<PAGE>
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, 2000
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or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 0-13121
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HMG Worldwide Corporation
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(Exact name of registrant as specified in its charter)
Delaware 13-3402432
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
475 Tenth Avenue, New York, New York 10018
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 736-2300
--------------
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 No
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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 11, 2000
--------------------------------- ------------------------------
Common Stock, $.01 par value 15,072,261
<PAGE>
Part I. Financial Information
Item 1.
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31, 1999 June 30, 2000
----------------- -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 5,973 $ 535
Accounts receivable - less allowance
for doubtful accounts of $781 and $392 15,607 24,566
Inventory 26,395 33,027
Prepaid expenses 997 820
Other current assets 464 1,065
-------- ---------
Total current assets 49,436 60,013
Property and equipment - net 9,877 10,036
Excess of cost over fair value
of assets acquired, less accumulated
amortization of $2,572 and $2,863 8,584 9,281
Deferred financing costs - net 1,966 1,632
Other assets 175 206
-------- ---------
$ 70,038 $ 81,168
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations $ 21,565 $ 26,002
Accounts payable 19,078 21,250
Accrued employee compensation and benefits 950 1,207
Deferred revenue 1,051 125
Accrued expenses 1,045 1,305
Other current liabilities 317 317
-------- ---------
Total current liabilities 44,006 50,206
Pension obligation 999 1,000
Convertible notes and debentures 7,000 6,000
Promissory note 1,600 1,600
Term loans 2,480 2,170
Other long-term liabilities 397 394
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56,482 61,370
-------- ---------
Stockholders' equity:
Common stock, par value $0.01; 50,000,000
shares authorized; 12,029,225 and
14,121,596 shares issued and outstanding 120 141
Additional paid-in capital 39,827 45,201
Accumulated deficit (26,391) (25,544)
-------- --------
13,556 19,798
-------- --------
$ 70,038 $ 81,168
======== ========
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>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------- ---------------------------------
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues $ 20,788 $ 29,979 $ 40,290 $ 53,414
Cost of revenues 14,602 21,949 28,353 38,636
------------ ------------ ------------ ------------
Gross profit 6,186 8,030 11,937 14,778
Selling, general and
administrative expenses 5,715 6,792 10,615 12,478
------------ ------------ ------------ ------------
Income from operations 471 1,238 1,322 2,300
Interest income 73 - 142 1
Interest expense (433) (803) (809) (1,437)
------------ ------------ ------------ ------------
Income before provision
for income taxes 111 435 655 864
Provision for income taxes (1) (8) (14) (17)
------------ ------------ ------------ ------------
Net income $ 110 $ 427 $ 641 $ 847
============ ============ ============ ============
Basic earnings per share
Net income per common
shares $ 0.01 $ 0.03 $ 0.06 $ 0.06
============ ============ ============ ============
Weighted average number of common
shares outstanding 11,102,454 13,208,047 10,927,928 12,736,940
============ ============ ============ ============
Diluted earnings per share
Net income per common and
common equivalent shares $ 0.01 $ 0.03 $ 0.05 $ 0.05
============ ============ ============ ============
Weighted average number of common
and common equivalent shares 13,988,273 15,537,326 13,531,607 15,945,985
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended June 30,
-------------------------
1999 2000
---- ----
Cash flows from operating activities:
Cash received from customers $ 38,222 $ 43,797
Interest received 150 1
Cash paid to suppliers (34,648 (45,887)
Cash paid to employees (8,344) (8,758)
Income taxes paid (66) (70)
Interest paid (710) (1,087)
-------- --------
Net cash used in operating
activities (5,396) (12,004)
-------- --------
Cash flows from investing activities:
Capital expenditures (1,443) (967)
-------- --------
Net cash used in investing
activities (1,443) (967)
-------- --------
Cash flows from financing activities:
Proceeds derived from the sale of
convertible notes 5,000 1,500
Proceeds derived from a credit
agreement, net 1,301 4,437
Proceeds from exercise of stock
options and warrants 73 1,894
Cash acquired pursuant to an acquisition 12
Principal payments of
outstanding debt obligations (75) (310)
-------- --------
Net cash provided by
financing activities 6,299 7,533
-------- --------
Net increase (decrease) in cash and
cash equivalents (540) (5,438)
Cash and cash equivalents
at beginning of year 5,730 5,973
-------- --------
Cash and cash equivalents
at June 30 $ 5,190 $ 535
======== ========
See accompanying notes to consolidated financial statements.
