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 was made and charged to income during the periods noted
above. Subsequent to the closing of HMG's New Jersey manufacturing facility
effective December 31, 1996, the Company is no longer participating in these
plans.
Note 7 - Income Taxes
The components of the provisions for income taxes are as follows:
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
(in thousands)
Current:
State and local $ 31 $ 42 $ 12
---- ---- ----
31 42 12
---- ---- ----
Deferred:
Federal - - -
State and local - - -
---- ---- ----
- - -
---- ---- ----
$ 31 $ 42 $ 12
==== ==== ====
33
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 7 - Income Taxes (continued)
The following is a summary of the significant components of the Company's
deferred taxes:
December 31,
------------
1998 1997
---- ----
(in thousands)
Deferred taxes:
Net operating loss carry forwards $15,404 $10,662
Accruals not currently deductible 89 138
Inventory capitalization 54 9
Depreciation 757 434
Other 193 149
------- -------
Subtotal 16,497 11,392
Less: Valuation allowance (16,497) (11,392)
------- -------
Net deferred taxes $ - $ -
======= =======
At December 31, 1998, the Company had net operating loss carry forwards of
approximately $34.6 million which expire during the years 2001 through 2013.
A reconciliation of the tax provisions and amounts computed by applying the
federal income tax rate of 35% to the income (loss) before income taxes is as
follows:
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
(in thousands)
Computed tax benefit, net of
valuation allowance $ - $ - $ -
State and local income taxes 31 42 12
---- ---- ----
$ 31 $ 42 $12
==== ==== ===
34
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 8 - 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. 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. For
the year ended December 31, 1998, the Company sold an aggregate of 150,000
shares of its Common Stock pursuant to a private placement from which it derived
net proceeds of approximately $169,000 and the Company issued 100,000 shares of
its Common Stock, valued at $110,000, pursuant to the Purchase Agreement of HMG
Schutz. Additionally, for the years ended December 31, 1998 and 1997, the
Company contributed 123,055 and 159,561 shares of Common Stock, respectively,
valued at $1.25 and $1.00 per share, respectively, to the HMG Worldwide
Corporation Capital Accumulation Plan. In December 1998, $40,000 of debentures
were converted into 32,000 shares of Common Stock at the election of the
debenture holders.
The Company maintains six stock option plans ("Stock Option Plans") which
have been adopted by the Board and subsequently approved by its stockholders.
The total number of shares reserved and available under the Stock Option Plans
are 3,253,012 shares. During 1997, the Company issued 210,000 incentive-based
stock options and 250,000 stock warrants outside of the Stock Option Plans. The
stock options were granted to certain employees and directors of the Company. In
addition, 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. The Company also issued an aggregate of 226,000 warrants exercisable at
$1.25 per warrant to Ivan Berkowitz, a director to the Company, and an associate
in connection with the Company's Private Placement of the Debentures and other
financial consulting services performed on behalf of the Company. During 1998,
the Company issued 175,000 incentive based stock options outside the Stock
Option Plan to certain employees and directors of the Company. Additionally, as
part of the acquisition and refinancing activities sponsored by the Company, the
Company recorded a $221,000 increase to additional paid in capital, using the
Black Scholes option pricing model, for the issuance of 650,000 warrants to
acquire the Company's Common Stock at an average exercise price of $1.10 per
share. Of such warrants, 31,250 warrants were issued to Ivan Berkowitz.
