UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: September 30, 1998
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from -------------- to--------------
Commission file number: 0-13121
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HMG Worldwide Corporation
-------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3402432
- ------------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
475 Tenth Avenue, New York, New York 10018
- ------------------------------------ -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 736-2300
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 12, 1998
- ---------------------------- --------------------------------
Common Stock, $.01 par value 9,147,205
1
<PAGE>
Part I. Financial Information
Item 1.
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 30, 1998 December 31, 1997
------------------ -----------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 7,115 $ 6,439
Accounts receivable - less
allowance for doubtful
accounts of $344 and $273 14,310 8,445
Inventory 15,640 6,671
Prepaid expenses 438 414
Other current assets 250 317
------- --------
Total current assets 37,753 22,286
Property and equipment - net 5,592 4,682
Excess of cost over fair market
value of assets acquired,
less accumulated amortization
of $1,921 and $1,615 6,238 6,544
Other assets 228 133
------- --------
$49,811 $33,645
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term
obligations $15,240 $10,942
Accounts payable 16,063 8,729
Accrued employee compensation
and benefits 1,858 1,418
Deferred revenue 351 604
Accrued expenses 1,508 673
Other current liabilities 320 346
------- --------
Total current liabilities 35,340 22,712
Pension obligation 1,034 1,175
Convertible debentures 2,200 2,200
Promissory Note 1,750
Term loans 537 678
Other long-term liabilities 398 410
------- --------
41,259 27,175
------- --------
Stockholders' equity:
Common stock, par value $.01;
50,000,000 shares authorized;
9,147,205 and 8,924,150 issued
and outstanding 91 89
Additional paid-in capital 34,907 34,645
Accumulated deficit (26,446) (28,264)
------- --------
8,552 6,470
------- --------
$49,811 $33,645
======= ========
See accompanying notes to consolidated financial statements.
2
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<TABLE>
<CAPTION>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -----------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues $22,463 $10,998 $51,878 $33,848
Cost of revenues 17,010 8,221 37,884 25,129
------- ------- ------- -------
Gross profit 5,453 2,777 13,994 8,719
Selling, general and
administrative expenses 4,246 2,558 11,076 8,288
------- ------- ------- -------
Income from operations 1,207 219 2,918 431
Interest income 62 84 210 231
Interest expense (417) (281) (1,199) (769)
Other income - - - 267
------- ------- ------- -------
Income before provision
for income taxes 852 22 1,929 160
Provision for income taxes (36) - (111) (10)
------- ------- ------- -------
Net income $ 816 $ 22 $ 1,818 $ 150
======= ======= ======= =======
Basic earnings per share
Net income per common and
common equivalent shares $ 0.09 $ - $ 0.20 $ 0.01
======= ======= ======= =======
Weighted average number of
common and common equivalent
shares outstanding 9,113,509 8,707,483 9,001,434 8,540,807
========= ========= ========= =========
Diluted earnings per share
Net income per common and
common equivalent shares
and assumed conversions $ 0.08 $ 0.17
======= =======
Weighted average number of
common and common equivalent
shares and assumed conversions 11,434,097 11,339,801
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended September 30,
-------------------------------
1998 1997
---- ----
Cash flows from operating activities:
Cash received from customers $48,490 $31,507
Interest received 218 231
Cash paid to suppliers (41,923) (27,573)
Cash paid to employees (7,802) (6,633)
Income taxes paid (3) (19)
Interest paid (1,173) (769)
------- -------
Net cash used in operating
activities (2,193) (3,256)
------- -------
Cash flows from investing activities:
Proceeds from the sale of
an investment 356
Capital expenditures (799) (402)
------- -------
Net cash used in investing activities (799) (46)
------- -------
Cash flows from financing activities:
Net proceeds from the sale of common
stock as part of a private placement 576
Proceeds derived from a credit
agreement, net 3,671 2,521
Proceeds derived from the sale of
convertible debentures 2,200
Cash acquired pursuant to an acquisition 138
Principal payments of
outstanding debt obligations (141) (303)
------- -------
Net cash provided by
financing activities 3,668 4,994
------- -------
Net increase in cash and
cash equivalents 676 1,692
Cash and cash equivalents
at beginning of year 6,439 6,950
------- -------
Cash and cash equivalents
at September 30 $ 7,115 $ 8,642
======= =======
See accompanying notes to consolidated financial statements.
