UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______to______
Commission file number 0-23059
HEALTHWORLD CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3922288
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
100 Avenue of the Americas
New York, New York 10013
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 966-7640
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 ___
---
As at November 12, 1998, 7,415,000 shares of Common Stock of the Registrant were
issued and outstanding.
HEALTHWORLD CORPORATION AND SUBSIDIARIES
Table of Contents
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1 Financial Statements
Consolidated Balance Sheets as of
December 31, 1997 and September 30, 1998 1
Consolidated Statements of Income
for the Three Months and Nine Months
Ended September 30, 1997 and 1998 2
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1997 and 1998 3
Notes to the Consolidated Financial Statements 4
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II. OTHER INFORMATION
Item 2 Changes in Securities and Use of Proceeds 18
Item 6 Exhibits and Reports on Form 8-K 18
SIGNATURES 19
EXHIBIT INDEX 20
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
HEALTHWORLD CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31, September 30,
1997 1998
------------------------ ------------------------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 18,092 $ 6,602
Accounts receivable 14,269 17,405
Unbilled production charges 1,501 3,110
Other current assets 1,004 1,680
------------------------ ------------------------
Total current assets 34,866 28,797
Restricted cash - 1,698
Property and equipment, net 2,434 4,389
Goodwill, net 3,670 12,440
Other assets 839 1,019
======================== ========================
$ 41,809 $ 48,343
======================== ========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Bank loans and overdrafts $ 634 $ -
Current portion of long-term debt 702 165
Current portion of capitalized lease obligations 125 90
Accounts payable 1,836 3,580
Accrued expenses 6,148 8,583
Advance billings 6,468 6,888
------------------------ ------------------------
Total current liabilities 15,913 19,306
Long-term debt 230 178
Capitalized lease obligations 99 72
Minority interests - 95
Deferred rent 768 841
Other liabilities 33 21
------------------------ ------------------------
Total liabilities 17,043 20,513
======================== ========================
Stockholders' Equity:
Preferred stock, $.01 par value; 1,000,000 shares
authorized; no shares outstanding
- -
Common stock, $.01 par value; 20,000,000 shares
authorized; and 7,415,000 shares outstanding
74 74
Additional paid-in capital 22,746 22,746
Retained earnings 1,931 4,860
Cumulative foreign currency translation adjustments 15 150
------------------------ ------------------------
Total stockholders' equity 24,766 27,830
======================== ========================
$ 41,809 $ 48,343
======================== ========================
The accompanying notes to consolidated financial statements are an
integral part of these statements.
1
HEALTHWORLD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
1997 1998 1997 1998
-------------- -------------- -------------- --------------
Revenues $ 9,435 $ 16,919 $ 23,186 $ 45,784
-------------- -------------- -------------- --------------
Operating expenses:
Salaries and related costs 6,235 12,282 16,042 34,747
General and office expenses 1,306 1,800 3,781 5,702
Depreciation and amortization 171 326 525 769
-------------- -------------- -------------- --------------
7,712 14,408 20,348 41,218
Income from operations 1,723 2,511 2,838 4,566
Interest income (expense), net (19) 148 8 551
-------------- -------------- -------------- --------------
Income before provision for income taxes
and minority interests 1,704 2,659 2,846 5,117
Provision for income taxes (Note 2) 252 1,133 359 2,156
Minority interests in net earnings of
subsidiaries 78 32 160 32
============== ============== ============== ==============
Net income $ 1,374 $ 1,494 $ 2,327 $ 2,929
============== ============== ============== ==============
Per share information (Note 3):
Net income per common share:
Basic $ 0.29 $ 0.20 $ 0.49 $ 0.40
============== ============== ============== ==============
Diluted $ 0.29 $ 0.20 $ 0.49 $ 0.39
============== ============== ============== ==============
Common shares used in computing
per share amounts:
Basic 4,741 7,415 4,741 7,415
============== ============== ============== ==============
Diluted 4,741 7,589 4,741 7,607
============== ============== ============== ==============
Pro forma information (Note 4):
Income before provision for income
taxes and minority interests $ 1,704 $ 2,846
Pro forma provision for income taxes 712 1,182
Minority interests in net earnings of
subsidiaries 78 160
============== ==============
Pro forma net income $ 914 $ 1,504
============== ==============
Pro forma per share information:
Net income per common share:
Basic $ 0.19 $ 0.32
============== ==============
Diluted $ 0.19 $ 0.32
============== ==============
Common shares used in computing
pro forma per share amounts:
Basic 4,741 4,741
============== ==============
Diluted 4,741 4,741
============== ==============
The accompanying notes to consolidated financial statements are an
integral part of these statements.