The following is a summary of stock option and warrant transactions for the
years ended December 31, 1998, 1997 and 1996:
1998 1997 1996
---- ---- ----
Options and warrants outstanding at January 1 3,078,828 2,427,328 2,031,450
Incentive options granted at $1.00 480,950
Incentive options granted at $1.25 305,500 599,450
Incentive options granted at $1.375 120,000
Incentive options granted at $1.50 75,000
Incentive options granted at $1.75 385,000
Incentive options granted at $2.00
Incentive options granted at $2.50 75,000
Warrants granted at $1.00 50,000
Warrants granted at $1.063 250,000
Warrants granted at $1.125 400,000
Warrants granted at $1.25 226,000
Warrants granted at $2.00 50,000
Options exercised (184,572)
Options canceled (10,900) (225,450) (69,000)
--------- --------- ----------
4,558,428 3,078,828 2,427,328
========= ========= =========
35
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 8 - Common Stock (continued)
At December 31, 1998, the Company has 173,300, 507,450, 250,000, 400,000,
1,130,450, 150,000, 75,000, 40,200, 1,322,028, 385,000, 50,000 and 75,000
options outstanding exercisable at $0.9375, $1.00, $1.063, $1.125, $1.25,
$1.375, $1.50, $1.56, $1.625, $1.75, $2.00 and $2.50 per share, respectively.
The weighted average exercise price and period of exercise of all outstanding
stock options and warrants at December 31, 1998 and 1997 was $1.38 per share and
6.2 years, respectively, and $1.35 per share and 6.6 years, respectively.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its employee stock options. Under APB Opinion 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 SAS No. 123 and has been determined as if the Company had accounted
for its employee stock options under the fair value method of SAS No. 123. The
weighted average fair value of options granted during 1998, 1997 and 1996 was
$0.35, $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
5.2%; volatility factor of expected market price of the Company's Common Stock
of 43% and a weighted average expected life of the option of 6.2 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, 1998 was
approximately $351,000 and pro forma net income, basic earnings per share and
dilutive earnings per share would have been approximately $1.6 million, $0.17
per share and $0.16 per share, respectively. For the year ended December 31,
1997, pro forma compensation expense was approximately $111,000 and pro forma
net income, basic earnings per share and diluted earnings per share would have
been $418,000, $0.05 per share and $0.02, respectively. For the year ended
December 31, 1996, pro forma compensation expense was approximately $160,000 and
pro forma net loss and basic and diluted net loss per share would have been
approximately $5.7 million and $0.75 per share, respectively.
36
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 8 - Common Stock (continued)
The following is the reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations for the years ended
December 31 1998 and 1997:
For the Year Ended December 31, 1998
------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
(in thousands, except per share data)
Net income .................. $1,904
======
Basic earnings per share
Income available to
common stockholders ..... $1,904 9,094 $0.21
=====
Effect of dilutive securities
10% convertible debentures 165 1,320
Stock options and warrants - 298
------ ------
Diluted earning per share
Income available to common
stockholders ............ $2,069 10,712 $0.19
====== ====== =====
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 and warrants - 2,568
------ ------
Diluted earning per share
Income available to common
stockholders ............ $ 529 11,206 $0.05
====== ====== =====
37
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 9 - Lease Commitments
The Company leases manufacturing, warehousing and office facilities and
production and office equipment, under leases expiring at various dates. Certain
facility leases contain renewal provisions and generally require the Company to
pay increases over base period amounts for taxes and other operating expenses.
At December 31, 1998, future minimum payments under noncancellable operating
leases are as follows:
Year Amount
---- ------
(in thousands)
1999 $1,106
2000 1,035
2001 946
2002 793
2003 226
Thereafter 4
------
$4,110
======
Rent expense for the years ended December 31, 1998, 1997 and 1996 was
approximately $1.3 million, $800,000 and $1.6 million, respectively.
Note 10 - Significant Clients
Net revenues from individual clients of the Company accounting for 10% or
more of net revenues for the years ended December 31, 1998, 1997 and 1996 are as
follows:
1998 1997 1996
---- ---- ----
Procter & Gamble Co. 12% 12% 17%
CVS/Pharmacy, Inc. 11%
Bristol Meyers Squibb, Co. 12%
Wal*Mart Stores, Inc. 11% 11%
Sara Lee Corporation 12%
Note 11 - Foreign Operations
The Company opened an office in Toronto, Canada effective July 1, 1997. For
the year ended December 31, 1998 and the six months ended December 31, 1997, the
Company generated revenues of approximately $3.5 million and $494,000,
respectively, realized income from operations of $218,000 and incurred a loss
from operations of $31,000, respectively, and had identifiable assets of $1.7
million and $447,000, respectively.
