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: June 30, 1999
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 0-13121
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HMG Worldwide Corporation
(Exact name of registrant as specified in its charter)
Delaware 13-3402432
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
475 Tenth Avenue, New York, New York 10018
- ------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 736-2300
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
No Yes X
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
No Yes
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 12, 1999
- ---------------------------- ------------------------------
Common Stock, $.01 par value 11,326,349
1
<PAGE>
Part I. Financial Information
Item 1.
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
June 30, 1999 December 31, 1998
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(unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents ........................................ $ 5,190 $ 5,730
Accounts receivable - less allowance
for doubtful accounts of $642 and $453 ......................... 16,981 15,505
Inventory ........................................................ 22,785 15,335
Prepaid expenses ................................................. 1,385 816
Other current assets ............................................. 323 263
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Total current assets .......................................... 46,664 37,649
Property and equipment - net ....................................... 7,323 6,319
Excess of cost over fair value
of assets acquired, less accumulated
amortization of $2,302 and $2,053 ................................ 7,359 7,528
Other assets ....................................................... 295 233
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$61,641 $51,729
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations ...................... $16,102 $14,801
Accounts payable ................................................. 19,433 15,933
Accrued employee compensation and benefits ....................... 1,615 1,353
Deferred revenue ................................................. 2,396 2,970
Accrued expenses ................................................. 1,354 1,575
Other current liabilities ........................................ 325 213
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Total current liabilities ...................................... 41,225 36,845
Pension obligation ................................................. 1,182 1,147
Convertible debentures ............................................. -- 2,160
Convertible notes .................................................. 5,000 --
Promissory note .................................................... 1,600 1,600
Term loans ......................................................... 416 491
Other long-term liabilities ........................................ 432 418
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49,855 42,661
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Stockholders' equity:
Common stock, par value $0.01; 50,000,000 shares
authorized; 11,111,605 and 9,329,205 shares
issued and outstanding ......................................... 111 93
Additional paid-in capital ....................................... 37,394 35,335
Accumulated deficit .............................................. (25,719) (26,360)
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11,786 9,068
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$61,641 $51,729
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See accompanying notes to consolidated financial statements.
</TABLE>
2
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
(unaudited)
<TABLE>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues ...................... $20,788 $16,549 $40,290 $29,415
Cost of revenues .................. 14,602 11,982 28,353 20,874
------- ------- ------- -------
Gross profit ..................... 6,186 4,567 11,937 8,541
Selling, general and
administrative expenses ......... 5,715 3,462 10,615 6,830
------- ------- ------- -------
Income from operations ........... 471 1,105 1,322 1,711
Interest income ................... 73 71 142 148
Interest expense .................. (433) (412) (809) (782)
------- ------- ------- -------
Income before provision
for income taxes ................ 111 764 655 1,077
Provision for income taxes ........ (1) (64) (14) (75)
------- ------- ------- -------
Net income ....................... $ 110 $ 700 $ 641 $ 1,002
======= ======= ======= =======
Basic earnings per share
Net income per common and
common equivalent shares ....... $ 0.01 $ 0.08 $ 0.06 $ 0.11
======= ======= ======= =======
Weighted average number of common
and common equivalent
shares outstanding ............. 11,102,454 8,964,718 10,927,928 8,944,659
========== ========= ========== =========
Diluted earnings per share
Net income per common and
common equivalent shares
and assumed conversions ........ $ 0.01 $ 0.07 $ 0.05 $ 0.10
======= ======= ======= =======
Weighted average number of common
and common equivalent shares
and assumed conversions ........ 13,988,273 11,446,256 13,531,607 11,290,156
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
3
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
Six Months Ended June 30,
-------------------------
1999 1998
---- ----
Cash flows from operating activities:
<S> <C> <C>
Cash received from customers ........ $38,222 $27,054
Interest received ................... 150 166
Cash paid to suppliers .............. (34,648) (25,745)
Cash paid to employees .............. (8,344) (4,771)