2
HEALTHWORLD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Nine Months Ended
September 30,
----------------------------------------
1997 1998
------------------ ------------------
Cash flows from operating activities:
Net income $ 2,327 $ 2,929
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 525 769
Deferred rent 77 73
Deferred income taxes 173 (29)
Minority interests in net earnings of subsidiaries 160 32
Gain on sale of fixed assets (19) (14)
Changes in operating assets and liabilities, net of effects from
acquisitions of businesses:
Accounts receivable (1,216) (1,363)
Unbilled production charges (1,672) (1,408)
Other current assets (59) (35)
Other assets (1,171) (117)
Accounts payable 1,312 285
Advance billings (122) (227)
Accrued expenses 443 1,344
Other liabilities (28) (12)
------------------ ------------------
Net cash provided by operating activities 730 2,227
------------------ ------------------
Cash flows from investing activities:
Capital expenditures, net (578) (709)
Proceeds from the sale of fixed assets 75 93
Businesses acquired, net of cash received - (10,213)
Restricted cash - (1,698)
------------------ ------------------
Net cash used in investing activities (503) (12,527)
------------------ ------------------
Cash flows from financing activities:
Payment of majority stockholder dividends (105) -
Repayments of line of credit (400) (634)
Distributions to stockholders (498) -
Payments of minority interest shareholders' dividends (55) -
Proceeds from bank loans 748 -
Repayment of bank loans and long term debt (149) (588)
Capital lease repayments (109) (104)
------------------ ------------------
Net cash used in financing activities (568) (1,326)
------------------ ------------------
Effect of exchange rates on cash - 136
------------------ ------------------
Net decrease in cash and cash equivalents (341) (11,490)
Cash and cash equivalents at beginning of period 2,214 18,092
------------------ ------------------
Cash and cash equivalents at end of period $ 1,873 $ 6,602
================== ==================
Supplemental disclosure of cash flow information: Cash paid for:
Taxes $ 365 $ 1,339
================== ==================
Interest $ 101 $ 57
================== ==================
Supplemental schedule of noncash investing activities:
Capital leases for new equipment $ - $ 42
================== ==================
The accompanying notes to consolidated financial statements are an
integral part of these statements.
3
HEALTHWORLD CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
On November 12, 1997, Healthworld Corporation (the "Company")
acquired (the "Consolidation"), in exchange for shares of its Common
Stock, all of the issued and outstanding common stock of each of (i)
Girgenti, Hughes, Butler & McDowell, Inc. and its affiliated entities
("GHB&M") and (ii) Milton Marketing Group Limited and its subsidiaries
("Milton"). Unless otherwise indicated, all references herein to the
"Company" give effect to the Consolidation and include GHBM, Milton and
each of the Company's other subsidiaries. The Consolidation was
accounted for under the pooling of interests method of accounting.
Accordingly, the Company's consolidated financial statements and notes
thereto have been restated to include the results of GHB&M and Milton
for all periods presented.
The Company is an international marketing and communications
services company specializing in healthcare. The Company provides many
of the world's largest pharmaceutical and other healthcare companies
with a comprehensive range of integrated strategic marketing services
designed to accelerate the market acceptance of new products and to
sustain marketability throughout their life-cycles. The Company's
services include advertising and promotion, contract sales, consulting,
publishing, medical education, public relations, interactive
multimedia, database marketing and marketing research services. The
Company offers its clients global reach and expertise through its
operations in the United States, the United Kingdom, France and Spain
and through Healthworld B.V., a world-wide network of licensed
independent marketing and communications agencies.
The accompanying consolidated financial statements include the
accounts of the Company and its wholly and majority owned subsidiaries
except for CPA Espana, S.L. ("CPA Spain"), which the Company acquired
subsequent to September 30, 1998. All intercompany balances and
transactions have been eliminated in consolidation.
Certain amounts in the financial statements for prior periods
have been reclassified to conform to the current year presentation for
comparative purposes.
The accompanying unaudited consolidated financial statements
reflect all adjustments, consisting of normal recurring accruals, which
are, in the opinion of the Company's management, necessary to present
fairly the financial position as of September 30, 1998 and the results
of operations and cash flows for the interim periods ended September
30, 1997 and 1998. Interim results are not necessarily indicative of
results for a full year. For further information, refer to the
consolidated financial statements and the accompanying notes included
in the Company's Annual Report on Form 10-K for the year ended December
31, 1997.
4
2. INCOME TAXES
Income taxes have been provided using the liability method in
accordance with Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes". The provision for income taxes
(recorded at an effective rate of 42.67% and 42.18% for the three month
and nine month periods ended September 30, 1998, respectively) reflects
management's estimation of the effective tax rate expected to be
applicable for the fiscal year. Prior to the Consolidation, certain of
the entities comprising GHB&M were treated as S corporations and were
not subject to Federal corporate income taxes. Such entities were
subject to certain corporate level state and local income taxes which
are provided for in the three month and nine month periods ended
September 30, 1997.
3. NET INCOME PER COMMON SHARE
In accordance with SFAS No. 128, "Earnings Per Share", basic
earnings per common share amounts were computed by dividing net
earnings by the weighted average number of common shares outstanding,
excluding any potential dilution. Diluted earnings per common share
amounts were computed by reflecting potential dilution from the
exercise of stock options. As there were no dilutive securities for the
three month and nine month periods ended September 30, 1997, no
reconciliation for such periods is presented herein.
