<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: September 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
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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.
Yes X No
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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.
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 November 10, 2000
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Common Stock, $.01 par value 15,126,057
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1.
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, 1999 SEPTEMBER 30, 2000
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(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,973 $ 291
Accounts receivable - less allowance
for doubtful accounts of $781 and $272 15,607 32,076
Inventory 26,395 37,351
Prepaid expenses 997 917
Other current assets 464 1,171
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Total current assets 49,436 71,806
Property and equipment - net 9,877 10,434
Excess of cost over fair value
of assets acquired, less accumulated
amortization of $2,572 and $3,041 8,584 9,087
Deferred financing costs - net 1,966 1,489
Other assets 175 215
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$70,038 $93,031
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations $21,565 $25,818
Accounts payable 19,078 28,321
Accrued employee compensation and benefits 950 1,572
Deferred revenue 1,051 108
Accrued expenses 1,045 1,762
Other current liabilities 317 334
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Total current liabilities 44,006 57,915
Pension obligation 999 961
Convertible notes and debentures 7,000 5,500
Promissory note 1,600 1,600
Term loans 2,480 2,025
Other long-term liabilities 397 394
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56,482 68,395
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Stockholders' equity:
Common stock, par value $0.01; 50,000,000 shares
authorized; 12,029,225 and 15,031,424 shares
issued and outstanding 120 150
Additional paid-in capital 39,827 49,003
Accumulated deficit (26,391) (24,517)
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13,556 24,636
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$70,038 $93,031
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</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>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER
--------------------------------- ---------------------------
1999 2000 1999 2000
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<S> <C> <C> <C> <C>
Net revenues $22,640 $43,162 $62,930 $96,576
Cost of revenues 16,360 32,224 44,713 70,860
------- ------- ------- -------
Gross profit 6,280 10,938 18,217 25,716
Selling, general and
administrative expenses 5,164 8,907 15,779 21,385
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Income from operations 1,116 2,031 2,438 4,331
Interest income 63 - 205 1
Interest expense (305) (921) (1,114) (2,358)
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Income before provision
for income taxes 874 1,110 1,529 1,974
Provision for income taxes (37) (83) (51) (100)
------- ------- ------- -------
Net income $ 837 $ 1,027 $ 1,478 $ 1,874
======= ======= ======= =======
Basic earnings per share
Net income per common
shares $ 0.07 $ 0.07 $ 0.13 $ 0.14
======= ======= ======= =======
Weighted average number of common
shares outstanding 11,291,619 14,787,961 11,124,324 13,429,764
========== ========== =========== ==========
Diluted earnings per share
Net income per common and
common equivalent shares $ 0.06 $ 0.06 $ 0.11 $ 0.11
======= ======= ======= =======
Weighted average number of common
and common equivalent shares 14,238,448 16,988,768 13,758,600 16,288,808
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 2000
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<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $57,352 $79,385
Interest received 223 1
Cash paid to suppliers (55,747) (78,161)
Cash paid to employees (12,564) (13,587)
Income taxes paid (52) (210)
Interest paid (884) (1,855)
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Net cash used in operating
activities (11,672) (14,427)
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Cash flows from investing activities:
Capital expenditures (4,154) (1,759)
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Net cash used in investing
activities (4,154) (1,759)
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Cash flows from financing activities:
Proceeds derived from the sale of
convertible notes 5,000 1,500
Proceeds derived from a credit
agreement, net 7,633 4,253
Proceeds from the sale of common stock, net 3,500
Proceeds from exercise of stock
options and warrants 376 1,694
Proceeds derived from the sale of convertible debentures 2,000
Cash acquired pursuant to an acquisition 12
Principal payments of
outstanding debt obligations (75) (455)
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Net cash provided by
financing activities 14,934 10,504
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Net increase (decrease) in cash and
cash equivalents (892) (5,682)
Cash and cash equivalents
at beginning of year 5,730 5,973
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Cash and cash equivalents
at September 30 $ 4,838 $ 291
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 2000
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Reconciliation of net income to net
cash used in operating activities:
Net income $ 1,478 $ 1,874
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 1,164 1,671
Decrease (increase) in assets:
Accounts receivable (2,640) (16,183)
Inventory (7,389) (10,956)
Prepaid expenses 129 80
Other assets (2,081) (261)
Increase (decrease) in liabilities:
Accounts payable 2,100 9,024
Deferred revenue (2,935) (943)
Accrued expenses (537) 420
Pension obligation (44) (38)
Other liabilities (917) 885
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Net cash used in operating
activities ($11,672) ($14,427)
======= =======
Non-cash financing activities:
Common stock issued in connection with
an employee benefit plan $ 152
=======
Common stock issued in connection
with the conversion of notes $ 2,160 $ 3,220
======= =======
Common stock issued in connection
with acquisitions $ 1,400 $ 792
======= =======
Fair value of net assets acquired in
connection with an acquisition $ 111 $ 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 and Pennsylvania and Toronto, Canada.