4
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
(in thousands)
(unaudited)
Six Months Ended June 30,
-------------------------
1999 2000
---- ----
Reconciliation of net income
to net cash used in
operating activities:
Net income $ 641 $ 847
Adjustments to reconcile net
income to net cash used in
operating activities:
Depreciation and amortization 688 1,099
Decrease (increase) in assets:
Accounts receivable (1,476) (8,673)
Inventory (7,450) (6,632)
Prepaid expenses (569) 177
Other assets (122) (289)
Increase (decrease) in liabilities:
Accounts payable 3,500 1,953
Deferred revenue (574) (926)
Accrued expenses (164) 37
Pension obligation 35 1
Other liabilities 95 402
-------- --------
Net cash used in operating
activities ($ 5,396) ($ 12,004)
======== ========
Non-cash financing activities:
Common stock issued in connection
with the conversion of notes $ 2,160 $ 2,709
======== ========
Common stock issued in connection
with an acquisition $ 792
========
Fair value of net assets acquired in
connection with an acquisition $ 29
========
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") is a multi-disciplinary marketing
solutions agency, incorporated in 1984, providing in-store and on-line marketing
services to major consumer goods manufacturers and retailers for brands,
categories, departments and stores. The Company's operations are conducted
principally through seven wholly- owned operating subsidiaries and an 80%-owned
operating subsidiary 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"), HMG Schutz International Inc. ("HMG Schutz"), Mark Zeff Consulting
Group, Inc. ("Zeff Consulting") and Ego Media, Inc. ("Ego Media"). The Company
conducts operations in New York, Illinois, Pennsylvania and Toronto, Canada.
The Consolidated Balance Sheet as of June 30, 2000, and the Consolidated
Statements of Operations and Cash Flows for the six months ended June 30, 2000
and 1999, 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, 2000 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, 1999 annual report to
shareholders. The results of operations for the period ended June 30, 2000 are
not necessarily indicative of the operating results for the full year.
Note 2 - Acquisition of Mark Zeff Consulting Group, Inc. and a Majority Interest
in The Glade Corp.
In May, 2000, the Company consummated the acquisitions of Mark Zeff
Consulting Group, Inc. ("Zeff Consulting"), a technology-based architectural,
digital and brand design firm, and a majority interest in The Glade Corp. The
Glade Corp. is a joint venture with Mark Zeff, President of Zeff Consulting, to
design, market and sell personal care, lifestyle and other products under the
"Zeff" brand or name. Pursuant to the terms of the agreement, the Company issued
316,750 shares of Common Stock, valued at $2.50 per share. Zeff Consulting
provides architectural design services for real estate development, such as
retail interiors and exteriors construction, and digital design and web-
branding services for on-line and new media applications. Pursuant to the terms
of the transaction, the Company has recorded approximately $1.0 million as the
excess cost over fair market value of assets acquired.
Note 3 - Inventory
Inventory consisted of the following components at December 31, 1999 and
June 30, 2000.
December 31, June 30,
1999 2000
---- ----
(in thousands)
Finished goods $ 7,945 $ 4,119
Work-in-process 8,018 10,974
Raw materials 10,432 17,934
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$26,395 $33,027
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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, 1999, the Company had net operating loss carry forwards 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
2000 are as follows:
Six Months Ended June 30,
-------------------------
1999 2000
---- ----
(in thousands)
State and local
income taxes $ 14 $ 17
==== ====
Note 5 - Convertible Debentures and Convertible Notes
During the six months ended June 30, 2000, one institutional holder of the
Company's Convertible Notes elected to convert in a series of conversions an
aggregate of $2.5 million of the then outstanding Convertible Notes issued by
the Company. As a consequence of the conversion, the Company issued 919,445
shares of Common Stock, inclusive of accrued interest, and retired $2.5 million
of the Convertible Notes.