4
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
(in thousands)
(unaudited)
Nine Months Ended September 30,
-------------------------------
1998 1997
---- ----
Reconciliation of net income
to net cash used in operating activities:
Net income $ 1,818 $ 150
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 797 690
Other income (267)
Decrease (increase) in assets:
Accounts receivable (4,153) (1,941)
Inventory (7,365) (155)
Prepaid expenses 31 (244)
Other assets (28) 42
Increase (decrease) in liabilities:
Accounts payable 6,517 544
Deferred revenue (1,082) (400)
Accrued expenses 835 (1,411)
Pension obligation (141) (264)
Other liabilities 578 -
------- -------
Net cash used in operating
activities ($ 2,193) ($ 3,256)
======= =======
Non-cash financing activities:
Common Stock issued in connection
with an employee benefit plan $ 155 $ 160
======= =======
Fair value of assets acquired in
connection with an acquisition $ 4,111
=======
Fair value of liabilities assumed in
connection with an acquisition $ 2,361
=======
Common Stock issued in connection with
an acquisition $ 110
=======
Note payable, net of imputed interest,
issued in connection with an acquisition $ 1,750
=======
See accompanying notes to consolidated financial statements.
5
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 - Consolidated Financial Statements
HMG Worldwide Corporation (the "Company") conducts its operations
principally through 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 Griffith Worldwide In-Store Marketing, Inc. ("HMG Griffith") and HMG Schutz
International Inc. ("HMG Schutz") with facilities in New York, Illinois,
Pennsylvania and Toronto, Canada.
The Consolidated Balance Sheet as of September 30, 1998, and the
Consolidated Statements of Operations and Cash Flows for the three months and
nine months ended September 30, 1998 and 1997, have been prepared by the Company
without audit. In the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows at September 30, 1998 and for all
periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These consolidated financial statements should
be read in conjunction with the consolidated financial statements and notes
thereto included in the Company's December 31, 1997 annual report to
shareholders. The results of operations for the period ended September 30, 1998
are not necessarily indicative of the operating results for the full year.
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 $1.7 million Promissory Note, net of
imputed interest of $346,000, 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, 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. 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 Pro Forma Statement of Operations of HMG Schutz and the Company (i) for
the nine months ended September 30, 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.
6
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
Note 2 - Acquisition of HMG Schutz Operations - continued
Pro Forma Pro Forma
Nine Months Ended Year Ended
September 30, 1998 December 31, 1997
------------------ -----------------
(in thousands, except per share data)
Net revenues $60,626 $67,903
Cost of revenues 43,832 48,789
------- -------
Gross profit 16,794 19,114
Selling, general and
administrative expenses 15,088(b) 20,696(a)
------- -------
Income (loss) from operations 1,706 (1,582)
Interest income 210 323
Interest expense (1,291) (1,359)
Other income - 267
------- -------
Income (loss) before income taxes 625 (2,351)
Provision for income taxes (25) -
------- -------
Net income (loss) $ 600 ($ 2,351)
======= =======
Basic earnings per share
Net income (loss) per share and
common share equivalent shares $ 0.07 ($ 0.27)
======= =======
Weighted averaged number of shares
of common and common equivalent
shares outstanding 9,101 8,738
======= =======
Diluted earnings per share
Net income per share and
common share equivalent shares $ 0.07
=======
Weighted averaged number of shares
of common and common equivalent
shares and assumed conversions 11,440
=======
(a) Selling, general and administrative expenses for the year ended
December 31, 1997 includes $1.2 million in special costs associated with
(i) the settlement of an investigation with the Department of Justice
("JOD"), $500,000, (ii) legal expenses arising as a result of the JOD
matter, $177,000 and (iii) expenses pursuant to an environmental
remediation program at its facility, $497,000. If such costs were
eliminated from the above Pro Forma Statement of Operations for the year
ended December 31, 1997, Pro Forma net loss would have been $1.2 million,
or $0.13 basic earnings per share.