The Consolidated Balance Sheet as of September 30, 2000, and the
Consolidated Statements of Operations and Cash Flows for the nine months ended
September 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 September 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 annual report on Form 10-K for the year ended
December 31, 1999. The results of operations for the period ended September 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
September 30, 2000.
DECEMBER 31, SEPTEMBER 30,
1999 2000
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(IN THOUSANDS)
Finished goods $ 7,945 $ 6,567
Work-in-process 8,018 12,026
Raw materials 10,432 18,758
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$26,395 $37,351
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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 nine months ended September 30,
1999 and 2000 are as follows:
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1999 2000
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(IN THOUSANDS)
Computed federal income tax $502 $ 637
Federal income tax valuation allowance (502) (637)
State and local income taxes 51 100
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$ 51 $ 100
==== =====
NOTE 5 - CONVERTIBLE DEBENTURES AND CONVERTIBLE NOTES
During the nine months ended September 30, 2000, one institutional holder
of the Company's Convertible Notes elected to convert in a series of conversions
an aggregate of $3.0 million of the then outstanding Convertible Notes issued by
the Company. As a consequence of the conversions, the Company issued an
aggregate of 1,170,069 shares of Common Stock, inclusive of accrued interest,
and retired $3.0 million of the Convertible Notes.
On March 22, 2000, the Company issued $1.5 million of its 7% Convertible
Notes Due March 22, 2003, as amended, to an institutional investor. Those
Convertible Notes are convertible into shares of the Company's Common Stock at a
conversion price equal to the lesser of (a) $9.60 or (b) 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
that may be acquired upon those 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 Corporation is a multi-disciplinary marketing solutions
agency. Initially, and until recently, HMG'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.
HMG 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 HMG'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, Walgreens, Wal*Mart and many
others.
To adapt to the changing economy and the expansion of e-commerce, HMG has
evolved its vision to capitalize on the growth of the Internet and new media.
HMG'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, HMG has provided research, creative, design, engineering, and
manufacturing support services to its clients. Over the course of decades of
experience, HMG 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, HMG 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, HMG acquired Zeff Consulting, a technology-based
architectural, digital and brand design firm, and a majority interest in The
Glade Corp. Glade 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.
HMG's vision is focused on the convergence of online and in-store
marketing. HMG intends to 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, HMG can provide
its services wherever purchase decisions are made. HMG 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
HMG's revenues for the nine months ended September 30, 2000 increased 53.5%
to $96.6 million as compared to $62.9 million for the nine months ended
September 30, 1999. HMG generated net income of $1.9 million, or $0.14 basic
earnings per share, as compared to net income of $1.5 million, or $0.13 basic
earnings per share, for the nine months ended September 30, 1999.