The following chart provides a reconciliation of information
used in calculating the per share amounts, for the three month and nine
month periods ended September 30, 1998:
Three Months Ended Nine Months Ended
September 30, 1998 September 30, 1998
------------------------------- -----------------------------
(In thousands, except per share data)
Numerator:
Net income $ 1,494 $ 2,929
------------------ -----------------
Denominator for basic
net income per common share 7,415 7,415
Effect of dilutive securities:
Stock options 174 192
------------------ -----------------
Denominator for diluted
net income per share 7,589 7,607
================== =================
Basic net income per
common share $ 0.20 $ 0.40
================== =================
Diluted net income
per common share $ 0.20 $ 0.39
================== =================
5
4. PRO FORMA NET INCOME
Pro forma net income for the three month and nine month periods
ended September 30, 1997 includes the pro forma effect of a C
corporation income tax provision as if each of the companies comprising
GHB&M (other than Syberactive, Inc., which was already treated as a C
corporation) were treated as C corporations for the entire period.
5. COMPREHENSIVE INCOME
The Financial Accounting Standards Board (the "FASB") issued
SFAS No. 130, "Reporting Comprehensive Income", which establishes
standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. This
statement is effective for fiscal years beginning after December 15,
1997, including interim periods.
Comprehensive income is as follows:
Three Months Ended September Nine Months
30, Ended September 30,
------------------------------ ------------------------------
1997 1998 1997 1998
-------------- ------------ ------------- ------------
(In thousands)
Net Income $ 1,374 $ 1,494 $ 2,327 $ 2,929
Other comprehensive income:
Foreign currency translation
adjustments (45) 130 (65) 136
============== ============ ============= ============
Comprehensive income $ 1,329 $ 1,624 $ 2,262 $ 3,065
============== ============ ============= ============
6. ACQUISITIONS OF BUSINESSES
In July 1998, the Company acquired 80% of the capital stock of
HFT, a French holding company, which owns 100% of the capital stock of
Torrent, S.A. ("Torrent"), a French healthcare communications agency,
which in turn owns 100% of the capital stock of Aigue Marine SARL
("Aigue") and Katchina Productions SARL ("Katchina"), each a French
company. The Company's initial cash payment was 18.8 million French
Francs (approximately US$3.2 million) including expenses related to the
acquisition. Total amounts to be paid in connection with the
acquisition, including potential subsequent earn-out payments to take
place on or prior to April 15, 2000 and April 15, 2002 based upon a
multiple of operating income of HFT, Torrent, Aigue and Katchina
(together the "HFT Group Companies") and the seller's option to sell
and the Company's option to purchase the remaining 20% of the capital
stock of HFT, will not exceed 48.8 million French Francs (approximately
US$8.2 million). The acquisition has been accounted for using the
purchase method of accounting, whereby the excess of the initial
purchase price over the fair value of the net assets acquired, 1.4
million French Francs (approximately US$240,000), after removing
minority interests, was recorded as goodwill. Total goodwill recorded
on the purchase was $2.9 million.
6
In July 1998, the Company acquired all of the capital stock of
Colwood House Medical Publications (U.K.) Limited ("Colwood"), a U.K.
medical education company. The Company's initial cash payment was
(pound)4.5 million (approximately US$7.5 million) including expenses
related to the acquisition. Total amounts to be paid in connection with
the acquisition, including potential subsequent earn-out payments to
take place in April 2000 and August 2001 based upon Colwood achieving
certain targeted operating profits, are not to exceed approximately
(pound)8.0 million (approximately US$13.3 million). Pursuant to the
acquisition agreement, the Company deposited an amount equal to
(pound)1.0 million (approximately US$1.7 million) in an interest
bearing escrow account to be applied towards the potential earn-out
payments, and may be required to deposit into such escrow account
potential additional amounts based on net operating profits to be
applied towards such future earn-out payments. The acquisition has been
accounted for using the purchase method of accounting, whereby the
excess of the initial purchase price over the fair value of the net
assets acquired, (pound)891,000 (approximately US$1.5 million), was
recorded as goodwill. Total goodwill recorded on the purchase was $6.0
million.
The results of operations of these acquisitions are included in
the consolidated financial statements from the dates of acquisition.
Summarized below are the unaudited pro forma results of
operations for the nine months ended September 30, 1997 and 1998 of the
Company as though the Colwood and the HFT Group Companies acquisitions
had occurred at the beginning of 1997. Adjustments have been made for
income taxes, amortization of goodwill, interest income and minority
interests in net earnings of subsidiaries related to these
transactions.
Nine Months Ended
September 30,
------------------------
1997 1998
----------- ---------
Pro Forma:
Revenues 30,626 51,283
Net income 1,431 2,984
Basic net income per common share $ 0.30 $ 0.40
=========== =========
Diluted net income per common share $ 0.30 $ 0.39
=========== =========
These pro forma results of operations are not necessarily
indicative of the actual results of operations that would have occurred
had the acquisitions been made at the beginning of 1997 or of results
which may occur in the future.
In October, 1998, the Company acquired all of the capital stock
of CPA Spain, a healthcare communications agency located in Madrid,
Spain. The Company's initial cash payment was approximately 212 million
Spanish Pesetas (approximately US$1.5 million) including expenses
related to the acquisition. Total amounts to be paid in connection with
the acquisition, including potential subsequent earn-out payments to
take place in April 2000 and April 2003 based upon CPA Spain achieving
certain targeted operating profits, are not to exceed approximately 661
million Spanish Pesetas (approximately US$4.8 million). The acquisition
will be accounted for using the purchase method of accounting,
7
whereby the excess purchase price over the fair value of the net assets
acquired will be recorded as goodwill.
