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, 1999
------------------
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
-------
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.
No Yes X
--------- ---------
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
--------- ---------
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, 1999
- ---------------------------- --------------------------------
Common Stock, $.01 par value 11,737,060
1
<PAGE>
Part I. Financial Information
Item 1.
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
September 30, 1999 December 31, 1998
------------------ -----------------
(unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents ........................ $ 4,838 $ 5,730
Accounts receivable - less allowance
for doubtful accounts of $397 and $453 ......... 18,145 15,505
Inventory ........................................ 22,724 15,335
Prepaid expenses ................................. 466 816
Other current assets ............................. 511 263
------- -------
Total current assets .......................... 46,684 37,649
Property and equipment - net ....................... 9,690 6,319
Excess of cost over fair value
of assets acquired, less accumulated
amortization of $2,434 and $2,053 ................ 8,691 7,528
Deferred financing costs ........................... 1,801 --
Other assets ....................................... 265 233
------- -------
$67,131 $51,729
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations ........ $19,750 $14,801
Accounts payable ................................... 18,033 15,933
Accrued employee compensation and benefits ......... 447 1,353
Deferred revenue ................................... 35 2,970
Accrued expenses ................................... 1,038 1,575
Other current liabilities .......................... 336 213
------- -------
Total current liabilities ........................ 39,639 36,845
Pension obligation ................................... 1,103 1,147
Convertible debentures ............................... 2,000 2,160
Convertible notes .................................... 5,000 --
Promissory note ...................................... 1,600 1,600
Term loans ........................................... 3,100 491
Other long-term liabilities .......................... 432 418
------- -------
52,874 42,661
------- -------
Stockholders' equity:
Common stock, par value $0.01; 50,000,000 shares
authorized; 11,715,724 and 9,329,205 shares
issued and outstanding ........................... 117 93
Additional paid-in capital ......................... 39,022 35,335
Accumulated deficit ................................ (24,882) (26,360)
------- -------
14,257 9,068
------- -------
$67,131 $51,729
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
(unaudited)
<TABLE>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues ............................... $22,640 $22,463 $62,930 $51,878
Cost of revenues ........................... 16,360 17,010 44,713 37,884
------- ------- ------- -------
Gross profit .............................. 6,280 5,453 18,217 13,994
Selling, general and
administrative expenses .................. 5,164 4,246 15,779 11,076
------- ------- ------- -------
Income from operations .................... 1,116 1,207 2,438 2,918
Interest income ............................ 63 62 205 210
Interest expense ........................... (305) (417) (1,114) (1,199)
------- ------- ------- -------
Income before provision
for income taxes ......................... 874 852 1,529 1,929
Provision for income taxes ................. (37) (36) (51) (111)
------- ------- ------- -------
Net income ................................ $ 837 $ 816 $ 1,478 $ 1,818
======= ======= ======= =======
Basic earnings per share
Net income per common and
common equivalent shares ................ $ 0.07 $ 0.09 $ 0.13 $ 0.20
======= ======= ======= =======
Weighted average number of common
and common equivalent
shares outstanding ...................... 11,291,619 9,113,509 11,124,324 9,001,434
========== ========= ========== =========
Diluted earnings per share
Net income per common and
common equivalent shares
and assumed conversions ................. $ 0.06 $ 0.08 $ 0.11 $ 0.17
======= ======= ======= =======
Weighted average number of common
and common equivalent shares
and assumed conversions ................. 14,238,448 11,434,097 13,758,600 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)
<TABLE>
Nine Months Ended September 30,
-------------------------------
1999 1998
---- ----
Cash flows from operating activities:
<S> <C> <C>
Cash received from customers ..................... $57,352 $48,490