During the nine months ended September 30, 2000, one institutional holder
of HMG's Convertible Notes elected to convert an aggregate of $3.0 million in a
series of conversions of the outstanding Convertible Notes issued by HMG. As a
consequence of those conversions, HMG issued an aggregate of 1,170,069 shares of
Common Stock, inclusive of accrued interest, and retired $3.0 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, HMG issued $1.5 million 7% of its Convertible Notes Due
March 22, 2003, as amended, to an institutional investor. Those Convertible
Notes are convertible into shares of HMG's Common Stock at a conversion price
equal to the lesser of (a) 9.60 or (b) the average of the two lowest closing
prices of the Common Stock during the 30 consecutive trading days immediately
prior to conversion. Those Convertible Notes were issued through a private
placement; however, HMG has registered the underlying shares that may be
acquired upon the conversion of the Convertible Notes under the Securities Act
of 1933.
In July 2000, HMG issued 700,000 shares of Common Stock to an institutional
investor in a private transaction. HMG received gross proceeds of $3.5 million
as a result of the transaction.
THREE MONTHS ENDED SEPTEMBER 30, 2000 AS COMPARED TO THE
THREE MONTHS ENDED SEPTEMBER 30, 1999
Net revenues increased $20.5 million, or 90.6%, to $43.2 million for the
three months ended September 30, 2000 as compared to $22.6 million for the three
months ended September 30, 1999. The $20.5 million increase in net revenues from
period to period was due principally to a net increase in marketing expenditures
of HMG's clients of $1.3 million, the national roll outs of new programs from
two clients of $17.7 million, and revenues from HMG's "e-business", Ego Media
and Zeff Consulting, of $1.5 million during the period.
Gross profit for the three months ended September 30, 2000 was $10.9
million as compared to $6.3 million for the three months ended September 30,
1999. The increase in gross profit of $4.6 million was principally a result of
the increase in net revenues, net of a decline in gross margin for the quarter.
For the three months ended September 30, 2000 and 1999, HMG's gross margin was
25.3% and 27.7%, respectively. The gross margin decrease of 2.4% was due
principally to the effect of (i) an unfavorable production revenue mix resulting
in a 6.2% decrease and (ii) a decrease in factory overhead expenses of 3.8%. The
decrease in factory overhead expense, as a percentage of revenues, was
principally the result of HMG's improved absorption of factory overhead expense
over a greater revenue base.
Selling, general and administrative expenses, SG&A, for the three months
ended September 30, 2000 was $8.9 million as compared to $5.2 million for the
comparable period in 1999. The increase in SG&A of $3.7 million from period to
period was principally due to the addition of Ego Media's and Zeff Consulting's
SG&A of $1.0 million and an increase in other selling and general expenses of
$2.7 million.
For the three months ended September 30, 1999, HMG generated interest
income of $63,000 through investments in interest-bearing marketable securities
and commercial paper. During the three months ended September 30, 2000, HMG did
not invest in interest-bearing marketable securities and commercial paper.
Interest expense was $921,000 for the three months ended September 30, 2000
as compared to $305,000 for the three months ended September 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 HMG's credit facilities.
As a consequence of the foregoing factors, HMG generated net income of $1.0
million, or $0.07 basic earnings per share, for the three months ended September
30, 2000 as compared to a net income of $837,000, or $0.07 basic earnings per
share, for the three months ended September 30, 1999.
9
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
NINE MONTHS ENDED SEPTEMBER 30, 2000 AS COMPARED TO THE
NINE MONTHS ENDED SEPTEMBER 30, 1999
Net revenues increased $33.6 million, or 53.4%, to $96.6 million for the
nine months ended September 30, 2000, as compared to $62.9 million for the nine
months ended September 30, 1999. The $33.6 million increase in net revenues from
period to period was due principally to a net increase in marketing expenditures
of HMG's clients of $4.2 million, the national roll outs of a new programs from
two client of $26.2 million, and revenues from HMG's "e-business", Ego Media and
Zeff Consulting, of $3.2 million during the period.