On March 22, 2000, the Company issued $1.5 million 7% Convertible Notes Due
March 22, 2003, as amended, to an institutional investor. The principal amount
of the Convertible Notes is convertible into shares of the Company's Common
Stock at a conversion price in an amount equal to the average of the two lowest
closing prices of the Common Stock during the 30 consecutive trading days
immediately prior to conversion. The Convertible Notes were issued through a
private placement; however, the Company has registered the underlying shares
which may be acquired upon the conversion of the Convertible 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
HMG Worldwide ("the Company") is a multi-disciplinary marketing solutions
agency. Initially, and until recently, the Company's vision was to be the
preeminent provider of in-store marketing services to major consumer goods
manufacturers and retailers for brands, categories, departments, and stores.
The Company succeeded in its original vision and has grown to become a
leading agency for in-store marketing services. The blue-chip clients that were
acquired during the Company's initial growth remain today as the core of an
enviable client list. Among the Company's valued clients are Clairol, Coca-Cola,
CVS, Hallmark, Kmart, Microsoft, Procter & Gamble, Sara Lee, Target, Wal*Mart
and many others.
To adapt to the changing economy and the expansion of e-commerce, the
company has evolved its vision to capitalize on the growth of the Internet and
new media.
Until recently, the Company's vision has been to increase its clients'
sales, increase labor efficiency, enhance retail branding, environment and
communication at the point-of-sale, and improve inventory management through
unique in-store branding, marketing, and merchandising systems. In fulfilling
its original vision, the Company has provided research, creative, design,
engineering, and manufacturing support services to its clients. Over the course
of decades of experience, the Company has developed an intimate knowledge of its
clients' brands and, more importantly, has compiled unequaled research on their
consumers' buying habits.
Ego Media, Mark Zeff Consulting Group, Inc. and The Glade Corp.
In September of 1999, the Company acquired an 80% interest in Ego Media.
Ego Media is a web-consulting, web-design, and web-branding group focused on
creating new-media marketing campaigns and online branding initiatives that
produce results for its clients.
In May, 2000, the Company acquired Zeff Consulting, a technology-based
architectural, digital and brand design firm, and a majority interest in The
Glade Corp. The Glade Corp. is a joint venture with Mark Zeff, President of Zeff
Consulting, to design, market and sell personal care, lifestyle and other
products under the "Zeff" brand or name.
The Company's vision is focused on the convergence of online and in-store
marketing. The Company will leverage decades-old client relationships with the
web-consulting expertise of Ego Media and the integrated design and digital
services of Zeff Consulting. With Ego Media and Zeff Consulting, the Company can
provide its services wherever purchase decisions are made. The Company offers an
advantage over its competition by offering seamless multi-disciplinary marketing
solutions that cross the border between "brick and mortar" and "click and
mortar" marketing.
Recent Developments
The Company's revenues for the six months ended June 30, 2000 increased
32.6% to $53.4 million as compared to $40.3 million for the six months ended
June 30, 1999. The Company generated net income of $847,000, or $0.06 basic
earnings per share as compared to net income of $641,000, or $0.06 per basic
earnings per share for the six months ended June 30, 1999.
During the six months ended June 30, 2000, one institutional holder of the
Company's Convertible Notes elected to convert an aggregate of $2.5 million in a
series of conversions of the outstanding Convertible Notes issued by the
Company. As a consequence of the conversion, the Company issued 919,445 shares
of Common Stock, inclusive of accrued interest, and retired $2.5 million of the
Convertible Notes.
8
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
On March 22, 2000, the Company issued $1.5 million 7% Convertible Notes Due
March 22, 2003, as amended, to an institutional investor. The principal amount
of the Convertible Notes is convertible into shares of the Company's Common
Stock at a conversion price in an amount equal to the average of the two lowest
closing prices of the Common Stock during the 30 consecutive trading days
immediately prior to conversion. The Convertible Notes were issued through a
private placement; however, the Company has registered the underlying shares
which may be acquired upon the conversion of the Convertible Notes under the
Securities Act of 1933.
In July 2000, the Company issued 700,000 shares of Common Stock to an
institutional investor in a private transaction. The Company received gross
proceeds of $3.5 million as a result of the transaction.
