UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
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For the quarterly period ended: March 31, 2010
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
Commission file number:
0-22945
HELIOS & MATHESON NORTH AMERICA INC.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
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13-3169913
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(State or other jurisdiction of
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(I.R.S. Employer Identification No.)
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incorporation or organization)
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200 Park Avenue South
New York, New York 10003
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(212) 979-8228
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(Address of Principal Executive Offices)
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(Registrants Telephone Number, Including Area Code)
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N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes
o
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
o
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Accelerated filer
o
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Non-accelerated filer
o
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Smaller reporting company
þ
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes
o
No
þ
As of May 12, 2010, there were 3,086,362 shares of common stock, with $.01 par value per share,
outstanding.
HELIOS & MATHESON NORTH AMERICA INC.
INDEX
2
Part I. Financial Information
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Item 1.
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Financial Statements
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HELIOS & MATHESON NORTH AMERICA INC.
CONSOLIDATED BALANCE SHEETS
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March 31,
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December 31,
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2010
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2009
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(unaudited)
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ASSETS
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Current Assets:
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Cash and cash equivalents
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$
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1,013,299
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$
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1,354,989
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Accounts receivable- less allowance for doubtful accounts of
$209,644 at March 31, 2010, and $220,879 at December 31, 2009
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2,442,737
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2,471,705
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Unbilled receivables
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96,949
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184,229
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Prepaid expenses and other current assets
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140,837
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178,879
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Total current assets
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3,693,822
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4,189,802
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Property and equipment, net
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63,084
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79,952
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Deposits and other assets
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150,953
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154,703
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Total assets
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$
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3,907,859
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$
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4,424,457
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LIABILITIES AND SHAREHOLDERS EQUITY
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Current Liabilities:
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Accounts payable and accrued expenses
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$
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1,586,431
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$
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1,630,054
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Deferred revenue
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69,758
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184,904
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Total current liabilities
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1,656,189
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1,814,958
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Shareholders equity:
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Preferred stock, $.01 par value; 2,000,000 shares authorized; no shares
issued and outstanding as of March 31, 2010, and December 31, 2009
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Common stock, $.01 par value; 30,000,000 shares authorized;
3,086,362 issued and outstanding as of March 31, 2010, and December 31,
2009
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30,864
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30,864
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Paid-in capital
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35,846,527
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35,840,669
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Accumulated other comprehensive income foreign currency translation
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1,470
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2,084
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Accumulated deficit
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(33,627,191
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)
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(33,264,118
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)
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Total shareholders equity
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2,251,670
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2,609,499
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Total liabilities and shareholders equity
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$
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3,907,859
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$
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4,424,457
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See accompanying notes to consolidated financial statements.
3
HELIOS & MATHESON NORTH AMERICA INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
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Three Months Ended
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March 31,
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2010
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2009
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(unaudited)
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(unaudited)
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Revenues
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$
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3,444,592
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$
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3,796,497
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Cost of revenues
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2,643,944
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2,843,467
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Gross profit
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800,648
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953,030
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Operating expenses:
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Selling, general & administrative
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1,145,449
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1,655,362
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Depreciation & amortization
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16,846
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34,821
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1,162,295
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1,690,183
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Loss from operations
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(361,647
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(737,153
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Other income(expense):
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Interest income-net
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3,074
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1,416
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3,074
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1,416
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Loss before income taxes
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(358,573
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(735,737
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Provision for income taxes
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4,500
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7,424
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Net loss
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(363,073
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(743,161
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Other comprehensive loss foreign currency adjustment
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(614
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(2,147
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Comprehensive loss
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$
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(363,687
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$
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(745,308
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Basic and diluted loss per share
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$
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(0.12
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$
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(0.31
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See accompanying notes to consolidated financial statements.
4
HELIOS & MATHESON NORTH AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
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Three Months Ended March 31,
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2010
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2009
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(unaudited)
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(unaudited)
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Cash flows from operating activities:
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Net loss
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$
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(363,073
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$
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(743,161
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Adjustments to reconcile net loss to net cash
used in operating activities, net of acquired assets:
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Depreciation and amortization
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16,847
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34,821
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Provision for doubtful accounts
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15,000
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15,000
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Stock based compensation
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5,858
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6,122
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Amortization of deferred financing cost
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3,750
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1,941
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Changes in operating assets and liabilities:
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Accounts receivable
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13,968
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353,039
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Unbilled receivables
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87,280
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(6,941
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Prepaid expenses and other current assets
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38,042
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110,690
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Deposits
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1,750
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Accounts payable and accrued expenses
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(43,623
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(9,206
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Deferred revenue
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(115,146
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146,847
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Net cash used in operating activities
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(341,097
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(89,098
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Cash flows from investing activities:
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Sale/(Purchase) of property and equipment
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21
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391
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Net cash provided by investing activities
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21
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391
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Cash flows from financing activities:
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Net cash provided by financing activities
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Effect of foreign currency exchange rate changes on cash and cash equivalents
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(614
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(2,147
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Net decrease in cash and cash equivalents
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(341,690
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(90,854
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)
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Cash and cash equivalents at beginning of period
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1,354,989
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912,272
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Cash and cash equivalents at end of period
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$
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1,013,299
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$
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821,418
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Supplemental disclosure of cash flow information:
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Cash paid during the period for interest
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$
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$
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Cash paid during the period for income taxes net of refunds
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$
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9,028
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$
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(58,435
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)
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See accompanying notes to consolidated financial statements
5
HELIOS & MATHESON NORTH AMERICA INC.