38
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 12 - 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 Eyecare Corporation ("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 13 - Related Party Transactions
For the years ended December 31 1998, 1997 and 1996, the Company incurred a
total of approximately $170,000, $433,000 and $200,000, 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 from time to time 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, 1998, 1997 and 1996, approximately
$112,000, $26,000 and $234,000, respectively, related to this agreement 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 retail and
consumer products companies. The three customers with the largest balances
account for approximately 30% of accounts receivable at December 31, 1998.
39
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 15 - Subsequent Events
In February 1999, the Company's convertible debenture holders elected to
convert the outstanding $2.2 million debentures into Common Stock at $1.25 per
share pursuant to the terms of the debentures. As a consequence of the
conversion, the Company issued 1,728,000 shares of Common Stock and retired the
convertible debentures.
On February 24, 1999, the Company issued $5.0 million 7% Convertible Notes
Due February 24, 2002 to two institutional investors. The principal amount of
the Notes is convertible into shares of the Company's Common Stock at a
conversion price of the lesser of $4.00 per share or a price based on the
prevailing market price of the Common Stock, subject to a maximum issuance of
2,160,000 shares upon conversion of the Notes, taken together. The Notes were
issued through a private placement; however, the Company has undertaken to
register, for resale by the holders of the Notes, the shares which may be
acquired upon the conversion of the Notes under the Securities Act of 1933.
40
<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,
1998.
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 61 Chairman of the Board and 1984
Chief Executive Officer
Andrew Wahl 38 President and Director 1984
Robert V. Cuddihy, Jr. 39 Executive Vice President, 1987
Chief Operating Officer,
Chief Financial Officer
and Director
L. Randy Riley 47 Executive Vice President and 1993
Director
Herbert F. Kozlov 46 Secretary and Director 1988
Ivan Berkowitz 53 Director 1998
Lawrence J. Twill, Sr. 61 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 President of HMG 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.
41
<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.
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.
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, 1998,
all filing requirements applicable to its officers, directors and greater than
10% beneficial owners were complied with.
42
<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, 1998, 1997
and 1996 by its chief executive officer and each of its executive officers whose
compensation exceeded $100,000 during its fiscal year ended December 31, 1998.
<TABLE>
Summary Compensation Table
Long-Term Compensation
----------------------
Annual Compensation Awards Payouts
------------------- ------ -------
Other Number of All
Name and Annual Restricted Securities Long-Term Other
Principal Compen- Stock Underlying Incentive Compen-
Position Year Salary Bonus sation (1) Awards Options Payouts sation
- --------- ---- ------ ----- ---------- ------ ------- ---------- ---------
<S> <C> <C> <C> <C>
Michael Wahl 1998 $250,000 $ - 60,000
Chief Executive 1997 $250,000 $ - 35,000
Officer 1996 $250,000 $ - 140,000
Andrew Wahl 1998 $250,000 $ - 60,000
President 1997 $250,000 $ - 35,000
1996 $250,000 $ - 140,000
Robert V. Cuddihy, Jr. 1998 $250,000 $ - 60,000
Chief Operating Officer 1997 $250,000 $ - 35,000
Chief Financial Officer 1996 $200,000 $ - 70,000
L. Randy Riley 1998 $250,000 $149,022 (2) 60,000
Executive Vice President 1997 $250,000 $ - 35,000
1996 $250,000 $ 70,000 129,450
</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.
(2)Messrs Riley received in 1998 incentive compensation of $149,022 based upon
his marketing and sales initiatives as established by the Board of Directors.