Management believes that each of the above accomplishments and its
expansion into electronic commerce positions the Company well as a leading,
innovative agency providing multi-disciplinary solutions to achieving results
for its clients wherever purchase decisions are made and having the appropriate
resources to support each of its clients initiatives. Furthermore, the Company
will continue to seek to acquire strategic businesses which will expand the
Company's retail and e-tail products and services, provide improved distribution
and reduce operating and manufacturing costs.
Three Months Ended June 30, 2000 as Compared to the
Three Months Ended June 30, 1999
Net revenues increased $9.2 million, or 44.2%, to $30.0 million for the
three months ended June 30, 2000 as compared to $20.8 million for the three
months ended June 30, 1999. The $9.2 million increase in net revenues from
period to period was due principally to a net increase in marketing expenditures
of the Company's clients of $2.8 million, a national roll out of a new program
from a new client of $4.9 million, and revenues from the Company's "e-business",
Ego Media and Zeff Consulting, of $1.5 million during the period.
Gross profit for the three months ended June 30, 2000 was $8.0 million as
compared to $6.2 million for the three months ended June 30, 1999. The increase
in gross profit of $1.8 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 June 30, 2000 and 1999, the Company's gross margin was 26.8% and 29.8%,
respectively. The gross margin decrease of 3.0% was due principally to the
effect of (i) an unfavorable production revenue mix resulting in a 2.1% increase
and (ii) an increase in factory overhead expenses of 0.9%. The increase in
factory overhead expense, as a percentage of revenues, was principally the
result of the Company's new warehouse and distribution center opened in
September 1999 to handle the increased warehousing and distribution needs of
many of the Company's retail clients.
Selling, general and administrative expenses ("SG&A") for the three months
ended June 30, 2000 was $6.8 million as compared to $5.7 million for the
comparable period in 1999. The increase in SG&A of $1.1 million from period to
period was principally due to the addition of Ego Media's and Zeff Consulting's
SG&A of $767,000 and an increase in other general expenses of $309,000.
For the three months ended June 30, 1999, the Company generated interest
income of $73,000 through investments in interest-bearing marketable securities
and commercial paper. During the three months ended June 30, 2000, the Company
did not invest in interest-bearing marketable securities and commercial paper.
Interest expense was $803,000 for the three months ended June 30, 2000 as
compared to $433,000 for the three months ended June 30, 1999. The increase in
interest expense was principally due to the combination of an increase in
average borrowings from period to period and an increase in the interest rate
incurred through the Company's credit facilities.
As a consequence of the foregoing factors, the Company generated net income
of $427,000, or $0.03 basic earnings per share, for the three months ended June
30, 2000 as compared to a net income of $110,000, or $0.01 basic earnings per
share, for the three months ended June 30, 1999.
9
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
Six Months Ended June 30, 2000 as Compared to the
Six Months Ended June 30, 1999
Net revenues increased $13.1 million, or 32.6%, to $53.4 million for the
six months ended June 30, 2000 as compared to $40.3 million for the six months
ended June 30, 1999. The $13.1 million increase in net revenues from period to
period was due principally to a net increase in marketing expenditures of the
Company's clients of $6.5 million, a national roll out of a new program from a
new client of $4.9 million, and revenues from the Company's "e- business", Ego
Media and Zeff Consulting, of $1.7 million during the period.
Gross profit for the six months ended June 30, 2000 was $14.8 million as
compared to $11.9 million for the six months ended June 30, 1999. The increase
in gross profit of $2.9 million was principally a result of the increase in net
revenues, net of a decline in gross margin for the quarter. For the six months
ended June 30, 2000 and 1999, the Company's gross margin was 27.7% and 29.6%,
respectively. The gross margin decrease of 1.9% was due principally to the
effect of an increase in factory overhead expenses. The increase in factory
overhead expense, as a percentage of revenues, was principally the result of the
Company's new warehouse and distribution center opened in September 1999 to
handle the increased warehousing and distribution needs of many of the Company's
retail clients.