Notes to Consolidated Financial Statements
(Unaudited)
1) GENERAL:
These financial statements should be read in conjunction with the financial statements
contained in Helios & Matheson North America Inc.s (Helios and Matheson or the Company) Form
10-K for the year ended December 31, 2009 filed with the Securities and Exchange Commission (SEC)
and the accompanying financial statements and related notes thereto. The accounting policies used
in preparing these financial statements are the same as those described in the Companys Form 10-K
for the year ended December 31, 2009.
2) CONTROLLED COMPANY:
The Board of Directors has determined that Helios and Matheson is a Controlled Company for
purposes of NASDAQ listing requirements. A Controlled Company is a company of which more than
50% of the voting power for the election of directors is held by an individual, group or another
company. Certain NASDAQ requirements do not apply to a Controlled Company, including
requirements that: (i) a majority of its Board of Directors must be comprised of independent
directors as defined in NASDAQs rules; and (ii) the compensation of officers and the nomination of
directors be determined in accordance with specific rules, generally requiring determinations by
committees comprised solely of independent directors or in meetings at which only the independent
directors are present. The Board of Directors has determined that Helios and Matheson is a
Controlled Company based on the fact that Helios and Matheson Information Technology, Ltd.
(Helios and Matheson Parent) holds approximately 69% of the voting power of the Company.
3) INTERIM FINANCIAL STATEMENTS:
In the opinion of management, the accompanying unaudited consolidated financial statements
contain all the adjustments (consisting only of normal recurring accruals) necessary to present
fairly the consolidated financial position as of March 31, 2010, the consolidated results of
operations for the three month period ended March 31, 2010 and 2009 and cash flows for the three
month period ended March 31, 2010 and 2009. The Company has performed an evaluation of subsequent
events through May 14, 2010 based upon reviews of the Companys financial transactions through that
date and inquiries conducted by the Companys interim Chief Executive Officer of senior management
and the Board of Directors.
The consolidated balance sheet at December 31, 2009 has been derived from the audited
financial statements at that date but does not include all the information and footnotes required
by accounting principles generally accepted in the United States of America for complete financial
statements. For further information, refer to the audited consolidated financial statements and
footnotes thereto included in the Form 10-K filed by the Company for the year ended December 31,
2009.
The consolidated results of operations for the three month period ended March 31, 2010 are not
necessarily indicative of the results to be expected for any other interim period or for the full
year.
For the twelve month period ended December 31, 2009, the Company reported an operating loss of
approximately ($2.1) million and for the three month period ended March 31, 2010, the Company
reported an operating loss of approximately ($362,000). While the Company continues to focus on
revenue growth and cost reductions, including but not limited to outsourcing and off-shoring
solutions, in an attempt to improve its financial condition, there can be no assurance that the
Company will be profitable in future periods.
In managements opinion, cash flows from operations and borrowing capacity (assuming obtaining
a commercially reasonable consent if required) combined with cash on hand will provide adequate
flexibility for funding the Companys working capital obligations for the next twelve months.
4) STOCK BASED COMPENSATION:
The Company has a stock based compensation plan, which is described as follows:
The Companys Stock Option Plan (the Plan) provides for the grant of stock options that are
either incentive or non-qualified for federal income tax purposes. The Plan provides for the
issuance of a maximum of 460,000 shares of common stock (subject to adjustment pursuant to
customary anti-dilution provisions). Stock options vest over a period of between one to four
years.
6
The exercise price per share of a stock option is established by the Compensation Committee of
the Board of Directors in its discretion but may not be less than the fair market value of a share
of common stock as of the date of grant. The aggregate fair market
value of the shares of common stock with respect to which incentive stock options first
become exercisable by an individual to whom an incentive stock option is granted during any
calendar year may not exceed $100,000.
Stock options, subject to certain restrictions, may be exercisable any time after full vesting
for a period not to exceed ten years from the date of grant. Such period is established by the
Company in its discretion on the date of grant. Stock options terminate in connection with the
termination of employment.
The Company uses the modified prospective application method as specified by the Financial
Accounting Standards Board (FASB), whereby compensation cost is recognized over the remaining
service period based on the grant-date fair value of those awards as calculated for pro forma
disclosures as originally issued. For the three month period ended March 31, 2010 and 2009, the
Company recorded stock based compensation expense of $5,858 and $6,122, respectively.
Information with respect to options under the Companys Plan is as follows:
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Weighted
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Number of
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Average
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Shares
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Exercise Price
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Balance December 31, 2009
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35,500
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$
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4.62
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Granted during 1st Qtr 2010
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Exercised during 1st Qtr 2010
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Forfeitures during 1st Qtr
2010
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Balance March 31, 2010
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35,500
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$
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4.62
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The following table summarizes the status of the stock options outstanding and exercisable at March
31, 2010:
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Number of
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Weighted
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Weighted-
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Stock
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Exercise Price
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Average
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Number of
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Remaining
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Options
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Range
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Exercise Price
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Options
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Contractual Life
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Exercisable
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$0.00 $4.80
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$
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3.06
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15,500
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1.2 years
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15,500
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$4.80 $9.60
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$
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5.82
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20,000
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6.1 years
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15,000
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35,500
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30,500
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At March 31, 2010, 30,500 stock options were exercisable with a weighted average exercise price of $4.42.