Set forth below is information with respect to options to purchase the
Company's Common Stock granted in the year ended December 31, 1998 and prior
years under the Company's Stock Option Plans.
43
<PAGE>
<TABLE>
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year End Option Values
Number of Securities
Number of Underlying Unexercised Value of Unexercised
Shares Options at In-the-Money Options
Acquired December 31, 1998 at December 31, 1998
------------------------ --------------------------
on Value Unexer- Unexer-
Name Exercise Realized Exercisable cisable Exercisable cisable
- ---- -------- -------- ----------- ------- ----------- -------
<S> <C> <C>
Michael Wahl 694,828 $383,960
Andrew Wahl 616,750 $396,222
Robert V.
Cuddihy, Jr. 318,850 $229,743
L. Randy Riley 318,850 $215,325
</TABLE>
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 aspect of the Company's operations for which each is
responsible.
44
<PAGE>
During 1998, 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 Company's continued expansion in 1998 as its strategy to
expand its existing client base through organic growth and to strategically
acquire complementary businesses resulted in the Company's eighth consecutive
quarterly profit. Net revenues increased 47.8% to $68.5 million for the year
ended December 31, 1998. The Company generated net income of $1.9 million, or
$0.21 basic earnings per share, in 1998 as compared to $529,000, or $0.06 basic
earnings per share, for the year ended December 31, 1997.
For the year ended December 31, 1998, the Board noted that the Company and
its executive management accomplished the following: (i) consummated the
acquisition of the business of Schutz International, Inc., now known as HMG
Schutz, a Chicago-based point-of-purchase company, effective August 1, 1998,
(ii) issued a Promissory Note for $1.6 million, net of imputed interest of
$278,000 and issued 110,000 shares of its Common Stock valued at $110,000, for
the purchase of HMG Schutz and the Company agreed to make certain future
contingency payments based upon revenues generated by HMG Schutz, (iii) acquired
an option to purchase for $2.3 million the HMG Schutz office and warehouse
facilities, (iv) further expanded the Company's Reading, Pennsylvania
manufacturing facilities to include a third 60,000 square foot warehouse and
distribution center, (v) relocated and expanded the Canadian operations through
HMG Griffith, to a new 25,000 square foot office, production and distribution
center and (vi) continued to focus on retail innovation and client service to
expand the revenue base with both retailers and brand manufacturers.
In addition, in February 1999, the Company's convertible debenture holders
elected to convert the outstanding $2.2 million of debentures into Common Stock
at $1.25 per share pursuant to the terms of the debentures. As a consequence of
the conversion, the Company issued 1,728,000 shares of Common Stock and retired
the convertible debentures. In addition, on February 24, 1999, the Company
issued $5.0 million 7% Convertible Notes Due February 24, 2002 to two
institutional investors. The principal amount of the Notes is convertible into
shares of the Company's Common Stock at a conversion price of the lesser of
$4.00 per share or a price based on the prevailing market price of the Common
Stock, subject to a maximum issuance of 2,160,000 shares upon conversion of the
Notes, taken together.
March 1, 1999
Michael Wahl - Chairman Herbert F. Kozlov
Andrew Wahl Robert V. Cuddihy, Jr
Ivan Berkowitz 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.
1/1/94 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
------ -------- -------- -------- -------- --------
HMG Worldwide $100 $ 35 $ 31 $ 12 $ 13 $ 21
Nasdaq US $100 $ 98 $ 138 $170 $209 $293
Nasdaq Non-Financial $100 $ 96 $ 134 $163 $191 $280
45
<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.
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, 1998 were approximately $170,000.
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.