Interest received ................................ 223 218
Cash paid to suppliers ........................... (55,747) (41,923)
Cash paid to employees ........................... (12,564) (7,802)
Income taxes paid ................................ (52) (3)
Interest paid .................................... (884) (1,173)
------- -------
Net cash used in operating
activities .................................. (11,672) (2,193)
------- -------
Cash flows from investing activities:
Capital expenditures ............................. (4,154) (799)
------- -------
Net cash used in investing activities .......... (4,154) (799)
------- -------
Cash flows from financing activities:
Proceeds derived from a credit
agreement, net ................................. 7,633 3,671
Proceeds derived from exercise of
stock options .................................. 376 --
Proceeds derived from the sale of
convertible debentures ......................... 2,000 --
Proceeds derived from the sale of
convertible notes .............................. 5,000 --
Cash acquired pursuant to an acquisition ......... -- 138
Principal payments of
outstanding debt obligations ................... (75) (141)
------- -------
Net cash provided by
financing activities ........................ 14,934 3,668
------- -------
Net increase (decrease) in cash and
cash equivalents ................................. (892) 676
Cash and cash equivalents
at beginning of year ............................. 5,730 6,439
------- -------
Cash and cash equivalents
at September 30 .................................. $ 4,838 $ 7,115
======= =======
</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>
Nine Months Ended September 30,
-------------------------------
1999 1998
---- ----
Reconciliation of net income
to net cash used in operating activities:
<S> <C> <C>
Net income ......................................... $ 1,478 $ 1,818
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization .................... 1,164 797
Decrease (increase) in assets:
Accounts receivable .............................. (2,640) (4,153)
Inventory ........................................ (7,389) (7,365)
Prepaid expenses ................................. 129 31
Other assets ..................................... (2,081) (28)
Increase (decrease) in liabilities:
Accounts payable ................................. 2,100 6,517
Deferred revenue ................................. (2,935) (1,082)
Accrued expenses ................................. (537) 835
Pension obligation ............................... (44) (141)
Other liabilities ................................ (917) 578
------- -------
Net cash used in operating
activities ....................................... ($11,672) ($ 2,193)
======= =======
Non-cash financing activities:
Common stock issued in connection
with an employee benefit plan ................... $ 152 $ 155
======= =======
Common stock issued in connection
with the conversion of debentures ............... $ 2,160
=======
Fair value of assets acquired in
connection with an acquisition .................. $ 198 $ 4,111
======= =======
Fair value of liabilities assumed in
connection with an acquisition .................. $ 87 $ 2,361
======= =======
Common stock issued in connection with
acquisitions .................................... $ 1,400 $ 110
======= =======
Note payable, net of imputed interest,
issued in connection with an acquisition ....... $ 1,750
=======
</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 September 30, 1999, and the
Consolidated Statements of Operations and Cash Flows for the nine months ended
September 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 September 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 September 30, 1999
are not necessarily indicative of the operating results for the full year.
Note 2 - Acquisition of Ego Media Inc.
Effective September 28, 1999, the Company consummated the acquisition of
80% of Ego Media, Inc. ("Ego Media"), a New York-based, leading edge,
technology-based, web-brand development and communications company. Pursuant to
the terms of the agreement, the Company issued an aggregate of 350,000 shares of
the Company's Common Stock, valued at $4.00 per share. Ego Media has recently
emerged from the development stage, focusing upon developing web-brand marketing
strategies for clients seeking to engage in "e-commerce". Pursuant to the terms
of the transaction, the Company has recorded approximately $1.4 million as the
excess cost over fair market value of assets acquired.
Note 3 - Inventory
Inventory consisted of the following components at September 30, 1999 and
December 31, 1998.