Income taxes paid ................... (66) (2)
Interest paid ....................... (710) (782)
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Net cash used in operating
activities ..................... (5,396) (4,080)
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Cash flows from investing activities:
Capital expenditures ................ (1,443) (408)
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Net cash used in
investing activities ............. (1,443) (408)
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Cash flows from financing activities:
Proceeds derived from the sale of
convertible notes ................. 5,000
Proceeds derived from a credit
agreement, net .................... 1,301 4,498
Proceeds from exercise of stock options 73
Principal payments of
outstanding debt obligations ...... (75) (94)
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Net cash provided by
financing activities ........... 6,299 4,404
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Effect of exchange rate changes ....... -- (3)
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Net decrease in cash and
cash equivalents .................... (540) (87)
Cash and cash equivalents
at beginning of year ................ 5,730 6,439
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Cash and cash equivalents
at June 30 .......................... $ 5,190 $ 6,352
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
(in thousands)
(unaudited)
<TABLE>
Six Months Ended June 30,
-------------------------
1999 1998
---- ----
Reconciliation of net income
to net cash used in operating activities:
<S> <C> <C>
Net income ............................... $ 641 $1,002
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization .......... 688 473
Decrease (increase) in assets:
Accounts receivable .................... (1,476) (3,982)
Inventory .............................. (7,450) (5,645)
Prepaid expenses ....................... (569) (99)
Other assets ........................... (122) 65
Increase (decrease) in liabilities:
Accounts payable ....................... 3,500 2,545
Deferred revenue ....................... (574) 1,625
Accrued expenses ....................... (164) (133)
Pension obligation ..................... 35 (50)
Other liabilities ...................... 95 119
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Net cash used in operating
activities ............................. ($5,396) ($4,080)
====== ======
Non-cash financing activities:
Common stock issued in connection
with an employee benefit plan ......... $ 154
Common stock issued in connection
with the conversion of debentures ..... $2,160
</TABLE>
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 four operating wholly- owned subsidiaries being,
respectively, HMG Worldwide In-Store Marketing, Inc. ("HMG"), HMG Intermark
Worldwide Manufacturing, Inc. ("HMG Intermark"), Display Depot, Inc. ("DDI") and
HMG Griffith Worldwide In- Store Marketing, Inc. ("HMG Griffith") with
facilities in New York, Illinois, Pennsylvania and Toronto, Canada.
The Consolidated Balance Sheet as of June 30, 1999, and the Consolidated
Statements of Operations and Cash Flows for the three months and six months
ended June 30, 1999 and 1998, 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 June 30, 1999 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, 1998 annual report to
shareholders. The results of operations for the period ended June 30, 1999 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 $1.6 million Promissory Note, as
adjusted, net of imputed interest of $278,000, and issued 100,000 shares of the
Company's Common Stock, valued at $1.10 per share, in consideration for the
acquired assets. The payments required under the Promissory Note commence upon
the second anniversary of the Purchase Agreement after which the Company will
make 20 equal quarterly principal installments, plus accrued interest at the
prime rate per annum, over five years. In addition, the Company has agreed to
make certain future contingent payments based upon revenues generated by HMG
Schutz over the next three years. To date, the company has recorded aggregate
contingent payments of $259,000 pursuant to the terms of the Purchase Agreement.
The Company also acquired an option to purchase at a future date yet to be
determined, the office and warehouse facilities and related land currently
occupied by HMG Schutz for approximately $2.3 million.
Note 3 - Inventory
Inventory consisted of the following components at June 30, 1999 and
December 31, 1998.
June 30, December 31,
1999 1998
---- ----
(in thousands)
Finished goods $ 3,908 $ 3,549
Work-in-process 4,255 3,789
Raw materials 14,622 7,997
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$22,785 $15,335
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6
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
Note 4 - Income Taxes
At December 31, 1998, the Company had net operating loss carryforwards of
approximately $34.6 million which expire during the years 2001 through 2013.
Components of income tax expense for the six months ended June 30, 1999 and
1998 are as follows:
Six Months Ended June 30,
-------------------------
1999 1998
---- ----
(in thousands)
State and local
income taxes $14 $75
=== ===
Note 5 - Convertible Debentures
In February 1999, the Company's convertible debenture holders elected to
convert the then outstanding $2.2 million debentures into Common Stock at $1.25
per share pursuant to the terms of the debentures. As a consequence of the
conversion, the Company issued 1,728,000 shares of Common Stock and retired the
convertible debentures.