7. NEW ACCOUNTING STANDARDS
The FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," which establishes standards for
the way that public business enterprises report information about
operating segments in financial statements issued to shareholders. It
also establishes standards for related disclosures about products and
services, geographic areas, and major customers. SFAS No. 131 is
effective for financial statements for fiscal years beginning after
December 15, 1997.
8. SUBSEQUENT EVENTS
In October 1998, the Company received notice from one of the
Company's largest customers for which the Company provides contract
sales services in the U.K., that it was terminating its customer
relationship with the Company. Soon after receipt by the Company of
such notice, the customer entered into insolvency "administration",
which is analogous to Chapter 11 bankruptcy proceedings in the United
States. Prior to entering into administration, the customer was, for
the most part, current in paying its accounts payable to the Company,
and the Company does not anticipate a material loss in the event that
the Company's current accounts receivable or other contractual
obligations from the customer are discharged in the course of the
administration. The Company will likely incur costs in connection with
the termination of the customer's account. However, the Company is
currently unable to quantify such costs.
8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This September 30, 1998 Quarterly Report on Form 10-Q contains
statements which constitute forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Those
statements include statements regarding the intent, belief or current
expectations of the Company and its management team. The Company's
stockholders and prospective investors are cautioned that any such
forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, and that actual results may differ
materially from those projected in the forward-looking statements. Such
risks and uncertainties include, among other things, competitive,
economic and regulatory factors in the healthcare marketing and
communications industry and the pharmaceutical and health-care
industry, general economic conditions, the ability of the Company to
manage its growth and successfully implement its business strategy and
other risks and uncertainties that are discussed herein.
Results of Operations
The following discussion and analysis should be read in
conjunction with the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.
The following table sets forth certain data as a percentage of
revenues for the periods indicated:
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------------- ----------------------------
1997 1998 1997 1998
-------------- ----------- ------------ -----------
Revenues 100.0% 100.0% 100.0% 100.0%
Salaries and related costs 66.1 72.6 69.2 75.9
General and office expenses 13.8 10.6 16.3 12.4
Depreciation and amortization 1.8 1.9 2.3 1.7
Income from operations 18.3 14.9 12.2 10.0
Interest income (expense), net (0.2) 0.8 - 1.2
Provision for income taxes 2.7 6.7 1.5 4.7
Minority interests 0.8 0.2 0.7 0.1
-------------- ----------- ------------ -----------
Net income 14.6% 8.8% 10.0% 6.4%
* Percentages may not agree to the Financial Statements due to rounding
9
The following table sets forth certain operating data with
respect to the Company's contract sales operations and communications
operations for the periods indicated:
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------------------- -----------------------------------
1997 1998 1997 1998
--------------- -------------- --------------- ---------------
Revenues (in thousands)
Contract sales $ 3,252 $ 8,689 $ 7,844 $ 24,996
Communications 6,183 8,230 15,342 20,788
Income From Operations
Contract sales $ 454 $ 94 $ 802 $ 727
Communications 1,269 2,417 2,036 3,839
Fiscal Three Months Ended September 30, 1998 Compared to Fiscal Three
Months Ended September 30, 1997
Revenues
Revenues for the three months ended September 30, 1998 were
$16.9 million, an increase of $7.5 million, or 79.3%, from $9.4 million
for the three months ended September 30, 1997. Contract sales revenues
increased to $8.7 million, an increase of 167.2% from $3.2 million in
the prior year's quarter. This was attributable to the growth of the
contract sales operation in the United Kingdom, which resulted
primarily from additional business from existing clients.
Communications revenues for the quarter ended September 30, 1998
increased to $8.2 million, an increase of 33.1% from $6.2 million for
the third quarter of 1997. Of such increase, approximately $1.2 million
was attributable to revenues derived as a result of the acquisitions of
Colwood House Medical Publications (U.K.) Limited ("Colwood") and HFT
and its subsidiaries (together, "the HFT Group Companies") while the
remaining increase was attributable to the growth of advertising and
promotion services, which resulted from assignments from new clients
and additional assignments from existing clients.
Salaries and Related Costs
Salaries and related costs for the three months ended September
30, 1998 were $12.3 million, an increase of $6.0 million, or 97.0%,
from $6.2 million for the three months ended September 30, 1997.
Salaries and related costs include all compensation and related
benefits for all employees and contracted talent. Such increase was
primarily attributable to (i) approximately $4.5 million of additional
salaries and related costs commensurate with the growth of the
Company's U.K. and U.S. contract sales operations, (ii) approximately
$810,000 relating to the additional support staff hired to handle the
increased level of contract sales business activity in the U.K., and
salaries related to the start-up of the U.S. contract sales division,
and (iii) approximately $530,000 relating to staffing costs as a result
of the acquisitions of Colwood and the HFT Group Companies. Salaries
and related costs represented 72.6% of revenues in the third quarter of
1998, compared to 66.1% in the third
10
quarter of 1997. Such increase, as a percentage of revenues, was
primarily attributable to growth of the Company's contract sales
operations and the corresponding increase in labor costs and increased
staffing costs for such operations. Generally, labor costs associated
with contract sales operations are greater as a percentage of
corresponding revenues than those for the Company's other services.