7
5) NET LOSS PER SHARE
:
The following table sets forth the computation of basic and diluted net loss per share for
the three months ended March 31, 2010 and 2009.
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Three Months Ended
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March 31,
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2010
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2009
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Numerator for basic net loss per share
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Net loss
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$
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(363,073
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)
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$
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(743,161
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)
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Net loss available to
common stockholders
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$
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(363,073
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)
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$
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(743,161
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)
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Numerator for diluted net loss per share
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Net loss available to common
stockholders & assumed conversion
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$
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(363,073
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$
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(743,161
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Denominator:
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Denominator for basic and diluted loss
per share weighted-average shares
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3,086,362
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2,396,707
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Basic and diluted loss per share:
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Net loss per share
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$
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(0.12
|
)
|
|
$
|
(0.31
|
)
|
|
|
|
|
|
|
|
During the three month period ended March 31, 2010 and March 31, 2009, all options and
warrants outstanding were excluded from the computation of net loss per share because the effect
would have been anti-dilutive.
6) CONCENTRATION OF CREDIT RISK:
The revenue of two customers represented approximately 21% and 20% of the revenues for the
three month period ended March 31, 2010. The revenues of two customers represented approximately
26% and 14% of revenues for the same period in 2009. No other customer represented greater than
10% of the Companys revenues for such periods.
7) CREDIT ARRANGEMENT:
The Company has entered into a Loan and Security Agreement (the Loan Agreement) with Keltic
Financial Partners, LP II (Keltic). The Loan Agreement, which was set to expire December 31,
2009, has been extended through December 31, 2010 with no material changes in terms and conditions.
Under the Loan Agreement, the Company has a line of credit up to $1.0 million based on the
Companys eligible accounts receivable balances at an interest rate based on the higher of prime
rate plus 2.75%, 90 day LIBOR rate plus 5.25% or 7%. Net availability at March 31, 2010 was
approximately $1.0 million. The Loan Agreement has certain financial covenants that shall apply
only if the Company has any outstanding obligations to Keltic including borrowing under the
facility. The Company had no outstanding balance at March 31, 2010, or at December 31, 2009, under
the Loan Agreement.
8) CONTRACTUAL OBLIGATIONS AND COMMITMENTS:
The Company has the following commitments as of March 31, 2010: obligations resulting from one
employment contract and two operating lease obligations. The Company has two operating leases for
its corporate headquarters located in New York and its branch office in New Jersey. The Company is
also currently using a facility in Massachusetts on a month-to-month basis through May 31, 2010.
The Company is unlikely to renew its lease for the New Jersey facility which expires August
31, 2010.
8
The Companys commitments at March 31, 2010, are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More Than 5
|
|
Contractual Obligations
|
|
Total
|
|
|
Less Than 1 Year
|
|
|
1 3 Years
|
|
|
3 5 Years
|
|
|
Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long Term Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employment Contracts
(1)
|
|
|
55,000
|
|
|
|
55,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Lease Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent
(2)
|
|
|
718,448
|
|
|
|
339,469
|
|
|
|
378,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
773,448
|
|
|
$
|
394,469
|
|
|
$
|
378,979
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The Company has an employment agreement with its one named Executive Officer,
Salvatore M. Quadrino, the Companys interim Chief Executive Officer, Chief Financial Officer and
Secretary. Under Mr. Quadrinos employment agreement, Mr. Quadrino will serve in a dual capacity as
interim Chief Executive Officer and Chief Financial Officer at an annual salary of $220,000. Mr.
Quadrinos employment agreement is set to expire June 30, 2010.
|
|
(2)
|
|
The Company has a New York facility with a lease term expiring July 31, 2012 and a
New Jersey facility with a lease term expiring August 31, 2010. The Company is unlikely to renew
the lease for its New Jersey facility.
|
As of March 31, 2010, the Company does not have any Off Balance Sheet Arrangements.
9) PROVISION FOR INCOME TAXES
The provision for income taxes as reflected in the consolidated statements of operations
varies from the expected statutory rate primarily due to a provision for minimum state taxes and
the recording of additional valuation allowance against deferred tax assets. Internal Revenue Code
Section 382 (the Code) places a limitation on the utilization of Federal net operating loss and
other credit carry-forwards when an ownership change, as defined by the tax law, occurs.
Generally, this occurs when a greater than 50 percent change in ownership occurs. On September 5,
2006, Helios and Matheson Parent acquired a greater than 50 percent ownership of the Company.
Accordingly, the actual utilization of the net operating loss carry-forwards for tax purposes are
limited annually under the Code to a percentage (currently about four and a half percent) of the
fair market value of the Company at the date of this ownership change. The Company did not
generate taxable income during the three months ended March 31, 2010. The Company maintains a
valuation allowance against additional deferred tax assets arising from net operating loss
carry-forwards since, in the opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized.
10) SUBSEQUENT EVENTS
On May 12, 2010, the Companys Board of Directors resolved that NR Suparna would be appointed
as the Companys Chief Operating Officer, effective on May 20, 2010, the date of the Companys
Annual Shareholder Meeting.
Mr. Suparna, age 63, has over 35 years of diverse sales, marketing and management experience.