Gross profit for the nine months ended September 30, 2000 was $25.7
million, as compared to $18.2 million for the nine months ended September 30,
1999. The increase in gross profit of $7.5 million was principally a result of
the increase in net revenues, net of a decline in gross margin for the nine
month period. For the nine months ended September 30, 2000 and 1999, HMG's gross
margin was 26.6% and 28.9%, respectively. The gross margin decrease of 2.3% was
due principally to the effect of (i) an unfavorable production revenue mix
resulting in a 1.0% decrease and (ii) an increase in factory overhead expenses
of 1.3%. The increase in factory overhead expense, as a percentage of revenues,
was principally the result of HMG's new warehouse and distribution center opened
in September 1999 to handle the increased warehousing and distribution needs of
many of HMG's retail clients.
SG&A for the nine months ended September 30, 2000 was $21.4 million as
compared to $15.8 million for the comparable period in 1999. The increase in
SG&A of $5.6 million from period to period was principally due to the addition
of Ego Media's and Zeff Consulting's SG&A of $2.1 million and an increase in
other selling and general expenses of $3.5 million.
For the nine months ended September 30, 1999, HMG generated interest income
of $205,000 through investments in interest-bearing marketable securities and
commercial paper. For the nine months ended September 30, 2000, HMG did not
invest in interest-bearing marketable securities and commercial paper.
Interest expense was $2.4 million for the nine months ended September 30,
2000 as compared to $1.1 million for the nine months ended September 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 HMG's credit facilities.
As a consequence of the foregoing factors, HMG generated net income of $1.9
million, or $0.14 basic earnings per share, for the nine months ended September
30, 2000 as compared to a net income of $1.5 million, or $0.13 basic earnings
per share, for the nine months ended September 30, 1999.
STOCKHOLDERS' EQUITY
Stockholders' equity increased $11.1 million to $24.6 million at September
30, 2000 from $13.6 million at December 31, 1999. The increase in stockholders'
equity was due to (i) net income of $1.9 million, (ii) the issuance of 1,170,069
shares of Common Stock and the retirement of the outstanding convertible
debentures and accrued interest of $3.2 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, (iv) net proceeds
of $3.5 million derived from the sale of 700,000 shares of Common Stock pursuant
to a private placement, and (v) net proceeds of $1.7 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, HMG had net operating loss carry forwards of
approximately $34.6 million which expire during the years 2001 through 2013.
HMG's income tax provision for the three months ended September 30, 2000
was $83,000 as compared to $37,000 for the three months ended September 30,
1999. HMG's income tax provision for the nine months ended September 30, 2000
was $100,000 as compared to $51,000 for the nine months ended September 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 HMG 's operations has not been significant to
date.
BACKLOG
At September 30, 2000, HMG's aggregate backlog was approximately $47.2
million, as compared to $48.9 million and $46.6 million at December 31, 1999 and
September 30, 1999, respectively. Of such aggregate backlog at September 30,
2000, approximately 21% was attributable to one client. HMG anticipates that
substantially all such backlog at September 30, 2000 will be filled during the
next twelve months. In addition to the $47.2 million backlog at September 30,
2000, HMG's supply contract with the Foster Grant Group L.P. requires Foster
Grant, subject to certain limitations, to purchase at least 70% of its in-store
merchandising displays from HMG with average annual purchases to aggregate no
less than $2.5 million. The aggregate value of the Foster Grant supply contract
at September 30, 2000 was $19.3 million, of which HMG anticipates that $2.5
million will be shipped within the next twelve months. Due to quarter-
to-quarter fluctuations in HMG'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, 2000 and December 31, 1999
aggregated $291,000 and $6.0 million, respectively. HMG's decrease in cash and
cash equivalents of approximately $5.7 million for the nine months ended
September 30, 2000 was due principally to the net effects of (i) net cash used
in operations of $14.4 million and (ii) capital expenditures of $1.8 million,
offset by (iii) proceeds derived from the sale of $1.5 million, of its 7%
Convertible Notes, (iv) proceeds from the exercise of stock options and warrants
of $1.7 million, (v) net proceeds of $3.5 million derived from the sale of
700,000 shares of Common Stock pursuant to a private placement, and (vi) net
proceeds of $3.8 million derived from HMG's credit facilities. HMG's negative
cash flows from operations for the nine months ended September 30, 2000 resulted
principally from a net increase in (i) accounts receivable of $16.2 million and
(ii) inventory of $11.0 million.