General and Office Expenses
General and office expenses for the three months ended September
30, 1998 were $1.8 million, an increase of $494,000, or 37.8%, from
$1.3 million for the three months ended September 30, 1997. General and
office expenses primarily include occupancy and related costs, client
development and other related administrative costs. Such increase was
primarily attributable to (i) increased occupancy and other related
costs of approximately $220,000 related primarily to the acquisitions
of Colwood and the HFT Group Companies, (ii) increased business
development costs and start-up costs for the U.S. contract sales
division of approximately $168,000, (iii) increased professional and
other related costs of approximately $51,000 partially attributable to
the transition of the Company from a private to a public company, and
(iv) an increased level of business activity. General and office
expenses represented 10.6% of revenues in the third quarter of 1998,
compared to 13.8% of the revenues in the third quarter of 1997. The
decrease in general and office expenses, as a percentage of revenues,
was primarily attributable to expenses generally being fixed costs
relative to increases in the Company's revenues.
Depreciation and Amortization
Depreciation and amortization for the three months ended
September 30, 1998 was $326,000, an increase of $155,000 or 90.6% from
$171,000 for the three months ended September 30, 1997. The increase
was commensurate with the growth of the business. Depreciation and
amortization represented 1.9% of revenues for the third quarter of
1998, compared to 1.8% for the third quarter of 1997.
Income From Operations
Income from operations for the three months ended September 30,
1998 was $2.5 million, an increase of $788,000, or 45.7%, from $1.7
million for the three months ended September 30, 1997. Income from
operations represented 14.8% of revenues for the third quarter of 1998,
compared to 18.3% for the third quarter of 1997.
Interest Income (Expense), net
Interest income (expense), net for the three months ended
September 30, 1998 was $148,000, an increase of $167,000 from ($19,000)
for the three months ended September 30, 1997, resulting primarily from
higher cash and cash equivalents for the third quarter of 1998. Such
increase in cash and cash equivalents was attributable to the receipt
of the net proceeds from the Company's initial public offering ("IPO")
of Common Stock which was consummated in November 1997.
11
Provision for Income Taxes
The provision for income taxes for the three months ended
September 30, 1998 was $1.1 million, an increase of $881,000 from
$252,000 for the three months ended September 30, 1997. Such increase
was primarily attributable to the Company being taxed as a C
corporation for the third quarter of 1998. During the third quarter of
1997, certain of the companies comprising GHB&M were treated as S
corporations, pursuant to which income or loss of each of such
companies was allocated to its stockholders by inclusion in their
respective individual income tax returns.
Net Income
Net income for the three months ended September 30, 1998 was
$1.5 million, an increase of $120,000, or 8.7%, from $1.4 million for
the three months ended September 30, 1997. Net income represented 8.8%
of revenues for the third quarter of 1998 compared to 14.6% for the
third quarter of 1997. Net income on a pro forma basis for the three
months ended September 30, 1997 was 9.7% of revenues.
Fiscal Nine Months Ended September 30, 1998 Compared to Fiscal Nine
Months Ended September 30, 1997
Revenues
Revenues for the nine months ended September 30, 1998 were $45.8
million, an increase of $22.6 million, or 97.5%, from $23.2 million for
the nine months ended September 30, 1997. Contract sales revenues
increased to $25.0 million, an increase of 218.7% from $7.9 million for
the same period in the prior year. This was attributable to the growth
of the contract sales operation in the United Kingdom, which resulted
primarily from additional business from existing clients.
Communications revenues for the nine months ended September 30, 1998
increased to $20.8 million, an increase of 35.5% from $15.3 million for
the same period in the prior year. Of such increase, approximately $3.8
million was attributable to the growth of advertising and promotion
services which resulted from assignments from new clients and
additional assignments from existing clients, and $1.2 million was
attributable to revenues derived as a result of the acquisitions of
Colwood and the HFT Group Companies.
Salaries and Related Costs
Salaries and related costs for the nine months ended September
30, 1998 were $34.7 million, an increase of $18.7 million, or 116.6%,
from $16.0 million for the nine months ended September 30, 1997.
Salaries and related costs include all compensation and related
benefits for all employees and contracted talent. Such increase was
primarily attributable to (i) approximately $13.8 million of additional
salaries and related costs relating to the growth of the Company's U.K.
and U.S. contract sales operations, (ii) approximately $2.4 million
relating to the additional support staff hired to handle the increased
level of U.K. contract sales business activity, and salaries related to
the start-up of the U.S. contract sales division, and (iii)
approximately $2.4 million relating to additional staffing costs to
support
12
the growth in communications services as well the acquisitions of
Colwood and the HFT Group Companies. Salaries and related costs
represented 75.9% of revenues for the first nine months of 1998,
compared to 69.2% for the first nine months of 1997. Such increase, as
a percentage of revenues, was primarily attributable to the growth of
the Company's contract sales operations and the corresponding increase
in labor costs and increased staffing costs for such operations.
Generally, labor costs associated with contract sales operations are
greater as a percentage of corresponding revenues than those for the
Company's other services.