From 2004 to 2009, Mr. Suparna served as President and CEO of the Bangalore, India operation of
Helios and Matheson Information Technology Ltd., the Companys parent. Mr. Suparna has also served
as a Director of Helios & Matheson Global Services Pvt. Ltd., the Companys wholly-owned
subsidiary, since 2007. From 2000 to 2002, Mr. Suparna was the Chief Operating Officer of Swedish
Match. The terms of Mr. Suparnas employment agreement and compensation are currently under
consideration and will be disclosed once finalized under a separate filing on a Form 8-K.
On May 12, 2010, the Companys Board of Directors also resolved that effective May 20, 2010,
Mr. Salvatore M. Quadrino will cease to serve as interim Chief Executive Officer of the Company and
will revert back to his original role as the Companys Chief Financial Officer.
9
|
|
|
Item 2.
|
|
Managements Discussion and Analysis of Financial Condition and Results of Operations
|
The following discussion and analysis of significant factors affecting the Companys operating
results, liquidity and capital resources should be read in conjunction with the accompanying
financial statements and related notes.
Statements included in this Managements Discussion and Analysis of Financial Condition and
Results of Operations and elsewhere in this document that do not relate to present or historical
conditions are forward-looking statements within the meaning of that term under Section 27A of
the Securities Act of 1933, as amended, and under Section 21E of the Securities Exchange Act of
1934, as amended. Additional oral or written forward-looking statements may be made by the Company
from time to time, and such statements may be included in documents that are filed with the SEC.
Such forward-looking statements involve risk and uncertainties that could cause results or outcomes
to differ materially from those expressed in such forward-looking statements. Forward-looking
statements may include, without limitation, statements made pursuant to the safe harbor provision
of the Private Securities Litigation Reform Act of 1995. Words such as believes, forecasts,
intends, possible, expects, estimates, anticipates, or plans and similar expressions
are intended to identify forward-looking statements. The Company cautions readers that results
predicted by forward-looking statements, including, without limitation, those relating to the
Companys future business prospects, revenues, working capital, liquidity, capital needs, interest
costs, and income are subject to certain risks and uncertainties that could cause actual results to
differ materially from those indicated in the forward-looking statements. The important factors on
which such statements are based, include but are not limited to, assumptions concerning the impact
of the recent economic crisis and ongoing economic uncertainty, including the impact on the IT
spending of the Companys customers, demand trends in the information technology industry and the
continuing needs of current and prospective customers for the Companys services.
Overview
Since 1983, Helios and Matheson has provided IT services and solutions to Fortune 1000
companies and other large organizations. In 1997, Helios and Matheson became a public company
headquartered in New York, New York. In addition, the Company has offices in Clark, New Jersey,
Chelmsford, Massachusetts and Bangalore, India. The Companys common stock is currently listed on
the NASDAQ Capital Market
CM
under the symbol HMNA. Prior to January 30, 2007, the
Companys name was The A Consulting Team, Inc.
Helios and Matheson provides a wide range of high quality, consulting solutions, through an
integrated suite of market driven Service Lines in the areas of Application Value Management,
Application Development and Integration, Independent Validation, Information Management and
Strategic Sourcing for Fortune 1000 companies and other large organizations. These services
historically account for approximately 90% of the Companys revenues. The Companys solutions are
based on an understanding of each clients enterprise model. The Companys accumulated knowledge
may be applied to new projects such as planning, designing and implementing enterprise-wide
information systems, database management services, performance optimization, migrations and
conversions, strategic sourcing, outsourcing and systems integration.
The Company is dedicated to providing cost efficient competitive services to its clients
through its Flexible Delivery Model which allows for dynamically configurable Onsite, Onshore or
Offshore service delivery based on the needs of the clients. This capability is made possible
either through Helios and Matheson Global Services Private Limited (HMGS), the Companys
subsidiary operating in Bangalore, India or Helios and Matheson Parent. The Companys ability to
blend more offshore work into its pricing should allow it to be more price competitive. To date,
any offshore work being performed through Helios and Matheson Parent has been de minimus.
Rapid technological advances and the wide acceptance and use of the Internet as a driving
force in commerce, accelerated the growth of the IT industry. These advances, including more
powerful and less expensive computer technology, fueled the transition from predominantly
centralized mainframe computer systems to open and distributed computing environments and the
advent of capabilities such as relational databases, imaging, software development productivity
tools, and web-enabled software. These advances expand the benefits that users can derive from
computer-based information systems and improve the price-to-performance ratios of such systems. As
a result, an increasing number of companies are employing IT in new ways, often to gain competitive
advantages in the marketplace, and IT services have become an essential component of many companys
long-term growth strategies. The same advances that have enhanced the benefits of computer systems
rendered the development and implementation of such systems increasingly complex, popularizing the
outsourcing of IT development and services to third party IT service providers like the Company.
Many companies outsource such work because outsourcing enables companies to realize cost
efficiencies. Accordingly, organizations turn to external IT services organizations such as Helios
& Matheson to develop, support and enhance their internal IT systems.
10
The Company believes that its business, operating results and financial condition have been
harmed by the recent economic crisis and ongoing economic uncertainty. A significant portion of the
Companys major customers are in the financial services, pharmaceutical and
manufacturing/automotive industries and came under considerable pressure as a result of the
unprecedented economic conditions in the financial markets. Spending on IT consulting services is
largely discretionary. While the Company has not lost any major clients, it has experienced a
pushback of new assignments from existing clients and difficulty in replacing completed projects,
both of which have impacted revenue growth through 2010 year to date.