September 30, December 31,
1999 1998
---- ----
(in thousands)
Finished goods $ 2,969 $ 3,549
Work-in-process 4,545 3,789
Raw materials 15,210 7,997
------- -------
$22,724 $15,335
======= =======
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 nine months ended September 30,
1999 and 1998 are as follows:
Nine months ended September 30,
-------------------------------
1999 1998
---- ----
(in thousands)
State and local
income taxes $51 $111
=== ====
Note 5 - Long-term Obligations
On August 26, 1999, the Company consummated a $35.0 million, five year
Revolving Credit, Term Loan and Security Agreement ("Credit Agreement") with a
financial institution. The Credit Agreement provides for a secured revolving
credit facility which advances up to the sum of (i) 85% of eligible accounts
receivable, (ii) 60% of eligible inventory and 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 0.25% per annum or, at the option of the Company, the Eurodollar
rate plus 2.5% per annum. The Company is required to pay a quarterly commitment
fee at the rate of 0.25% 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) declaration or payment of
dividends, (ii) the occurrence of additional indebtedness and (iii) the sale of
certain assets. The Credit Agreement replaces a prior $17 million credit
facility.
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 are 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 registered
for resale the underlying shares which may be issued upon the conversion of the
Notes under the Securities Act of 1933.
On August 26, 1999, the Company issued a $2.0 million, 10% Convertible
Debenture Due August 26, 2002 ("Debenture") to an institutional investor. The
Debenture bears interest at the rate of 10% per annum and is 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 $4.00
per share. The Debenture was issued through a private placement; however, the
Company registered for resale the underlying shares which may be issued upon the
conversion of the Debenture 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 third 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
eleventh consecutive quarterly profit. Net revenues increased 21.3% to $62.9
million for the nine months ended September 30, 1999. The Company generated net
income of $1.5 million, or $0.13 basic earnings per share, in 1999 as compared
to $1.8 million, or $0.20 basic earnings per share, for the nine months ended
September 30, 1998.
Effective September 28, 1999, the Company consummated the acquisition of
80% of Ego Media, Inc. ("Ego Media"), a New York-based, leading edge,
technology-based, web-brand development and communications company. Pursuant to
the terms of the agreement, the Company issued an aggregate of 350,000 shares of
the Company's Common Stock, valued at $4.00 per share. Ego Media has recently
emerged from the development stage, focusing upon developing web-brand marketing
strategies for clients seeking to engage in "e-commerce". Pursuant to the terms
of the transaction, the Company has recorded approximately $1.4 million as the
excess cost over fair market value of assets acquired.
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. On August 26, 1999, the Company consummated a $35.0 million, five
year Revolving Credit, Term Loan and Security Agreement ("Credit Agreement")
with a financial institution. The Credit Agreement provides for a secured
revolving credit facility which advances up to the sum of (i) 85% of eligible
accounts receivable, (ii) 60% of eligible inventory and 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.
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 are 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 issued upon the
conversion of the Notes under the Securities Act of 1933. On August 26, 1999,
the Company issued a $2.0 million, 10% Convertible Debenture Due August 26, 2002
("Debenture") to an institutional investor. The Debenture bears interest at the
rate of 10% per annum and is 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 $4.00 per share. The Debenture was
issued through a private placement; however, the Company registered for resale
the underlying shares which may be issued upon the conversion of the Debenture
under the Securities Act of 1933.
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.
8
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
Management believes that HMG is well positioned as a leading, innovative,
marketing solutions company providing innovation wherever purchase decisions are
made. 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 September 30, 1999 as Compared to the
Three Months Ended September 30, 1998
Net revenues increased $200,000, or 0.8%, to $22.6 million for the three
months ended September 30, 1999 as compared to $22.5 million for the three
months ended September 30, 1998. The $200,000 increase in net revenues from
period to period was due principally to fluctuations in the Company's client
shipping schedule from period to period
Gross profit for the three months ended September 30, 1999 was $6.3 million
as compared to $5.4 million for the three months ended September 30, 1998. The
increase in gross profit of $900,000 was principally a result of an increase in
gross margin for the quarter. For the three months ended September 30, 1999 and
1998, the Company's gross margin was 27.7% and 24.3%, respectively. The gross
margin increase of 3.4% was due principally to the net effect of (i) a favorable
production revenue mix resulting in a 5.0% increase, reflecting the Company's
production of certain programs at higher margins due to the larger production
volumes, offset by (ii) a 1.6% increase in 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 September 30, 1999 was $5.2 million as compared to $4.2 million for the
comparable period in 1998. The increase in SG&A of $900,000 from period to
period was principally due to the addition of the operations of HMG Schutz of
$700,000 and increased spending in other general expenses of $200,000.