(b) Selling, general and administrative expenses for the nine months ended
September 30, 1998 includes $86,000 in special costs associated with (i)
additional legal expenses arising as a result of the JOD matter, $60,000,
and (ii) additional expenses pursuant to environmental remediation program
at its facility, $26,000. If such costs were eliminated from the above Pro
Forma Statement of Operations for the nine months ended September 30, 1998,
Pro Forma net income would have been $686,000, or $0.08 basis earnings per
share.
7
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
Note 3 - Inventory
Inventory consisted of the following components at September 30, 1998 and
December 31, 1997.
September 30, December 31,
1998 1997
---- ----
(in thousands)
Finished goods $ 2,834 $1,210
Work-in-process 3,321 1,015
Raw materials 9,485 4,446
------- ------
$15,640 $6,671
======= ======
Note 4 - Income Taxes
At December 31, 1997, the Company had net operating loss carryforwards of
approximately $27.6 million which expire during the years 2001 through 2012.
Components of income tax expense for the nine months ended September 30,
1998 and 1997 are as follows:
Nine Months Ended September 30,
1998 1997
---- ----
(in thousands)
State and local
income taxes $111 $10
==== ===
Note 5 - Convertible Debentures
Effective September 30, 1997, the Company issued $2.2 million 10%
Convertible Debentures due September 30, 2000 ("Debentures") through a private
placement ("Private Placement"). The Debentures bear interest at the rate of 10%
per annum and are convertible, at the option of the holder at any time, into
shares of the Company's Common Stock ("Conversion Shares"), $0.01 par value,
based upon the conversion price of $1.25 per share. The Company may prepay the
Debentures, on 30 days prior notice, at such time as the average closing price
of the Common Stock exceeds $1.75 per share for a 30 day period prior to notice
of such prepayment provided that the Conversion Shares have been registered
under the Securities Act at the time of such prepayment. The Debentures and
Conversion Shares which may be acquired upon the conversion have been issued
without registration by reason of the private offering exemption under Section
4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder.
Accordingly, the Debentures and the Conversion Shares may not be resold absent
registration under the Securities Act or the availability of an applicable
exemption from such registration.
8
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Recent Developments
Effective August 1, 1998, the Company consummated the acquisition of the
business of Schutz International Inc. ("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 $1.7 million Promissory Note, net of imputed interest of $346,000, 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, 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. 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.
Three Months Ended September 30, 1998 as Compared to the
Three Months Ended September 30, 1997
Net revenues increased $11.5 million, or 104%, to $22.5 million for the
three months ended September 30, 1998 as compared to $11.0 million for the three
months ended September 30, 1997. The $11.5 million increase in net revenues from
period to period was due principally to (i) the addition of net revenues from
HMG Schutz, acquired August 1, 1998, and HMG Griffith, acquired July 1, 1997, of
$4.4 million and $819,000, respectively, (ii) the shipment of five new national
rollouts of merchandising systems developed by the Company of approximately $3.7
million and (iii) a net increase in marketing expenditures of the Company's
clients during the period of $2.5 million.
Gross profit for the three months ended September 30, 1998 was $5.4 million
as compared to $2.8 million for the three months ended September 30, 1997. The
increase in gross profit of $2.6 million was principally a result of the
increase in net revenues, net of a decline in gross margin for the quarter. For
the three months ended September 30, 1998 and 1997, the Company's gross margin
was 24.3% and 25.3%, respectively. The gross margin decrease of 1% was due
principally to the net effect of (i) an unfavorable production revenue mix
resulting in a 3.7% decrease, reflecting the Company's production of certain
projects at lower margins due to the larger production volumes, offset by (ii) a
decrease in factory overhead expenses of 2.7%. The unfavorable production
revenue mix was principally the result of certain larger programs produced by
the Company during the period at reduced gross margin levels in light of the
operational overhead efficiencies realized by the Company during the period.
Selling, general and administrative expenses ("SG&A") for the three months
ended September 30, 1998 was $4.2 million as compared to $2.6 million for the
comparable period in 1997. The increase in SG&A of $1.7 from period to period
was principally due to the addition of HMG Schutz and HMG Griffith SG&A of $1.0
million and $335,000, respectively, and increased spending in other general
expenses of $308,000.