On February 24, 1999, the Company issued $5.0 million 7% Convertible Notes
Due February 24, 2002 (the "Notes") to two institutional investors. The
principal amount of the Notes is convertible into shares of the Company's Common
Stock at a conversion price of the lesser of $4.00 per share or a price based on
the prevailing market price of the Common Stock, subject to a maximum issuance
of 2,160,000 shares upon conversion of the Notes, taken together. The Notes were
issued through a private placement; however, the Company has registered, for
resale, the shares which may be acquired upon the conversion of the Notes under
the Securities Act of 1933.
7
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company continued to expand during the second quarter of 1999 as its
strategy to expand its existing client base through organic growth and to
strategically acquire complementary businesses has resulted in the Company's
tenth consecutive quarterly profit. Net revenues increased 37% to $40.3 million
for the six months ended June 30, 1999. The Company generated net income of
$641,000, or $0.06 basic earnings per share, in 1999 as compared to $1.0
million, or $0.11 basic earnings per share, for the six months ended June 30,
1998.
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 $1.6 million Promissory Note, net of imputed interest of $278,000, and issued
100,000 shares of the Company's Common Stock, valued at $1.10 per share, in
consideration for the acquired assets. The payments required under the
Promissory Note commence upon the second anniversary of the Purchase Agreement
after which the Company will make 20 equal quarterly principal installments,
plus accrued interest at the prime rate per annum, over five years. In addition,
the Company has agreed to make certain future contingent payments based upon
revenues generated by HMG Schutz over the next three years. 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.
During the fourth quarter of 1998, the Company engaged BNY Capital Markets
("BNY Capital"), a division of The Bank of New York and an independent financial
consultant, to assist the Company in targeting and financing new, strategic
acquisitions. The Company, in conjunction with BNY Capital, is currently seeking
to refinance its existing revolving line of credit and term loans under more
favorable terms and to provide a source of acquisition financing in the form of
debt. The Company is seeking a $35.0 million credit facility.
In February 1999, the Company's convertible debenture holders elected to
convert the outstanding $2.2 million of debentures into Common Stock at $1.25
per share pursuant to the terms of the debentures. As a consequence of the
conversion, the Company issued 1,728,000 shares of Common Stock and retired the
convertible debentures. In addition, on February 24, 1999, the Company issued
$5.0 million 7% Convertible Notes Due February 24, 2002 to two institutional
investors. The principal amount of the Notes is convertible into shares of the
Company's Common Stock at a conversion price of the lesser of $4.00 per share or
a price based on the prevailing market price of the Common Stock, subject to a
maximum issuance of 2,160,000 shares upon conversion of the Notes, taken
together. The Notes were issued through a private placement; however, the
Company has registered, for resale, the shares which may be acquired upon the
conversion of the Notes under the Securities Act of 1933.
Management believes that HMG is well positioned as a leading, innovative,
client service oriented company in the in-store marketing industry. Furthermore,
HMG will continue to seek to acquire strategic businesses which will expand the
Company's products and services, provide improved distribution and reduce
operating and manufacturing costs.
Three Months Ended June 30, 1999 as Compared to the
Three Months Ended June 30, 1998
Net revenues increased $4.2 million, or 25.6%, to $20.8 million for the
three months ended June 30, 1999 as compared to $16.6 million for the three
months ended June 30, 1998. The $4.2 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, of $5.2 million and (ii) a net decrease in
the Company's clients' scheduled shipments during the period of approximately
$1.0 million.
Gross profit for the three months ended June 30, 1999 was $6.2 million as
compared to $4.6 million for the three months ended June 30 1998. The increase
in gross profit of $1.6 million was principally a result of the increase in net
revenues and an increase in gross margin for the quarter. For the three months
ended June 30, 1999 and 1998, the Company's gross margin was 29.7% and 27.6%,
respectively. The gross margin increase of 2.1% was due principally to the net
effect of (i) a favorable production revenue mix resulting in a 3.1% increase,
reflecting the Company's production of certain projects at lower margins due to
the larger production volumes, offset by (ii) a 1.0% increase in
8
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
factory overhead expense. The favorable production revenue mix was principally
the result of certain programs produced by the Company during the period at
improved gross margin levels in light of the operational efficiencies realized
by the Company during the period.