General and Office Expenses
General and office expenses for the nine months ended September
30, 1998 were $5.7 million, an increase of $1.9 million, or 50.8%, from
$3.8 million for the nine months ended September 30, 1997. General and
office expenses primarily include occupancy and related costs, client
development and other related administrative costs. Such increase is
primarily attributable to (i) increased business development costs and
start up costs for the U.S. contract sales division of approximately
$970,000, (ii) increased occupancy and related costs of approximately
$450,000 as a result of increased rent and occupancy related costs
commensurate with the growth of the business and the acquisitions of
Colwood and the HFT Group Companies, and (iii) increased professional
and other related costs of approximately $310,000 partially relating to
the transition of the Company from a private to a public company.
General and office expenses represented 12.5% of revenues for the first
nine months of 1998, compared to 16.3% of revenues for the first nine
months of 1997. The decrease in general and office expenses, as a
percentage of revenues, was primarily attributable to such expenses
generally being fixed costs relative to increases in the Company's
revenues.
Depreciation and Amortization
Depreciation and amortization for the nine months ended
September 30, 1998 was $769,000, an increase of $244,000 or 46.5% from
$525,000 for the nine months ended September 30, 1997. The increase was
commensurate with the growth of the business. Depreciation and
amortization represented 1.7% of revenues for the first nine months of
1998, compared to 2.3% for the first nine months of 1997.
Income From Operations
Income from operations for the nine months ended September 30,
1998 was $4.6 million, an increase of $1.7 million, or 60.9%, from $2.8
million for the nine months ended September 30, 1997. Income from
operations represented 10.0% of revenues for the first nine months of
1998, compared to 12.2% for the first nine months of 1997.
13
Interest Income (Expense), net
Interest income (expense), net for the nine months ended
September 30, 1998 was $551,000, an increase of $543,000 from $8,000
for the nine months ended September 30, 1997, primarily due to higher
cash and cash equivalents for the nine months ended September 30, 1998.
Such increase in cash and cash equivalents was attributable to the
receipt of the net proceeds from the Company's IPO of Common Stock
which was consummated in November 1997.
Provision for Income Taxes
The provision for income taxes for the nine months ended
September 30, 1998 was $2.2 million, an increase of $1.8 million from
$359,000 for the nine months ended September 30, 1997. Such increase
was primarily attributable to the Company being taxed as a C
corporation for the nine months ended September 30, 1998. During the
first nine months of 1997, certain of the companies comprising GHB&M
were treated as S corporations, pursuant to which income or loss of
each of such companies was allocated to its stockholders by inclusion
in their respective individual income tax returns.
Net Income
Net income for the nine months ended September 30, 1998 was $2.9
million, an increase of $602,000, or 25.9%, from $2.3 million for the
nine months ended September 30, 1997. Net income represented 6.4% of
revenues for the nine months ended September 30, 1998 compared to 10.0%
for the nine months ended September 30, 1997. Net income on a pro forma
basis for the nine months ended September 30, 1997 was 6.5% of
revenues.
Liquidity and Capital Resources
At September 30, 1998 and December 31, 1997, the Company had
cash and cash equivalents of approximately $6.6 million and $18.1
million, respectively, a decrease of $11.5 million. The Company's
working capital was $9.5 million and $19.0 million at September 30,
1998 and December 31, 1997, respectively. The decrease in cash and cash
equivalents and working capital was primarily attributable to $12.1
million of cash reserves used for initial payments and the related
expenses in the recent acquisitions of Colwood and the HFT Group
Companies, including $1.7 million placed in an interest bearing escrow
account to be used in the event of future Colwood earn-out payments,
and capital expenditures of approximately $700,000, partially offset by
net income of $2.9 million for the nine months ended September 30,
1998.
Bank borrowings for the Company's U.S. operations from Chase
Manhattan Bank, N.A. (the "GHB&M Credit Facility") consist of (i) an
uncommitted line of credit (the "GHB&M Line of Credit") which expires
on December 31, 1998, and bears interest at the bank's prime rate (8.5%
as of September 30, 1998) plus 1.0% per annum, pursuant to which GHB&M
was able to request borrowings of, but the bank was not obligated to
lend, up to $3.5 million; the Company is currently negotiating a new
facility similar to the one currently in place, although to date, no
agreement has been entered into and there can be no
14
assurance that a new credit facility will be entered into on favorable
terms or at all, (ii) a term note in the principal amount of $300,000
(the "GHB&M Term Note"), and (iii) a letter of credit in the amount of
$200,000. The GHB&M Credit Facility is secured by a first priority
security interest in GHB&M's personal property and is personally
guaranteed by certain of GHB&M's stockholders. The GHB&M Term Note had
$47,000 outstanding as of September 30, 1998 and bears interest at
7.75% per annum and is payable in 36 equal monthly installments with
the last installment due February 1999. No amounts were outstanding
under the GHB&M Line of Credit as of September 30, 1998.