46
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth information as of March 19, 1999 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 1,376,725 (2) 11.7%
475 Tenth Avenue
New York, NY 10018
Andrew Wahl 957,803 (3) 8.2%
475 Tenth Avenue
New York, NY 10018
Robert V. Cuddihy, Jr. 459,408 (4) 4.0%
475 Tenth Avenue
New York, NY 10018
Herbert F. Kozlov 305,476 (5) 2.7%
529 Fifth Avenue
New York, NY 10017
L. Randy Riley 429,194 (6) 3.8%
475 Tenth Avenue
New York, NY 10018
Lawrence J. Twill, Sr. 186,150 (7) 1.7%
111 East 30th Street (16A)
New York, NY 10016
Gilmour 1994 Jersey Trust 972,222 (8) 8.8%
7 Bond Street
St. Helier
Jersey, Channel Island
State of Wisconsin Investment Board 740,000 6.7%
P.O. Box 7842
Madison, WI 53707
Great Court Analysis LLC 640,000 (9, 10) 5.8%
5150 Overland Avenue
Culver City, CA 90230
Wynnefield Partners Small Cap Value L.P. 617,000 5.6%
One Penn Plaza
Suite 4720
New York, NY 10119
Ivan Berkowitz 234,250 (9, 10) 1.8%
1790 Broadway
Suite 1500
New York, NY 10009
All executive officers 4,589,006 (11) 33.4%
and directors as a group
(7 persons)
47
<PAGE>
(1) Includes shares issuable pursuant to currently exercisable options and
options which will be exercisable within 60 days of March 19, 1999. Except
as otherwise indicated, the persons named herein have sole voting and
disposition power with respect to the shares beneficially owned.
(2) Includes 694,828 shares issuable upon exercise of options.
(3) Includes 611,750 shares issuable upon exercise of options.
(4) Includes 318,850 shares issuable upon exercise of options.
(5) Includes 287,600 shares issuable upon exercise of options.
(6) Includes 318,850 shares issuable upon exercise of options.
(7) Includes 175,400 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) Ivan Berkowitz, a director of the Company, is the President of Great Court
Analysis LLC which beneficially owned 640,000 shares.
(10) Includes 203,000 shares issuable upon exercise of options and warrants.
Ivan Berkowitz, a director of the Company, is the President of Great Court
Analysis LLC which beneficially owned 640,000 shares
(11) Includes 2,641,528 shares issuable upon exercise of options and warrants
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 1, 2000. Unpaid amounts bear interest at a fluctuating rate equal to the
six months U.S. Treasury bill rate. Mr. Cuddihy made aggregate prepayments for
the period 1995 - 1998 of $208,854, plus accrued interest. At December 31, 1998,
the unpaid balance of such advance was $41,146.
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,
2000. Unpaid amounts bear interest at a fluctuating rate equal to the six months
U.S. Treasury bill rate. In 1995, 1997 and 1998, Mr. Wahl made prepayments of
$25,000, $20,000 and $25,000, respectively. At December 31, 1998, the unpaid
principal balance of such advance was $30,000 and no interest was paid during
1998.
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, 1998 were approximately $170,000.
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.
48
<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 Schedule.
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) 1997 Stock Option Plan(4)*
(e) 1998 Stock Option Plan(5)*
(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(6)
(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(6)
(f) Employment Agreement, dated April 30, 1993, between Registrant,
Marlboro Marketing, Inc., a New York corporation, and Michael
Wahl(3)*
(g) Stock Purchase Agreement, dated as of September 30, 1995, between
Benson Eyecare Corporation and Intermark Corp (7)
(h) 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 (7)
(i) Loan and Security Agreement between Congress Financial Corporation
and Registrant dated November 22, 1996 (9)
(j) Issuance of $2.2 million, 10% convertible debentures (8)
(k) Asset Purchase Agreement, dated August 1, 1998 between HWO
Ventures, Inc. And Registrant (10) (l) Issuance of $5.0 million, 7%
convertible debentures (11)
21 Subsidiaries of the Registrant (6)
23 Consents of Friedman Alpren & Green LLP
27 Financial Data Schedule
(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 Proxy Statement, dated
July 8, 1997, and incorporated herein by reference.