For the three months ended March 31, 2010, approximately 87% of the Companys consulting
services revenues were generated from clients under time and materials engagements, as compared to
approximately 73% for the three months ended March 31, 2009, with the remainder generated under
fixed-price engagements. The Company has established standard-billing guidelines for consulting
services based on the types of services offered. Actual billing rates are established on a
project-by-project basis and may vary from the standard guidelines. The Company typically bills its
clients for time and materials services on a semi-monthly basis. Arrangements for fixed-price
engagements are made on a case-by-case basis. Consulting services revenues generated under time and
materials engagements are recognized as those services are provided. Revenues from fixed fee
contracts are recorded when work is performed on the basis of the proportionate performance method,
which is based on costs incurred to date relative to total estimated costs.
The Companys most significant operating cost is its personnel cost, which is included in cost
of revenues. As a result, the Companys operating performance is primarily based upon billing
margins (billable hourly rate less the consultants hourly cost) and consultant utilization rates
(number of days worked by a consultant during a semi-monthly billing cycle divided by the number of
billing days in that cycle). For the three month period ended March 31, 2010, gross margin was
23.2% as compared to 25.1% for the three month period ended March 31, 2009. The decrease in gross
margin is primarily a result of a decrease in higher margin project revenue. Large portions of the
Companys engagements are on a time and materials basis. While most of the Companys engagements
allow for periodic price adjustments to address, among other things, increases in consultant costs,
to date clients have been averse to accepting cost increases. Additionally, during the past three
years, an increasing number of the Companys clients are outsourcing the management of their time
and material engagements to external Vendor Management Organizations (VMOs) as a means of
monitoring and controlling the costs of external service providers. The Company has been
challenged with absorbing the costs associated with the VMOs which have negatively impacted the
Companys margins.
Helios and Matheson actively manages its personnel utilization rates by monitoring project
requirements and timetables. Helios and Mathesons utilization rate for the three month period
ended March 31, 2010 was approximately 94% as compared to approximately 78% for the three month
period ended March 31, 2009. As projects are completed, consultants either are re-deployed to new
projects at the current client site or to new projects at another client site or are encouraged to
participate in Helios and Mathesons training programs in order to expand their technical skill
sets. The Company carefully monitors consultants that are not utilized. While the Company has
established guidelines for the amount of non-billing time that it allows before a consultant is
terminated, actual terminations vary as circumstances warrant.
Helios and Matheson markets and distributes software products developed by independent
software developers. The Company believes its relationships with approximately 52 software clients
throughout the country provide opportunities for the delivery of additional Company consulting and
training services. The software products offered by Helios and Matheson are developed in the
United States, England and Finland and marketed primarily through trade shows, direct mail,
telemarketing, client presentations and referrals.
Historically, the Company has generated revenues by selling software licenses. In addition to
initial software license fees, the Company has historically derived revenues from the annual
renewal of software licenses. Because future obligations associated with such revenue are
insignificant, revenues from the sale of software licenses are recognized upon delivery of the
software to a customer. The Company views software sales as ancillary to its core consulting
services business. Revenue generated from software sales have varied from period to period. For
the three month period ending March 31, 2010, revenue from the software service line was
approximately 10% of the Companys total revenues.
On March 15, 2010, Cogito, a software company whose products the Company has marketed since
1991 under an exclusive perpetual distribution agreement, notified the Company of Cogitos intent
to terminate the agreement effective thirty days from the date of notice. The Company disputes
that there are any valid grounds for termination of the Cogito agreement and communicated its
position to Cogito after receiving Cogitos notice of termination. Thus far, the Company and
Cogito have not reached a mutual resolution of the matter and the Company has reserved all of its
rights and continues to explore all available legal remedies. As a result of Cogitos actions, the
Company expects that future software product revenues will be significantly reduced until or unless
the Company develops an alternate software business line.
11
Critical Accounting Policies
The methods, estimates and judgments the Company uses in applying its most critical accounting
polices have a significant impact on the results the Company reports in its consolidated financial
statements. The Company evaluates its estimates and judgments on an on-going basis. Estimates are
based on historical experience and on assumptions that the Company believes to be reasonable under
the circumstances. The Companys experience and assumptions form the basis for its judgments about
the carrying value of assets and liabilities that are not readily apparent from other sources.
Actual results may vary from what is anticipated and different assumptions or estimates about the
future could change reported results. The Company believes the following accounting policies are
the most critical to it, in that they are important to the portrayal of its financial statements
and they require the most difficult, subjective or complex judgments in the preparation of the
consolidated financial statements.
Revenue Recognition
Consulting revenues are recognized as services are provided. The Company primarily provides
consulting services under time and material contracts, whereby revenue is recognized as hours and
costs are incurred. Customers for consulting revenues are billed on a weekly, semi-monthly or
monthly basis. Revenues from fixed fee contracts are recorded when work is performed on the basis
of the proportionate performance method, which is based on costs incurred to date relative to total
estimated costs. Any anticipated contract losses are estimated and accrued at the time they become
known and estimable. Unbilled accounts receivables represent amounts recognized as revenue based
on services performed in advance of customer billings. Revenue from sales of software licenses is
recognized upon delivery of the software to a customer because future obligations associated with
such revenue are insignificant.