For the three months ended September 30, 1998, the Company generated
interest income of $62,000 as compared to $84,000 for the three months ended
September 30, 1997. The decrease was principally attributable to a decrease in
cash and cash equivalents invested in interest-bearing marketable securities and
commercial paper from period to period.
Interest expense was $417,000 for the three months ended September 30, 1998
as compared to $281,000 for the three months ended September 30, 1997. The
increase in interest expense was principally due to the increased average
borrowings from period to period.
As a consequence of the foregoing factors, the Company generated net income
of $816,000, or $0.09 basic earnings per share for the three months ended
September 30 1998 as compared to a net income of $22,000, or $0.00 basic
earnings per share, for the three months ended September 30, 1997.
9
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
Nine Months Ended September 30, 1998 as Compared to the
Nine Months Ended September 30, 1997
Net revenues increased $18.0 million, or 53%, to $51.9 million for nine
months ended September 30, 1998 as compared to $33.8 million for the nine months
ended September 30, 1997. The $18.0 million increase in net revenues from period
to period was due principally to (i) the addition of net revenues from HMG
Schutz, $4.4 million, and HMG Griffith, $2.7 million, and (ii) the shipment of
five new national rollouts of merchandising systems developed by the Company of
approximately $11.6 million. Each of the five national merchandising system
rollouts were new merchandising initiatives with new clients to the Company.
Gross profit for the nine months ended September 30, 1998 was $14.0 million
as compared to $8.7 million for the nine months ended September 30, 1997. The
increase in gross profit of $5.3 million was principally a result of the
increase in net revenues and an increase in gross margin. For the nine months
ended September 30, 1998 and 1997, the Company's gross margin was 27.0% and
25.7%, respectively. The gross margin increase of 1.3% was due principally to a
favorable production revenue mix resulting in the Company's efforts of more
direct, internal production of its merchandising systems, lower labor costs and
increased production volume and purchasing efficiencies. The favorable
production revenue mix was principally the result of an increase in the number
of programs manufactured and assembled at the Company's Pennsylvania and
Brooklyn facilities and the increased operational efficiencies on the specific
programs shipped.
SG&A for the nine months ended September 30, 1998 was $11.1 million as
compared to $8.3 million for the comparable period in 1997. The increase in SG&A
of $2.8 million from period to period was principally due to (i) the addition of
HMG Schutz and HMG Griffith SG&A of $1.1 million and $837,000, respectively, and
(ii) increased spending in other general expenses of $905,000.
For the nine months ended September 30, 1998, the Company generated
interest income of $210,000 as compared to $231,000 for the nine months ended
September 30, 1997. The decrease was principally attributable to an decrease in
cash and cash equivalents invested in interest-bearing marketable securities and
commercial paper from period and period.
Interest expense was $1.2 million for the nine months ended September 30,
1998 as compared to $769,000 for the nine months ended September 30, 1997. The
increase in interest expense was principally due to the increased average
borrowings from period to period.
As a consequence of the foregoing factors, the Company generated net income
of $1.8 million or $0.20 basic earnings per share, for the nine months ended
September 30 1998 as compared to a net income of $150,000, or $0.01 basic
earnings per share, for the nine months ended September 30, 1997.
Stockholders' Equity
Stockholders' equity increased $2.1 million to $8.6 million at September
30, 1998 from $6.5 million at December 31, 1997. The increase in stockholders'
equity was due to (i) net income of $1.8 million, (ii) the contribution of
123,055 shares of Common Stock, valued at $1.25 per share, to the HMG Worldwide
Corporation Capital Accumulation Plan and (iii) the issuance of 100,000 of
Common Stock, valued at $1.10 per share, pursuant to the HMG Schutz Purchase
Agreement.
10
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
Income Taxes
At December 31, 1997, the Company had net operating loss carryforwards of
approximately $27.6 million which expire during the years 2001 through 2012.
The Company's income tax provision for the nine months ended September 30,
1998 was $111,000 as compared to $10,000 for the nine months ended September 30,
1997. The income tax provision for the nine months ended September 30, 1998 and
1997 was comprised principally of state and local taxes.