Selling, general and administrative expenses ("SG&A") for the three months
ended June 30, 1999 was $5.7 million as compared to $3.5 million for the
comparable period in 1998. The increase in SG&A of $2.2 from period to period
was principally due to the addition of the operations of HMG Schutz of $1.9
million and increased spending in other general expenses of $300,000.
For the three months ended June 30, 1999, the Company generated interest
income of $73,000 as compared to $71,000 for the three months ended June 30,
1998. The increase was principally attributable to an increase in cash and cash
equivalents invested in interest-bearing marketable securities and commercial
paper from period to period.
Interest expense was $433,000 for the three months ended June 30, 1999 as
compared to $412,000 for the three months ended June 30, 1998. 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 $110,000, or $0.01 basic earnings per share, for the three months ended June
30, 1999 as compared to a net income of $700,000, or $0.08 basic earnings per
share, for the three months ended June 30, 1998.
Six Months Ended June 30, 1999 as Compared to the
Six Months Ended June 30, 1998
Net revenues increased $10.9 million, or 37.0%, to $40.3 million for six
months ended June 30, 1999 as compared to $29.4 million for the six months ended
June 30, 1998. The $10.9 million increase in net revenues from period to period
was due principally to (i) the addition of HMG Schutz, acquired August 1, 1998,
of $9.9 million and (ii) a net increase in marketing expenditures of the
Company's clients during the period of approximately $1.0 million.
Gross profit for the six months ended June 30, 1999 was $11.9 million as
compared to $8.5 million for the six months ended June 30, 1998. The increase in
gross profit of $3.4 million was principally a result of the increase in net
revenues and an increase in gross margin. For the six months ended June 30, 1999
and 1998, the Company's gross margin was 29.6% and 29.0%, respectively. The
gross margin increase of 0.6% was due principally to a favorable production
revenue mix, reflecting the Company's efforts of more direct, internal
production of its merchandising systems, lower labor costs and increased
production volume and purchasing efficiencies. The favorable production revenue
mix was principally the result of an increase in the number of programs
manufactured and assembled at the Company's Pennsylvania and Brooklyn, New York
facilities and the increased operational efficiencies on the specific programs
shipped.
Selling, general and administrative expenses ("SG&A") for the six months
ended June 30, 1999 was $10.6 million as compared to $6.8 million for the
comparable period in 1998. The increase in SG&A of $3.8 million from period to
period was principally due to the addition of HMG Schutz SG&A of $3.6 million
and increased spending in other general expenses of $200,000.
For the six months ended June 30, 1999, the Company generated interest
income of $142,000 as compared to $148,000 for the six months ended June 30,
1998. The decrease was principally attributable to a decrease in cash and cash
equivalents invested in interest-bearing marketable securities and commercial
paper from period and period.
Interest expense was $809,000 for the six months ended June 30, 1999 as
compared to $782,000 for the six months ended June 30, 1998. The increase in
interest expense was principally due to the increased average borrowings from
period to period.
9
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -continued
As a consequence of the foregoing factors, the Company generated net income
of $641,000 or $0.06 basic earnings per share, for the six months ended June 30,
1999 as compared to a net income of $1.0 million, or $0.11 basic earnings per
share, for the six months ended June 30, 1998.
Stockholders' Equity
Stockholders' equity increased $2.7 million to $11.8 million at June 30,
1999 from $9.1 million at December 31, 1998. The increase in stockholders'
equity was due to (i) net income of $641,000, (ii) the issuance of 1,728,000
shares of Common Stock and the retirement of the outstanding convertible
debentures of $2.0 million, net of expenses, and (iii) net proceeds of $73,000
derived from the exercise of stock options pursuant to a plan.
Income Taxes
At December 31, 1998, the Company had net operating loss carryforwards of
approximately $34.6 million which expire during the years 2001 through 2013.