Allowance for Doubtful Accounts
The Company monitors its accounts receivable balances on a monthly basis to ensure that they
are collectible. On a quarterly basis, the Company uses its historical experience to accurately
determine its accounts receivable reserve. The Companys allowance for doubtful accounts is an
estimate based on specifically identified accounts as well as general reserves. The Company
evaluates specific accounts where it has information that the customer may have an inability to
meet its financial obligations. In these cases, management uses its judgment, based on the best
available facts and circumstances, and records a specific reserve for that customer, against
amounts due, to reduce the receivable to the amount that is expected to be collected. These
specific reserves are reevaluated and adjusted as additional information is received that impacts
the amount reserved. The Company also establishes a general reserve for all customers based on a
range of percentages applied to aging categories. These percentages are based on historical
collection and write-off experience. If circumstances change, the Companys estimate of the
recoverability of amounts due the Company could be reduced or increased by a material amount. Such
a change in estimated recoverability would be accounted for in the period in which the facts that
give rise to the change become known.
Valuation of Deferred Tax Assets
Deferred tax assets are reduced by a valuation allowance when, in the opinion of the Company,
it is more likely than not that some portion or all of the deferred tax assets will not be
realized. The Company assesses the recoverability of deferred tax assets at least annually based
upon the Companys ability to generate sufficient future taxable income and the availability of
effective tax planning strategies.
Stock Based Compensation
The Company uses the modified prospective application method as specified by the FASB whereby
compensation cost is recognized over the remaining service period based on the grant-date fair
value of those awards as calculated for pro forma disclosures as originally issued.
12
Results of Operations
|
|
The following table sets forth the percentage of revenues of certain items included in the
Companys Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of revenues
|
|
|
76.8
|
%
|
|
|
74.9
|
%
|
|
|
|
|
|
|
|
Gross profit
|
|
|
23.2
|
%
|
|
|
25.1
|
%
|
Operating expenses
|
|
|
33.7
|
%
|
|
|
44.5
|
%
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(10.5
|
)%
|
|
|
(19.4
|
)%
|
|
|
|
|
|
|
|
Net loss
|
|
|
(10.5
|
)%
|
|
|
(19.6
|
)%
|
|
|
|
|
|
|
|
Comparison of The Three Months Ended March 31, 2010 to The Three Months Ended March 31, 2009
Revenues.
Revenues for the three months ended March 31, 2010 were $3.4 million
compared to $3.8 million for the three months ended March 31, 2009. The decrease is primarily
attributable to a decline in consulting revenue due to difficulty in replacing completed projects
and a pushback of new assignments from existing clients primarily as a result of the continuing
economic uncertainty still adversely affecting spending on IT services.
Gross Profit
. The resulting gross profit for the three months ended March 31, 2010 was
$801,000 compared to $953,000 for the three months ended March 31, 2009. As a percentage of total
revenues, gross margin for the three months ended March 31, 2010 was 23.2% compared to 25.1% for
the three months ended March 31, 2009. Gross margin has declined primarily as a result of a
decrease in higher margin project revenue.
Operating Expenses.
Operating expenses are comprised of Selling, General and Administrative
(SG&A) expenses, and depreciation and amortization. SG&A expenses for the three months ended
March 31, 2010 were $1.1 million compared to the 2009 comparable period level of $1.7 million. The
decrease in SG&A expenses is associated with various cost reduction initiatives including, but not
limited to, a reduction in employee headcount. Depreciation and amortization expenses decreased
$18,000 from $35,000 for the three months ended March 31, 2009 to $17,000 for the three months
ended March 31, 2010.
Taxes.
Taxes for the three months ended March 31, 2010 were $5,000 compared to $7,000 for
the three months ended March 31, 2009. For the three months ended March 31, 2010, the Company
recorded a tax provision of $5,000 for minimum state taxes compared to a provision for minimum
state taxes of $5,000 and a provision to return adjustment of $2,000 from the filing of state and
federal tax returns for the three months ended March 31, 2009.
Net Loss.
As a result of the above, the Company incurred a net loss of ($363,000) or ($0.12)
per basic and diluted share for the three months ended March 31, 2010 compared to a net loss of
($743,000) or ($0.31) per basic and diluted share for the three months ended March 31, 2009.
13
Liquidity and Capital Resources
The Company had an operating loss of ($362,000) and a net loss of ($363,000) for the three
months ended March 31, 2010. During the three months ended March 31, 2009, the Company had an
operating loss of ($737,000) and a net loss of ($743,000). The Company believes that its business,
operating results and financial condition have been harmed by the recent economic crisis and
ongoing economic uncertainty which continue to adversely affect the IT spending of its clients. A
significant portion of the Companys major customers are in the financial services industry and
came under considerable pressure as a result of the recent unprecedented economic conditions in the
financial markets. While the Company has not lost any major clients, it has experienced a pushback
of new assignments from existing clients and difficulty replacing high-margin completed projects,
both of which have impacted revenue growth through the first quarter of 2010. While the Company
continues to focus on revenue growth and cost reductions, including but not limited to eliminating
non-billing resources, outsourcing and off-shoring solutions, in an attempt to improve its
financial condition, there can be no assurance that the Company will be profitable in future
periods.
The Companys cash balances were $1.0 million at March 31, 2010 and $1.4 million at December
31, 2009. Net cash used in operating activities for the three months ended March 31, 2010 was
$341,000 compared to net cash used in operating activities of $89,000 for the three months ended
March 31, 2009.