Inflation
The effect of inflation on the Company's operations has not been
significant to date.
Backlog
At September 30, 1998, the Company's aggregate backlog was approximately
$34.4 million as compared to $32.0 million and $24.9 million at December 31,
1997 and September 30, 1997, respectively. Of such aggregate backlog at
September 30, 1998, approximately 23% was attributable to two clients. The
Company anticipates that substantially all such backlog at September 30, 1998
will be filled during the next twelve months. In addition to the $34.4 million
backlog at September 30, 1998, the Company's supply contract with the Foster
Grant Group L.P. ("Foster Grant") requires Foster Grant, subject to certain
limitations, to purchase at least 70% of its in-store merchandising displays
from the Company with average annual purchases to aggregate no less than $2.5
million. The aggregate value of the Foster Grant supply contract at September
30, 1998 was $24.3 million, of which the Company anticipates that $2.5 million
will be shipped within the next twelve months. Due to quarter to quarter
fluctuations in the Company's backlog levels, attributable to the timing, nature
and size of its merchandising system programs for its clients, such backlog
levels are not necessarily an indicator of future net revenue levels.
Liquidity and Capital Resources
Cash and cash equivalents at September 30, 1998 and December 31, 1997
aggregated $7.1 million and $6.4 million, respectively. The Company's increase
in cash and cash equivalents of approximately $676,000 for the nine months ended
September 30, 1998 was due principally to the net effects of (i) net cash used
in operations of $2.2 million, (ii) capital expenditures of $799,000 and (iii)
reductions of debt obligations of $141,000, offset by (iv) proceeds from
borrowings under the Company's revolving line of credit with its bank lender of
$3.7 million. The Company's negative cash flows from operations for the nine
months ended September 30, 1998 resulted principally from (i) an increase in
accounts receivable and inventory of $11.5 million offset by (ii) an increase in
general liabilities of $6.7 million.
The Company has secured a $16.0 million Credit Agreement with a financial
institution in the form of a revolving credit and term loan facility. The Credit
Agreement provides for a secured revolving credit facility which advances up to
the sum of (i) 85% of eligible accounts receivable, (ii) the lesser of 60% of
eligible finished goods inventory or $750,000 and (iii) the Company's cash, cash
equivalents and marketable securities. The Credit Agreement is secured by a lien
on and a security interest in the Company's cash, cash equivalents, marketable
securities, accounts receivable, inventory, and equipment and all other tangible
and intangible assets and a pledge of the common stock of each of the Company's
wholly-owned subsidiaries.
Borrowings under the Credit Agreement bear interest at the institution's
prime rate plus 1% per annum. The Company is required to pay a quarterly
commitment fee at the rate of one half of 1% per annum of the average daily
unused amount of funds available. Additionally, the Credit Agreement contains
certain customary affirmative and negative covenants which require the Company
to maintain certain financial ratios, and, among other things restrict, (i) the
declaration or payment of dividends, (ii) the incurrence of additional
indebtedness and (iii) the sale of certain assets. As of September 30, 1998, the
Company was in compliance with all financial covenants of the Credit Agreement,
as amended.
11
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
Pursuant to the terms of the Credit Agreement, the lender can advance up to
$1.6 million in the form of a term loan collateralized by the Company's current
and future real estate and equipment. The term loan portion of the Credit
Agreement is amortized on a sixty month basis with a final payment due upon the
termination of the Credit Agreement and bears interest at the institution's
prime rate plus 1% per annum. At September 30, 1998, the balance outstanding on
the term loan component of the Credit Agreement was approximately $725,000.
Effective September 30, 1997, the Company issued $2.2 million 10%
Convertible Debentures due September 30, 2000 ("Debentures") through a private
placement ("Private Placement"). The Debentures bear interest at the rate of 10%
per annum and are convertible, at the option of the holder at any time, into
shares of the Company's Common Stock ("Conversion Shares"), $0.01 par value,
based upon the conversion price of $1.25 per share. The Company may prepay the
Debentures, on 30 days prior notice, at such time as the average closing price
of the Common Stock exceeds $1.75 per share for a 30 day period prior to notice
of such prepayment provided that the Conversion Shares have been registered
under the Securities Act at the time of such prepayment. The Debentures and the
Conversion Shares which may be acquired upon the conversion have been issued
without registration by reason of the private offering exemption under Section 4
(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder.