For the three months ended September 30, 1999, the Company earned interest
income of $63,000 as compared to $62,000 for the three months ended September
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 $305,000 for the three months ended September 30, 1999
as compared to $417,000 for the three months ended September 30, 1998. The
decrease in interest expense was principally due to the decreased average
borrowings from period to period.
As a consequence of the foregoing factors, the Company generated net income
of $837,000, or $0.07 basic earnings per share, for the three months ended
September 30, 1999 as compared to a net income of $816,000, or $0.09 basic
earnings per share, for the three months ended September 30, 1998.
Nine months ended September 30, 1999 as Compared to the
Nine months ended September 30, 1998
Net revenues increased $11.0 million, or 21.2%, to $62.9 million for nine
months ended September 30, 1999 as compared to $51.9 million for the nine months
ended September 30, 1998. The $11.0 million increase in net revenues from period
to period was due principally to (i) the addition of HMG Schutz, acquired August
1, 1998, of $9.4 million and (ii) a net increase in marketing expenditures of
the Company's clients during the period of approximately $1.6 million.
Gross profit for the nine months ended September 30, 1999 was $18.2 million
as compared to $14.0 million for the nine months ended September 30, 1998. The
increase in gross profit of $4.2 million was principally a result of the
increase in net revenues and an increase in gross margin. For the nine months
ended September 30, 1999 and 1998, the Company's gross margin was 28.9% and
27.0%, respectively. The gross margin increase of 1.9% was due principally to a
favorable production revenue mix, reflecting the Company's efforts of more
direct, internal production of its
9
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -continued
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 nine months
ended September 30, 1999 was $15.8 million as compared to $11.1 million for the
comparable period in 1998. The increase in SG&A of $4.7 million from period to
period was principally due to the addition of HMG Schutz SG&A of $4.3 million
and increased spending in other general expenses of $300,000.
For the nine months ended September 30, 1999, the Company generated
interest income of $205,000 as compared to $210,000 for the nine months ended
September 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 $1.1 million for the nine months ended September 30,
1999 as compared to $1.2 million for the nine months ended September 30, 1998.
The decrease 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 $1.5 million or $0.13 basic earnings per share, for the nine months ended
September 30, 1999 as compared to a net income of $1.8 million, or $0.20 basic
earnings per share, for the nine months ended September 30, 1998.
Stockholders' Equity
Stockholders' equity increased $5.2 million to $14.3 million at September
30, 1999 from $9.1 million at December 31, 1998. The increase in stockholders'
equity was due to (i) net income of $1.5 million, (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, (iii) the issuance of 350,000
shares of Common Stock, valued at $1.4 million, in connection with the
acquisition of Ego Media and (iii) net proceeds of $376,000 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 and nine months
ended September 30, 1999 was $37,000 and $51,000, respectively, as compared to
$36,000 and $111,000, respectively, for the three months and nine months ended
September 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 September 30, 1999, the Company's aggregate backlog was approximately
$46.6 million as compared to $48.8 million and $34.4 million at December 31,
1998 and September 30, 1998, respectively. Of such aggregate backlog at
September 30, 1999, approximately 43% was attributable to two clients. The
Company anticipates that substantially all such backlog at September 30, 1999
will be filled during the next twelve months to eighteen months. In addition to
the $46.6 million backlog at September 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
September 30, 1999 was approximately $21.3 million, of which
10
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -continued
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, 1999 and December 31, 1998
aggregated $4.8 million and $5.7 million, respectively. The Company's decrease
in cash and cash equivalents of $900,000 for the nine months ended September 30,
1999 was due principally to the net effects of (i) net cash used in operations
of $11.7 million, (ii) capital expenditures of $4.2 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, and $2.0 million, 10% Convertible
Debentures, (v) proceeds from exercise of stock options of $376,000 and (vi)
proceeds derived from the Company's Credit Agreement of $7.6 million. The
Company's negative cash flows from operations for the nine months ended
September 30, 1999 resulted principally from (i) a net increase in accounts
receivable and inventory of $10.0 million and (ii) a net increase in general
liabilities of $2.2 million.