The Company's income tax provision for the three months ended June 30, 1999
was $1,000 as compared to $64,000 for the three months ended June 30, 1998. The
income tax provisions were 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 June 30, 1999, the Company's aggregate backlog was approximately $46.7
million as compared to $48.8 million and $28.6 million at December 31, 1998 and
June 30, 1998, respectively. Of such aggregate backlog at June 30, 1999,
approximately 33% was attributable to four clients. The Company anticipates that
substantially all such backlog at June 30, 1999 will be filled during the next
twelve months. In addition to the $46.7 million backlog at June 30, 1999, 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 June 30, 1999 was approximately $21.6 million,
of which the Company anticipates that $2.5 million will be shipped within the
next twelve months. Due to quarter to quarter fluctuations in the Company's
backlog levels, attributable to the timing, nature and size of its merchandising
system programs for its clients, such backlog levels are not necessarily an
indicator of future net revenue levels.
Liquidity and Capital Resources
Cash and cash equivalents at June 30, 1999 and December 31, 1998 aggregated
$5.2 million and $5.7 million, respectively. The Company's decrease in cash and
cash equivalents of $540,000 for the six months ended June 30, 1999 was due
principally to the net effects of (i) net cash used in operations of $5.4
million, (ii) capital expenditures of $1.4 million and (iii) reductions of debt
obligations of $75,000, offset by (iv) proceeds derived from the sale of $5.0
million, 7% Convertible Notes, (v) proceeds from exercise of stock options of
$73,000 and (vi) proceeds derived from the Company's Credit Agreement of $1.3
million. The Company's negative cash flows from operations for the six months
ended June 30, 1999 resulted principally from (i) a net increase in accounts
receivable and inventory of $8.9 million and (ii) a net increase in general
liabilities of $3.1 million.
The Company maintains a $17.0 million Credit Agreement with a financial
institution in the form of a revolving credit and term loan facility. The Credit
Agreement provides for a secured revolving credit facility which advances up to
the sum of (i) 85% of eligible accounts receivable, (ii) the lesser of 60% of
eligible finished goods inventory or $750,000 and (iii) the Company's cash, cash
equivalents and marketable securities. The Credit Agreement is secured
10
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
by a lien on and a security interest in the Company's cash, cash equivalents,
marketable securities, accounts receivable, inventory, equipment and certain
real estate and all other tangible and intangible assets and a pledge of the
common stock of each of the Company's wholly-owned subsidiaries.
Borrowings under the Credit Agreement bear interest at the institution's
prime rate plus 3/4% per annum. The Company is required to pay a quarterly
commitment fee at the rate of one half of 1% per annum of the average daily
unused amount of funds available. Additionally, the Credit Agreement contains
certain customary affirmative and negative covenants which require the Company
to maintain certain financial ratios, and, among other things restrict, (i) the
declaration or payment of dividends, (ii) the incurrence of additional
indebtedness and (iii) the sale of certain assets. As of June 30, 1999, the
Company was in compliance with all financial covenants of the Credit Agreement,
as amended.
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 June 30, 1999, the balance outstanding on the
term loan component of the Credit Agreement was approximately $585,000.
On February 24, 1999, the Company issued $5.0 million 7% Convertible Notes
Due February 24, 2002 to two institutional investors. The principal amount of
the Notes is convertible into shares of the Company's Common Stock at a
conversion price of the lesser of $4.00 per share or a price based on the
prevailing market price of the Common Stock, subject to a maximum issuance of
2,160,000 shares upon conversion of the Notes, taken together. The Notes were
issued through a private placement; however, the Company has registered, for
resale, the shares which may be acquired upon the conversion of the Notes under
the Securities Act of 1933.
The Company's working capital at June 30, 1999 was $5.4 million, inclusive
of borrowings of $16.1 million pursuant to the three-year Credit Agreement. From
time to time, the Company experiences temporary liquidity problems due to the
timing of cash flows while the Company is in production and building inventory.