Accordingly, the Debentures and the Conversion Shares may not be resold absent
registration under the Securities Act or the availability of an applicable
exemption from such registration.
The Company's working capital at September 30, 1998 was approximately $2.4
million, inclusive of borrowings of $15.2 million pursuant to the three year
Credit Agreement. For the nine months ended September 30, 1998, the Company's
accounts receivable and inventory levels have increased $14.8 million during the
period, principally due to (i) the acquisition of HMG Schutz, $3.8 million, and
(ii) revenue growth of the Company and the current production demands required
by the Company's clients and related shipment schedules. Due to the working
capital position, the Company experiences temporary liquidity problems from time
to time due to the timing of cash flows while the Company is in production and
building inventory. However, management believes that its current cash and cash
equivalents, its backlog, anticipated future cash flows from operations and its
availability under its Credit Agreement will be sufficient to support its debt
service requirements and its other capital and operating needs for the next
fiscal year. Management believes that continued focus upon strategic cost
reductions and efficiencies, an expanded client base and future cash flows from
operations developed and/or implemented by the Company provide an important
basis for future profitability and liquidity, however, there can be no assurance
that such belief will prove to be correct, that additional financing will not be
required, or that any such financing will be available on commercially
reasonable terms or otherwise.
The above statements and certain other statements contained in this
quarterly report on Form 10-Q are based on current expectations. Such statements
are forward looking statements that involve a number of risks and uncertainties.
Factors that could cause actual results to differ materially include the
following (i) general economic conditions at retail, (ii) competitive market
influences, (iii) client budgetary restrictions, (iv) delays in shipment of
scheduled programs to clients, (v) delay in or inability to expand the Company's
client base and/or (vi) the loss of or reduction in spending of existing
clients.
12
<PAGE>
Part II Other Information
Item 6. Exhibits and Reports of Form 8-K
The following financial statement exhibits are files as part of this Report:
INDEX TO FINANCIAL STATEMENT EXHIBITS
Page
----
Exhibit 11 - Computation of Per Share Earnings 15
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HMG Worldwide Corporation
-------------------------
(Registrant)
Date: November 12, 1998 /S/ Robert V. Cuddihy, Jr.
----------------- --------------------------
Robert V. Cuddihy, Jr.
Chief Operating Officer and
Chief Financial Officer
(Principal Accounting Officer)
14
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998
(in thousands, except per share data)
(unaudited)
For the Three Months Ended September 30, 1998
---------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic earnings per share:
Income available to
common stockholders $816 9,114 $0.09
=====
Effect of dilutive securities:
10% convertible debentures 55 1,760
Stock options and warrants 560
---- -----
Diluted earnings per share:
Income available to common
stockholders' and assumed
conversions $871 11,434 $0.08
==== ====== =====
For the Nine Months Ended September 30, 1998
--------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic earnings per share:
Income available to
common stockholders $1,818 9,001 $0.20
=====
Effect of dilutive securities:
10% convertible debentures 165 1,760
Stock options and warrants 579
------ -----
Diluted earnings per share:
Income available to common
stockholders' and assumed
conversions $1,983 11,340 $0.17
====== ====== =====
15
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 7,115
<SECURITIES> 0
<RECEIVABLES> 14,654
<ALLOWANCES> 344
<INVENTORY> 15,640
<CURRENT-ASSETS> 37,753
<PP&E> 6,389
<DEPRECIATION> 797
<TOTAL-ASSETS> 49,811
<CURRENT-LIABILITIES> 35,340
<BONDS> 0
0
0
<COMMON> 91
<OTHER-SE> 8,643
<TOTAL-LIABILITY-AND-EQUITY> 49,811
<SALES> 51,878
<TOTAL-REVENUES> 51,878
<CGS> 37,884
<TOTAL-COSTS> 11,076
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,199
<INCOME-PRETAX> 1,929
<INCOME-TAX> 111
<INCOME-CONTINUING> 1,818
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,818
<EPS-PRIMARY> .20
<EPS-DILUTED> .17
</TABLE>