Bank borrowings for the Company's U.K. operations consist of an
overdraft facility (the "Milton Overdraft Facility") with Bank of
Scotland for an aggregate amount of up to (pound)750,000 (approximately
US$1.27 million). Amounts drawn under the Milton Overdraft Facility
bear interest payable at the United Kingdom base rate (7.5% as of
September 30, 1998) plus 2.0% per annum (the "Prevailing Rate"). As of
September 30, 1998, Milton had no amounts outstanding under the Milton
Overdraft Facility. Colwood maintains an overdraft facility (the
"Colwood Overdraft Facility") with National Westminster Bank plc
("NWB") for an aggregate amount of up to (pound)400,000 (approximately
US$680,000). Amounts drawn under the Colwood Overdraft Facility bear
interest payable at the NWB base rate plus 2.0% (9.5% as of September
30, 1998) until October 31, 1998 and after that date, at the NWB base
rate plus 1.75% from November 1, 1998 until October 31, 1999. As of
September 30, 1998, no amounts were outstanding under the Colwood
Overdraft facility. In addition, as of September 30, 1998, the Company
had, with respect to its U.K. operations, a term loan from Bank of
Scotland in the principal amount of $588,000 (of which $297,000 was
outstanding on September 30, 1998) which bears interest payable at the
Prevailing Rate with principal payable in installments of $58,000 each
May and November through November 2000.
Bank borrowings for the Company's French operations consist of
an unsecured line of credit (the "HFT Group Companies Line of Credit")
which bears interest at the French Prime Rate plus 3.0% (6.75% as of
September 30, 1998) per annum pursuant to which the HFT Group Companies
may request borrowings of, but the bank is not obligated to lend, up to
FF500,000 (approximately US$85,000). As of September 30, 1998, the HFT
Group Companies had no amounts outstanding under the HFT Group
Companies Line of Credit. In addition, the HFT Group Companies have
entered into an unsecured facility (the "HFT Group Companies Receivable
Facility") whereby the HFT Group Companies may request borrowings, but
the bank is not obligated to lend, in the amount of confirmed, unpaid
client accounts receivable up to FF1,000,000 (approximately US$170,000)
to be repaid upon receipt of the corresponding receivable balances.
Amounts drawn under the HFT Group Companies Receivable Facility bear
interest payable at the French Prime Rate plus 3.0% (6.75% as of
September 30, 1998) per annum. As of September 30, 1998, no amounts
were outstanding under the HFT Group Companies Receivable Facility.
In July 1998, the Company acquired 80% of the capital stock of
HFT, a French holding company, which owns 100% of the capital stock of
Torrent, S.A. a French healthcare communications agency, which in turn
owns 100% of the capital stock of Aigue Marine SARL and Katchina
Productions SARL, each a French company. The Company's initial cash
payment was 18.8 million French Francs (approximately US$3.2 million)
15
including expenses related to the acquisition. Total amounts to be paid
in connection with the acquisition, including potential subsequent
earn-out payments to take place on or prior to April 15, 2000 and April
15, 2002 based upon a multiple of operating income of the HFT Group
Companies and the seller's option to sell and the Company's option to
purchase the remaining 20% of the capital stock of HFT, will not exceed
48.8 million French Francs (approximately US$8.2 million).
In July 1998, the Company acquired all of the capital stock of
Colwood, a U.K. medical education company. The Company's initial cash
payment was (pound)4.5 million (approximately US$7.5 million) including
expenses related to the acquisition. Total amounts to be paid in
connection with the acquisition, including potential subsequent
earn-out payments to take place in April 2000 and August 2001 based
upon Colwood achieving certain targeted operating profits, are not to
exceed approximately (pound)8.0 million (approximately US$13.3
million).
Pursuant to the acquisition agreement with respect to the
Colwood transaction, the Company deposited an amount equal to
(pound)1.0 million (approximately US$1.7 million) in an interest
bearing escrow account to be applied towards the potential earn-out
payments to be made in April 2000 and August 2001, and may be required
to deposit into such escrow account potential additional amounts based
on net operating profits to be applied towards such future earn-out
payments. Accordingly, such committed amounts will not be available for
working capital purposes.
In October, 1998, the Company acquired all of the capital stock
of CPA Espana, S.L. ("CPA Spain"), a healthcare communications agency
located in Madrid, Spain. The Company's initial cash payment was
approximately 212 million Spanish Pesetas (approximately US$1.5
million) including expenses related to the acquisition. Total amounts
to be paid in connection with the acquisition, including potential
subsequent earn-out payments to take place in April 2000 and April 2003
based upon CPA Spain achieving certain targeted operating profits, are
not to exceed approximately 661 million Spanish Pesetas (approximately
US$4.8 million).
Inflation did not have a significant impact upon the results of
the Company during fiscal 1997 or the nine months ended September 30,
1998.
Impact of Year 2000
Until recently, computer programs were generally written using two
digits rather than four to define the applicable year. Accordingly,
such programs may be unable to distinguish properly between the Year
1900 and the Year 2000. This could result in system failures or data
corruption for the Company, its customers or vendors which could cause
disruptions of operations, including, among other things, a temporary
inability to process transactions or engage in business activities or
to receive information, services or payment from vendors or customers.
The Company's internal computing systems are primarily limited to
hardware and software for its financial systems, such as general ledger
and accounts receivable and
16
payable systems, and word processing, database and graphic design
systems. The Company is not dependent on large legacy systems.