However management believes that its current cash and cash equivalents, its
backlog, anticipated future cash flows from operations, availability under its
Credit Agreement and the proceeds derived from the issuance of Convertible Notes
will be sufficient to support its debt service requirements and its other
capital and operating needs for the next fiscal year. Furthermore, the Company
engaged BNY Capital to assist the Company in refinancing its current revolving
line of credit and term loans under more favorable terms and to provide a source
of acquisition financing in the form of debt. The Company is seeking a $35.0
million credit facility. Management believes its pending financing, an expanded
client base and future cash flows from operations developed by the Company
provide an important basis for future profitability and liquidity, however,
there can be no assurance that such belief will prove to be correct, that
additional financing will not be required, or that any such financing will be
available on commercially reasonable terms or otherwise.
Year 2000
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium ("Year 2000") approaches. The Year
2000 problem is pervasive and complex as virtually every computer operation will
be affected in some way by the rollover of the two digit year value to 00. The
issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail.
The Company is utilizing both internal and external resources to identify,
correct or reprogram and test the systems for Year 2000 compliance. The
Company's Year 2000 strategy includes the evaluation of all critical Company
software applications, client/server applications, PC's and workstations, vendor
supplied software, equipment and clients and suppliers. An inventory and
assessment of all areas have been completed and the Company has inspected,
remediated and performed testing of each of its systems for Year 2000
compliance.
11
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
As of June 30, 1999, the Company believes that it has successfully
remediated its client/server business applications for the millennium change.
During the third quarter of 1999, the Company is scheduled to bring HMG Schutz
and HMG Griffith on line with its client/server business applications such that
all Company operations will be tied together and data can be accessed and
exchanged through a common shared technology platform. The Company's suppliers
are also engaged in their Year 2000 testing and the Company is monitoring their
progress. In addition, in the event that a supplier is unable to become Year
2000 compliant, the Company's supplier network is sufficient, and material and
services are available to the Company to adjust to a change in a production
supply without compromising the manufacturing schedule established by the
Company. However, there can be no assurance that the systems of other companies
on which the Company's systems rely also will be timely converted or that any
such failure to convert by another company would not have an adverse effect on
the Company's systems.
It is anticipated that the Year 2000 project will be completed during the
third quarter of 1999. To date, the Company has incurred expenses of
approximately $375,000 in hardware upgrades and software enhancements. The
Company projects that the total cost of the Year 2000 project will approximate
$475,000 to $550,000.
The above statements and certain other statements contained in this
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 filed as part of this Report:
INDEX TO FINANCIAL STATEMENT EXHIBITS
Page
Exhibit 11 - Computation of Per Share Earnings 14
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: August 12, 1999 By: /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 SIX MONTHS ENDED JUNE 30, 1999
(in thousands, except per share data)
(unaudited)
For the Three Months Ended June 30, 1999
----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- --------
Basic earnings per share:
Income available to
common stockholders $110 11,102 $0.01
=====
Effect of dilutive securities:
Stock options and warrants - 2,886
---- =====
Diluted earnings per share:
Income available to common
stockholders and assumed
conversions $110 13,988 $0.01
==== ====== =====
For the Six Months Ended June 30, 1999
Income Shares Per Share
(Numerator) (Denominator) Amount
Basic earnings per share:
Income available to
common stockholders $641 10,928 $0.06
=====
Effect of dilutive securities:
Stock options and warrants - 2,604
---- =====
Diluted earnings per share:
Income available to common
stockholders and assumed
conversions $641 13,532 $0.05
==== ====== =====
15
<PAGE>
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<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000756680
<NAME> HMG Worldwide Corp.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 5,190
<SECURITIES> 0
<RECEIVABLES> 17,623
<ALLOWANCES> 642
<INVENTORY> 22,785
<CURRENT-ASSETS> 46,664
<PP&E> 10,306
<DEPRECIATION> 2,983
<TOTAL-ASSETS> 61,641
<CURRENT-LIABILITIES> 41,225
<BONDS> 0
0
0
<COMMON> 111
<OTHER-SE> 11,675
<TOTAL-LIABILITY-AND-EQUITY> 61,641
<SALES> 46,290
<TOTAL-REVENUES> 40,290
<CGS> 28,353
<TOTAL-COSTS> 10,615
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 809
<INCOME-PRETAX> 655
<INCOME-TAX> 14
<INCOME-CONTINUING> 641
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 641
<EPS-BASIC> .06
<EPS-DILUTED> .05
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