HMG 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 HMG, the Eurodollar rate plus 2.5% per annum. HMG 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 HMG
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 September 30, 2000, HMG 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 HMG'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 September 30, 2000, the
balance outstanding under the term loan was $2.6 million.
11
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
During the nine months ended September 30, 2000, one institutional holder
of HMG's Convertible Notes elected to convert an aggregate of $3.0 million of
such Convertible Notes in a series of conversions. As a consequence of those
conversions, HMG issued an aggregate of 1,170,069 shares of Common Stock,
inclusive of accrued interest, and retired $3.0 million of those Convertible
Notes.
On March 22, 2000, HMG 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 HMG's Common Stock at a conversion price
equal to the lesser of (a) $9.60 or (b) the average of the two lowest closing
prices of the Common Stock during the 30 consecutive trading days immediately
prior to conversion. Those Convertible Notes were issued through a private
placement; however, HMG has registered the underlying shares that may be
acquired upon the conversion of the Convertible Notes under the Securities Act
of 1933.
HMG's working capital at September 30, 2000 was $13.9 million, inclusive of
borrowing of $25.8 million pursuant to the five-year Credit Agreement. The
working capital needs of HMG continue to expand as increases in revenues direct
to retailers require HMG 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, HMG experiences temporary liquidity problems due to the timing of cash
flows while HMG is in production and building inventory. Additionally, HMG's
working capital was deployed in the recently completed capital expenditure
program whereby HMG developed a series of proprietary products that can be
marketed across a variety of different clients and retail store environments.
Further, as HMG expands its Internet and e-commerce, HMGe division, the timing
of cash flows for this division will require support through HMG's existing
credit facilities and other potential resources.
In March 2000, the Company retained an investment banker, Friedman,
Billings and Ramsey, to advise HMG in the financing of its Internet expansion,
as well as the increased working capital requirements of its traditional core
in-store marketing business. HMG may seek to raise additional capital in order
to provide a more rapid growth and expansion of its HMGe division.
In July 2000, HMG issued 700,000 shares of Common Stock to an institutional
investor in a private transaction. HMG received gross proceeds of $3.5 million
as a result of the transaction.
HMG's management believes that its current cash and cash equivalents, its
backlog, anticipated future cash flows from operations and availability under
its Credit Agreement will be sufficient to support its debt service requirements
and its other capital and operating needs for the next fiscal year. Management
believes HMG's investment in a strategic e-commerce division, an expanded client
base and future cash flows from operations developed by HMG 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) the timing and collection
of accounts receivable from clients, (v) delays in shipment of scheduled
programs to clients, (vi) delay in or inability to expand HMG's client base
and/or (vii) the loss of or reduction in spending of existing clients.
12
<PAGE>
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 HMG infringed RTC's US Patent No. 4,830,201. The complaint in
the action seeks unspecified damages 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 November 28, 2000.
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 10, 2000 /s/ Robert V. Cuddihy, Jr.
----------------- --------------------------
Robert V. Cuddihy, Jr.
Chief Financial Officer
(Principal Accounting Officer)
14
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
---------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
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 $837 14,239 $0.06
==== ====== =====
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000
---------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Basic earnings per share:
Income available to
common stockholders $1,027 14,788 $0.07
=====
Effect of dilutive securities:
Stock options and warrants - 2,201
------ ------
Diluted earnings per share:
Income available to common
stockholders $1,027 16,989 $0.06
====== ====== =====
</TABLE>
15
<PAGE>
HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS - CONTINUED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
---------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
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 $1,478 13,758 $0.11
====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
---------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Basic earnings per share:
Income available to
common stockholders $1,874 13,430 $0.14
=====
Effect of dilutive securities:
Stock options and warrants - 2,859
------ ------
Diluted earnings per share:
Income available to common
stockholders $1,874 16,289 $0.11
====== ====== =====
</TABLE>
16