Selling, general and administrative expenses ("SG&A") for the six months
ended June 30, 2000 was $12.5 million as compared to $10.6 million for the
comparable period in 1999. The increase in SG&A of $1.9 million from period to
period was principally due to the addition of Ego Media's and Zeff Consulting's
SG&A of $1.1 million and an increase in other general expenses of $771,000.
For the six months ended June 30, 1999, the Company generated interest
income of $142,000 through investments in interest-bearing marketable securities
and commercial paper. For the six months ended June 30, 2000, the Company did
not invest in interest-bearing marketable securities and commercial paper.
Interest expense was $1.4 million for the six months ended June 30, 2000 as
compared to $809,000 for the six months ended June 30, 1999. The increase in
interest expense was principally due to the combination of an increase in
average borrowings from period to period and an increase in the interest rate
incurred through the Company's credit facilities.
As a consequence of the foregoing factors, the Company generated net income
of $847,000, or $0.06 basic earnings per share, for the six months ended June
30, 2000 as compared to a net income of $641,000, or $0.06 basic earnings per
share, for the six months ended June 30, 1999.
Stockholders' Equity
Stockholders' equity increased $6.2 million to $19.8 million at June 30,
2000 from $13.6 million at December 31, 1999. The increase in stockholders'
equity was due to (i) net income of $847,000, (ii) the issuance of 919,445
shares of Common Stock and the retirement of the outstanding convertible
debentures and accrued interest of $2.7 million, net of expenses, (iii) the
issuance of 316,750 shares of Common Stock valued at $2.50 per share in
connection with the acquisition of Zeff Consulting, $792,000, and (iv) net
proceeds of $1.9 million derived from the exercise of stock options and
warrants.
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, 1999, the Company had net operating loss carry forwards 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, 2000
was $8,000 as compared to $1,000 for the three months ended June 30, 1999. The
Company's income tax provision for the six months ended June 30, 2000 was
$17,000 as compared to $14,000 for the six months ended June 30, 1999. The
income tax provisions for each of the periods 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, 2000, the Company's aggregate backlog was approximately $69.1
million as compared to $48.9 million and $46.7 million at December 31, 1999 and
June 30, 1999, respectively. Of such aggregate backlog at June 30, 2000,
approximately 33% was attributable to one client. The Company anticipates that
substantially all such backlog at June 30, 2000 will be filled during the next
twelve months. In addition to the $69.1 million backlog at June 30, 2000, 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, 2000 was $19.4 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, 2000 and December 31, 1999 aggregated
$535,000 and $6.0 million, respectively. The Company's decrease in cash and cash
equivalents of approximately $5.5 million for the six months ended June 30, 2000
was due principally to the net effects of (i) net cash used in operations of
$12.0 million and (ii) capital expenditures of $1.0 million, offset by (iii)
proceeds derived from the sale of $1.5 million, 7% Convertible Notes, (iv)
proceeds from exercise of stock options and warrants of $1.9 million, and (v)
net proceeds of $4.1 million derived from the Company's credit facilities. The
Company's negative cash flows from operations for the six months ended June 30,
2000 resulted principally from a net increase in (i) accounts receivable of $9.0
million and (ii) inventory of $6.6 million.
The Company maintains a $35.0 million Credit Agreement with a financial
institution in the form of a revolving credit and term loan facility. 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 of 0.25%
per annum of the average daily unused amount of the 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 of dividends, (ii) the
incurrence of additional indebtedness and (iii) the sale of certain assets. As
of June 30, 2000, 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 advanced $3.1
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 quarterly basis over five years and bears interest at the
institution's prime rate plus 0.25% per annum. At June 30, 2000, the balance
outstanding under the term loan was $2.8 million.
11
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
During the six months ended June 30, 2000, one institutional holder of the
Company's Convertible Notes elected to convert an aggregate of $2.5 million in a
series of conversions of the then outstanding Convertible Notes issued by the
Company. As a consequence of the conversion, the Company issued 919,445 shares
of Common Stock, inclusive of accrued interest, and retired $2.5 million of the
Convertible Notes.