The Companys accounts receivable, less allowance for doubtful accounts, at March 31, 2010 and
at December 31, 2009 were $2.5 million and $2.7 million, respectively, representing 68 and 60 days
of sales outstanding (DSO), respectively. The increase in DSO is attributed to an extension in
payment terms for one major client as well as a limited number of dated client disputes. The
accounts receivable at March 31, 2010 and December 31, 2009 included $97,000 and $184,000 of
unbilled revenue, respectively. The Company has provided an allowance for doubtful accounts at the
end of each of the periods presented. After giving effect to this allowance, the Company does not
anticipate any difficulty in collecting amounts due.
For the three month periods ended March 31, 2010 and March 31, 2009, there was no cash
provided by investing activities. Additions to property and equipment of $3,000 for the three month
period ended March 31, 2010 and $5,000 for the three month period ended March 31, 2009 were offset
by proceeds in like amounts from the sale of Company automobiles in the comparable periods.
There was no cash provided by or used in financing activities for the three month periods
ended March 31, 2010 and March 31, 2009, respectively.
The Company has entered into a Loan and Security Agreement with Keltic. The Loan Agreement,
which was set to expire December 31, 2009, has been extended through December 31, 2010 with no
material changes in terms and conditions. Under the Loan Agreement, the Company has a line of
credit up to $1.0 million based on the Companys eligible accounts receivable balances at an
interest rate that is based on the higher of prime rate plus 2.75%, 90 day LIBOR rate plus 5.25% or
7%. Availability at March 31, 2010 was $1.0 million. The Loan Agreement has certain financial
covenants that shall apply only if the Company has any outstanding obligations to Keltic including
borrowing under the facility. The Company had no outstanding balance at March 31, 2010, or at
December 31, 2009, under the Loan Agreement.
In managements opinion, cash flows from operations and borrowing capacity (assuming obtaining
a commercially reasonable consent if required) combined with cash on hand will provide adequate
flexibility for funding the Companys working capital obligations for the next twelve months.
For the three months ended March 31, 2010, there were no shares of common stock issued
pursuant to the exercise of options issued under the Companys stock option plan.
Off Balance Sheet Arrangements
As of March 31, 2010, the Company does not have any Off Balance Sheet Arrangements.
Contractual Obligations and Commitments
The Company has the following commitments as of March 31, 2010: obligations of one employment
contract and two operating lease obligations. The Company has two operating leases for its
corporate headquarters located in New York and its branch office in New Jersey. The
Company is also currently using a facility in Massachusetts on a month-to-month basis through May
31, 2010.
14
The Company is unlikely to renew its lease for the New Jersey facility which expires August
31, 2010.
The Companys commitments at March 31, 2010 are reflected and further detailed in the
Contractual Obligation table located in Part I, Item 1, Note 8 of this Form 10-Q.
Inflation
The Company has not suffered material adverse affects from inflation in the past. However, a
substantial increase in the inflation rate in the future may adversely affect customers purchasing
decisions, may increase the costs of borrowing or may have an adverse impact on the Companys
margins and overall cost structure.
Recent Accounting Pronouncements
None.
|
|
|
Item 3.
|
|
Quantitative and Qualitative Disclosures about Market Risk
|
The Company has not entered into market risk sensitive transactions required to be disclosed
under this item.
|
|
|
Item 4T.
|
|
Controls and Procedures
|
Evaluation of disclosure controls and procedures.
Salvatore M. Quadrino, the
Companys Principal Executive Officer and Principal Financial Officer, after evaluating the
effectiveness of the Companys disclosure controls and procedures (as defined in the Securities
and Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this
report, has concluded that its disclosure controls and procedures are effective and designed to
ensure that material information relating to the Company and its consolidated subsidiaries would be
made known to it by others within these entities.
Changes in internal control.
There were no significant changes in the Companys
internal control over financial reporting in connection with the evaluation that occurred during
its first fiscal quarter of 2010 that has materially affected or is reasonably likely to materially
affect its internal control over financial reporting.
Part II. Other Information
|
|
|
Item 1.
|
|
Legal Proceedings
|
None.
The Companys 2009 Annual Report on Form 10-K includes a detailed discussion of risk factors.
Additional risks or uncertainties not currently known to the Company or that the Company deems to
be immaterial also may materially adversely affect the Companys business, financial condition
and/or operating results. The information presented below updates and should be read in
conjunction with the risk factors and information disclosed in the Companys Form 10-K for the year
ended December 31, 2009.
15
Going Concern and Capital Requirements
The Companys financial statements have been presented on the basis that it is a going
concern, which contemplates the realization of assets and satisfaction of liabilities in the normal
course of business. At March 31, 2010, the Company had $1.0 million of cash and cash equivalents
on hand as compared to $1.4 million at December 31, 2009. The Company has a line of credit up to
$1.0 million with Keltic based on the Companys eligible accounts receivable balances which is
subject to certain financial covenants that
shall apply only if the Company has any outstanding obligations to Keltic including borrowing
under the facility. The combination of an outstanding balance at the end of any fiscal quarter and
earnings before taxes, depreciation and amortization of less than $25,000 for that quarter will
cause a default under the Loan Agreement and may require the Company to obtain a waiver from Keltic
or limit the Companys access to the line of credit. The Keltic line of credit, which was set to
expire on December 31, 2009, has been extended through December 31, 2010 with no material changes
in terms and conditions. For the twelve month period ended December 31, 2009 the Company reported
a net loss of ($2.1) million. For the three month period ended March 31, 2010, the Company
reported a net loss of ($363,000). Beyond December 31, 2010, there is no guarantee that the
Company will be able to renew or replace its current financing upon expiration on commercially
reasonable terms or at all. Based upon the Companys reduced liquidity and net losses, the ability
of the Company to continue as a going concern is dependent on the Company achieving profitable
operations and or obtaining additional sources of financing within the current fiscal year.