The Company's management is continuing to conduct an assessment of
the Company's operations worldwide from an internal, vendor and
customer perspective. The assessment addresses all of the Company's
material computer systems, applications and any other material systems
that the Company believes may be vulnerable to the Year 2000 Issue and
significantly affect operations. This assessment includes seeking
information from certain of the Company's material vendors which
provide certain external services to the Company, although the Company
cannot control whether or the manner in which such services will be
provided. In addition, the Company's assessment includes determining
whether the Company's significant high volume customers are Year 2000
compliant or will be Year 2000 compliant prior to the Year 2000. The
Company believes that its internal computer systems used in its U.S.
operations are currently Year 2000 compliant, and that those used in
its foreign operations, to the extent not already Year 2000 compliant,
will be made Year 2000 compliant in 1999. To date, the cost of the
Company's Year 2000 assessment and compliance efforts has not been
material to the Company's results of operations or liquidity and the
Company does not anticipate that the cost of completing its assessment
and compliance project will be material to its results of operations or
liquidity in 1998 or 1999.
The cost of the Company's Year 2000 project and the date on which
the Company believes it will complete the necessary modifications are
based on the Company's estimates, which were derived utilizing numerous
assumptions of future events. The Company presently believes that the
Year 2000 issue will not pose significant operational problems for its
internal information systems. However, if the anticipated modifications
and conversions are not completed on a timely basis, the Year 2000
issue could have an adverse effect on the Company's operations. The
financial impact of making the required systems changes can not be
known precisely at this time, but is not expected to be material to the
Company's financial position, results of operations or cash flows.
Subsequent Events
In October 1998, the Company received notice from one of the
Company's largest customers for which the Company provides contract
sales services in the U.K., that it was terminating its customer
relationship with the Company. Soon after receipt by the Company of
such notice, the customer entered into insolvency "administration",
which is analogous to Chapter 11 bankruptcy proceedings in the United
States. Prior to entering into administration, the customer was, for
the most part, current in paying its accounts payable to the Company,
and the Company does not anticipate a material loss in the event that
the Company's current accounts receivable or other contractual
obligations from the customer are discharged in the course of the
administration. The Company will likely incur costs in connection with
the termination of the customer's account. Although the Company is
currently unable to quantify such costs, the Company believes that
incurring such costs as a result of the loss of the customer as a
client will not have a material adverse effect on the results of its
operations or its liquidity.
17
Part. II OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On November 21, 1997, the Company commenced an IPO of 2,415,000
shares of its Common Stock, par value $.01 per share. The Company's
registration statement on Form S-1 (File No. 333-34571) filed with the
Securities and Exchange Commission (the "Commission") with respect to
the IPO was declared effective by the Commission on November 21, 1997.
All of the shares of the Common Stock included in the IPO were sold by
the Company.
The aggregate net proceeds received by the Company from the IPO,
after deducting underwriting discounts and commissions and related
expenses, was approximately $16,445,000. Through June 30, 1998, the
Company had used approximately $1.7 million of the net proceeds of the
IPO solely for working capital purposes. Subsequent to that date,
through September 30, 1998, the end of the current reporting period,
the Company used approximately $12.6 million of the net proceeds of
the IPO in connection with the acquisitions of Colwood and the HFT
Group Companies, and acquisition costs associated with the purchase of
CPA Spain, including $1.7 million placed in an interest bearing escrow
account to be used in the event of future Colwood earn-out payments.
In connection with the acquisitions of Colwood, the HFT Group
Companies and CPA Spain, approximately $127,000 was paid to the law
firm of Todtman, Nachamie, Spizz and Johns, of which Alex Spizz, a
director of the Company, is a member. In addition, the Company used
approximately $700,000 of the proceeds to purchase fixed assets.
Subsequent to September 30, 1998, and in connection with the
acquisition in October 1998 of CPA Spain, the Company used
approximately $1.5 million of the net proceeds of the IPO for initial
payments.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits- The exhibits to this Form 10-Q are listed in the accompanying
Exhibit Index.
(b) Reports on form 8-K
On August 6, 1998, the Company filed with the Securities and
Exchange Commission a Current Report on Form 8-K, for which the Date
of Report was July 23, 1998, reporting the acquisition by the Company
on July 23, 1998 of the HFT Group Companies and on July 24, 1998 of
Colwood. On October 5, 1998, the Company filed an Amendment No.1 to
Current Report on Form 8-K relating to the same items, which Amendment
contained, with respect to Colwood, a Balance sheet, a Statement of
Income, a Statement of Shareholders' Equity and a Statement of Cash
Flows as of and for the year ended April 30, 1998, and, with respect
to Healthworld Corporation, on an unaudited pro forma combining basis,
Balance Sheets as of June 30, 1998 and Statements of Income for the
six months ended June 30, 1998 and the year ended December 31, 1997.
18
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.
HEALTHWORLD CORPORATION
Date: November 12, 1998 By: /s/ STEVEN GIRGENTI
--------------------------------------------
Steven Girgenti
Chairman and Chief Executive Officer
Date: November 12, 1998 By: /s/ STUART DIAMOND
--------------------------------------------
Stuart Diamond
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
19
EXHIBIT INDEX
Number Description of Exhibits
- ------ -----------------------
27 Financial Data Schedule
20