(5) Denotes document filed as an exhibit to Registrant's Proxy Statement, dated
October 7, 1998, and incorporated herein by reference.
(6) 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.
(7) Denotes document filed as an exhibit to Registrant's Annual Report on Form
10-K dated December 31, 1995, and incorporated herein by reference.
49
<PAGE>
(8) Denotes document filed as on exhibit to Registrant's Form 8-K dated October
31, 1997 and incorporated herein by reference.
(9) Denotes document filed as an exhibit to Registrant's Annual Report on Form
10-K dated December 31, 1997, and incorporated herein by reference.
(10) Denotes document filed as an exhibit to Registrants Form 8-K dated August
12, 1998 and incorporated herein by reference
(11) Denotes document filed as on exhibit to Registrant's Form 8-K dated March
22, 1999 and incorporated herein by reference.
* Management contract or compensatory plan or arrangement
50
<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, 1999 By:/s/Robert V. Cuddihy, Jr.
-------------------------
Robert V. Cuddihy, Jr.
Executive Vice President Chief
Operating Officer, Principal
Accounting 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, 1999
Michael Wahl Board and Chief
Executive Officer
/s/Andrew Wahl
- --------------------------- President and March 27, 1999
Andrew Wahl Director
/s/Robert V. Cuddihy, Jr.
- --------------------------- Executive Vice March 27, 1999
Robert V. Cuddihy, Jr. President Chief Operating
Officer, Principal Accounting and
Chief Financial Officer
and Director
/s/L. Randy Riley
- --------------------------- Executive Vice March 27, 1999
L. Randy Riley President and
Director
/s/Ivan Berkowitz
- --------------------------- Director March 27, 1999
Ivan Berkowitz
/s/Herbert F. Kozlov
- --------------------------- Director March 27, 1999
Herbert F. Kozlov
/s/Lawrence J. Twill, Sr.
- --------------------------- Director March 27, 1999
Lawrence J. Twill, Sr.
51
<PAGE>
INDEX TO FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule is filed as part of this Report:
PAGE
----
Independent Auditors' Report A-2
Schedule II - Valuation and Qualifying Accounts and Reserves A-3
Schedule other than the one listed are omitted as not required or applicable.
52
<PAGE>
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT
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, 24 1999. Our audits were made for the purpose of forming an opinion on
those statements taken as a whole. The schedule listed in the index is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in our audits of the basic
financial statements and, in our opinion, fairly states in all material respects
the information 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 24, 1999
A - 2
<PAGE>
<TABLE>
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, 1998:
<S> <C> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts $273 $100 $100 (b) ($20) $453
==== ==== ==== === ====
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
==== ==== ==== === ====
</TABLE>
(a) Write-off of accounts receivable.
(b) Amount acquired as part of the HMG Schutz acquisition pursuant to the
Purchase Agreement effective August 1, 1998.
A-3
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000756680
<NAME> HMG Worldwide Corporation
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Dec-31-1998
<CASH> 5,730
<SECURITIES> 0
<RECEIVABLES> 15,958
<ALLOWANCES> 453
<INVENTORY> 15,335
<CURRENT-ASSETS> 37,649
<PP&E> 8,863
<DEPRECIATION> 2,544
<TOTAL-ASSETS> 51,729
<CURRENT-LIABILITIES> 36,845
<BONDS> 0
0
0
<COMMON> 93
<OTHER-SE> 8,979
<TOTAL-LIABILITY-AND-EQUITY> 51,729
<SALES> 68,457
<TOTAL-REVENUES> 68,457
<CGS> 49,220
<TOTAL-COSTS> 15,938
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,651
<INCOME-PRETAX> 1,935
<INCOME-TAX> 31
<INCOME-CONTINUING> 1,904
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,904
<EPS-PRIMARY> .21
<EPS-DILUTED> .19
</TABLE>