On August 26, 1999, the Company consummated a $35.0 million, five year
Revolving Credit, Term Loan and Security Agreement ("Credit Agreement") with a
financial institution. The Credit Agreement provides for a secured revolving
credit facility which advances up to the sum of (i) 85% of eligible accounts
receivable, (ii) 60% of eligible inventory and 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 0.25% per annum or, at the option of the Company, the Eurodollar
rate plus 2.5% per annum. The Company is required to pay a quarterly commitment
fee at the rate of 0.25% 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) declaration or payment of
dividends, (ii) the occurance of additional indebtedness and (iii) the sale of
certain assets. As of September 30, 1999, the Company was in compliance with all
financial covenants of the Credit Agreement. The Credit Agreement replaces an
existing $17 million credit facility.
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 are 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 registered
for resale the underlying shares which may be issued upon the conversion of the
Notes under the Securities Act of 1933.
On August 26, 1999, the Company issued a $2.0 million, 10% Convertible
Debenture Due August 26, 2002 ("Debenture") to an institutional investor. The
Debenture bears interest at the rate of 10% per annum and is 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 $4.00
per share. The Debenture was issued through a private placement; however, the
Company registered for resale the underlying shares which may be issued upon the
conversion of the Debenture under the Securities Act of 1933.
The Company's working capital at September 30, 1999 was $7.0 million,
inclusive of borrowings of $19.7 million pursuant to the five-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 new 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.
Management believes its current financing, an expanded client base and future
cash flows from operations developed by the
11
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
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.
As of September 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 installed 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.
The Company's Year 2000 project is complete as of September 30, 1999. To
date, we have incurred expenses of approximately $425,000 in hardware upgrades
and software enhancements.
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 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, 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 NINE MONTHS ENDED SEPTEMBER 30, 1999
(in thousands, except per share data)
(unaudited)
For the Three Months Ended September 30, 1999
---------------------------------------------
Income Shares Per Share
------ ------ ---------
(Numerator) (Denominator) Amount
Basic earnings per share:
Income available to
common stockholders $ 837 11,292 $0.07
=====
Effect of dilutive securities:
Stock options and warrants -- 2,947
------ -----
Diluted earnings per share:
Income available to common
stockholders and assumed
conversions $ 837 14,239 $0.06
====== ====== =====
For the Nine Months Ended September 30, 1999
--------------------------------------------
Income Shares Per Share
------ ------ ---------
(Numerator) (Denominator) Amount
Basic earnings per share:
Income available to
common stockholders $1,478 11,124 $0.13
=====
Effect of dilutive securities:
Stock options and warrants -- 2,634
------ ------
Diluted earnings per share:
Income available to common
stockholders and assumed
conversions $1,478 13,758 $0.11
====== ====== =====
15
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000756680
<NAME> HMG Worldwide Corp.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 4,838
<SECURITIES> 0
<RECEIVABLES> 18,542
<ALLOWANCES> 397
<INVENTORY> 22,724
<CURRENT-ASSETS> 46,684
<PP&E> 13,017
<DEPRECIATION> 3,327
<TOTAL-ASSETS> 67,131
<CURRENT-LIABILITIES> 39,639
<BONDS> 0
0
0
<COMMON> 117
<OTHER-SE> 14,140
<TOTAL-LIABILITY-AND-EQUITY> 67,131
<SALES> 62,930
<TOTAL-REVENUES> 62,930
<CGS> 44,713
<TOTAL-COSTS> 15,779
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,114
<INCOME-PRETAX> 1,529
<INCOME-TAX> 51
<INCOME-CONTINUING> 1,478
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,478
<EPS-BASIC> .13
<EPS-DILUTED> .11
</TABLE>