On March 22, 2000, the Company issued $1.5 million 7% Convertible Notes Due
March 22, 2003 to an institutional investor. The principal amount of the
Convertible Notes is convertible into shares of the Company's Common Stock at a
conversion price in an amount equal to the average of the two lowest closing
prices of the Common Stock during the 30 consecutive trading days immediately
prior to conversion. The Convertible Notes were issued through a private
placement; however, the Company has registered the underlying shares which may
be acquired upon the conversion of the Convertible Notes under the Securities
Act of 1933.
The Company's working capital at June 30, 2000 was $9.8 million, inclusive
of borrowing of $26.0 million pursuant to the five-year Credit Agreement. The
working capital needs of the Company continue to expand as increases in revenues
direct to retailers require the Company to maintain a substantial investment in
inventory to manage new merchandising programs, support existing merchandising
programs, new store openings and remodeling activities engaged by the retailer.
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. Additionally, the Company's working capital was deployed in the
recently completed capital expenditure program whereby the Company developed a
series of proprietary products that can be marketed across a variety of
different clients and retail store environments. In addition, as the Company
expands its Internet and e-commerce, HMGe division, the timing of cash flows for
this division will require support through the Company's existing credit
facilities and other potential resources.
In March 2000, the Company retained an investment banker, Friedman,
Billings and Ramsey, to advise the Company in the financing of its Internet
expansion as well as the increased working capital requirements of its
traditional core in- store marketing business. The Company may seek to raise
additional capital in order to provide a more rapid growth and expansion of its
HMGe division as the Company believes that there are significant opportunities
to grow this business unit, both organically and through strategic acquisitions.
In July 2000, the Company issued 700,000 shares of Common Stock to an
institutional investor in a private transaction. The Company received gross
proceeds of $3.5 million as a result of the transaction.
The Company's management believes that its current cash and cash
equivalents, its backlog, anticipated future cash flows from operations,
availability under its Credit Agreement and issuance of Convertible Notes will
be sufficient to support its debt service requirements and its other capital and
operating needs for the next fiscal year. Management believes the Company's
investment in a strategic e-commerce division, an expanded client base and
future cash flows from operations developed by the Company provide an important
base for future revenues 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.
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Part II Other Information
Item 5. Other Matters
On May 30, 2000, RTC Industries, Inc. ("RTC") filed an action in the United
States District Court for the Northern District of Illinois against HMG
Worldwide Corporation (the "Company") alleging that certain shelf divider
systems sold by the Company infringed RTC's US Patent No. 4,830,201. The
Complaint in the action seeks unspecified damaged and an injunction. On June 26,
2000, the Company filed an Answer and Counterclaim seeking a declaration of
non-infringement. The litigation is currently in the preliminary phases of
discovery. The Company intends to vigorously defend itself in this matter. A
status conference before the court is scheduled for September 28, 2000.
Item 6. Exhibits and Reports of Form 8-K
The Company filed a Current Report on Form 8-K on June 22, 2000 in which it
reported as Item 5. - Other Events the acquisition of Zeff Consulting and a
majority interest in The Glade Corp.
The Company filed a Current Report on Form 8-K on June 29, 2000 in which it
reported as Item 5. - Other Events the amendment of the terms of its outstanding
Convertible Note.
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
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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 11, 2000 /s/ Robert V. Cuddihy, Jr.
--------------- ----------------------------
Robert V. Cuddihy, Jr.
Chief Financial Officer
(Principal Accounting Officer)
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HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS
(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 $ 110 13,988 $ 0.01
======= ======= =======
For the Three Months Ended June 30, 2000
----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic earnings per share:
Income available to
common stockholders $ 427 13,208 $ 0.03
=======
Effect of dilutive securities:
Stock options and warrants - 2,329
------- -------
Diluted earnings per share:
Income available to common
stockholders $ 427 15,537 $ 0.03
======= ======= =======
15
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HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS - continued
(in thousands, except per share data)
(unaudited)
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 $ 641 13,532 $ 0.05
======= ======= =======
For the Six Months Ended June 30, 2000
----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic earnings per share:
Income available to
common stockholders $ 847 12,737 $ 0.06
=======
Effect of dilutive securities:
Stock options and warrants - 3,209
------- -------
Diluted earnings per share:
Income available to common
stockholders $ 847 15,946 $ 0.05
======= ======= =======
16
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