The Company may require additional financing in the future to continue to implement its
product and services development, marketing and other corporate programs. If the Company is able
to obtain additional debt financing, the terms of such financing could contain restrictive
covenants that might negatively affect its shares of common stock, such as limitations on payments
of dividends and could reduce earnings due to interest expenses. Any further issuance of equity
securities could have a dilutive effect on the holders of the Companys shares of common stock.
The Companys business, operating results and financial condition (including, potentially, its
ability to continue as a going concern) may be materially harmed if the Company cannot obtain
additional financing.
NASDAQ Listing
The NASDAQ Capital Markets
CM
continued listing requirements, as applicable to the
Company, include requirements that a company maintain a minimum shareholders equity of $2,500,000,
a minimum bid price of $1 and that the market value of its publicly held shares (the market value
of its shares not held by officers, directors or beneficial owners of more than 10% of the
Companys total shares outstanding) be at least $1,000,000.
On February 1, 2010, the Company received a letter from NASDAQ stating that, based on the
closing bid price of the Companys listed securities for the preceding 30 consecutive business
days, a deficiency exists with regard to NASDAQ Listing Rule 5550(a)(2), which requires a minimum
bid price of $1.00 per share.
On March 9, 2010, the Company received an additional letter from NASDAQ stating that for the
preceding 30 consecutive trading days the Companys common stock had not maintained a minimum
market value of publicly held shares of $1,000,000 as required by NASDAQ Listing Rule 5550(a)(5).
On March 23, 2010, the Company received a letter from NASDAQ stating that since the time
NASDAQ contacted the Company on March 9, 2010, the Company regained compliance with both the $1.00
minimum bid price requirement and the minimum market value of publicly held shares requirement of
$1,000,000.
As of March 31, 2010, the Companys shareholders equity was $2,251,670 which is below the
minimum $2,500,000 requirement. At the close of business on May 12, 2010, the bid price for a
share of the Companys stock was $1.15, and the Company believes the value of its publicly held
shares was approximately $1,085,018 based upon the public filings of our officers, directors and
beneficial owners.
If the Companys common stock is delisted from The NASDAQ Capital Market
CM
, the
market liquidity of the Companys common stock will likely be significantly limited, which would
reduce shareholders ability to sell the Companys common stock. Additionally, any such delisting
could harm the Companys ability to raise capital through alternative financing sources on
acceptable terms, if at all, and may result in the loss of confidence in the Companys financial
stability by suppliers, customers and employees. In addition, a delisting would likely increase
the price volatility of the Companys shares of common stock and have a material adverse impact on
the price of the Companys shares of common stock.
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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None.
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Item 3.
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Defaults Upon Senior Securities
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None.
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Item 4.
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[Removed and Reserved]
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16
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Item 5.
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Other Information
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On May 12, 2010, the Companys Board of Directors resolved that NR Suparna would be appointed
as the Companys Chief Operating Officer, effective on May 20, 2010, the date of the Companys
Annual Shareholder Meeting.
Mr. Suparna, age 63, has over 35 years of diverse sales, marketing and management experience.
From 2004 to 2009, Mr. Suparna served as President and CEO of the Bangalore, India operation of
Helios and Matheson Information Technology Ltd., the Companys parent. Mr. Suparna has also served
as a Director of Helios & Matheson Global Services Pvt. Ltd., the Companys wholly-owned
subsidiary, since 2007. From 2000 to 2002, Mr. Suparna was the Chief Operating Officer of Swedish
Match. The terms of Mr. Suparnas employment agreement and compensation are currently under
consideration and will be disclosed once finalized under a separate filing on a Form 8-K.
On May 12, 2010, the Companys Board of Directors also resolved that effective May 20, 2010,
Mr. Salvatore M. Quadrino will cease to serve as interim Chief Executive Officer of the Company and
will revert back to his original role as the Companys Chief Financial Officer.
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3.1
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Certificate of Incorporation of the Registrant, incorporated by reference to Exhibit 3.1
to the Form 10-K, as previously filed with the SEC on March 31, 2010.
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3.2
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Bylaws of Helios & Matheson North America Inc., incorporated by reference to Exhibit 3.2
to the Form 10-K, as previously filed with the SEC on March 31, 2010.
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31.1
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Certification of Interim Chief Executive Officer and Chief Financial Officer pursuant to
Section 302 of Sarbanes-Oxley Act of 2002.
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32.1
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Certification of the Interim Chief Executive Officer and Chief Financial Officer, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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HELIOS & MATHESON NORTH AMERICA INC.
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By:
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/s/ Salvatore M. Quadrino
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Date: May 14, 2010
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Salvatore M. Quadrino
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Interim Chief Executive Officer and
Chief Financial Officer
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18
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