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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, 1999
OR
/_/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______to______
Commission file number 0-23059
HEALTHWORLD CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3922288
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
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) 625-4000
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 10, 1999, 8,109,965 shares of Common Stock of the Registrant were
issued and outstanding.
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HEALTHWORLD CORPORATION AND SUBSIDIARIES
Table of Contents
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1 Financial Statements
Consolidated Balance Sheets as of
December 31, 1998 and September 30, 1999................ 1
Consolidated Statements of Income
for the Three Months and Nine Months
Ended September 30, 1998 and 1999....................... 2
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1998 and 1999........... 3
Notes to the Consolidated Financial Statements.......... 4
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................11
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K..........................21
SIGNATURES...................................................................22
EXHIBIT INDEX................................................................23
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
HEALTHWORLD CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31, September 30,
1998 1999
------------ -------------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents ..................................... $ 6,472 $ 6,851
Accounts receivable, net ...................................... 18,889 30,298
Unbilled production charges ................................... 3,151 2,738
Other current assets .......................................... 1,501 1,426
-------- --------
Total current assets ............................................... 30,013 41,313
Restricted cash .................................................... 1,860 1,972
Property and equipment, net ........................................ 4,443 5,146
Goodwill, net ...................................................... 14,266 30,407
Other assets ....................................................... 289 701
======== ========
Total assets ....................................................... $ 50,871 $ 79,539
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt ............................. $ 135 $ --
Current portion of capitalized lease obligations .............. 74 52
Accounts payable .............................................. 4,247 5,459
Accrued expenses .............................................. 7,739 9,204
Advance billings .............................................. 7,982 20,352
Other current liabilities ..................................... 302 1,942
-------- --------
Total current liabilities .......................................... 20,479 37,009
Long-term debt ..................................................... 116 --
Capitalized lease obligations ...................................... 59 105
Minority interests ................................................. 111 122
Deferred rent ...................................................... 888 1,008
Other liabilities .................................................. 17 74
-------- --------
Total liabilities .................................................. 21,670 38,318
-------- --------
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; 7,415,167, and 8,098,280 shares
outstanding, respectively ................................. 74 81
Additional paid-in capital .................................... 22,748 31,062
Retained earnings ............................................. 6,357 10,113
Accumulated other comprehensive income ........................ 22 (35)
-------- --------
Total stockholders' equity ......................................... 29,201 41,221
======== ========
Total liabilities and stockholders' equity ......................... $ 50,871 $ 79,539
======== ========
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
-------------------------- -------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1998 1999 1998 1999
------- ------- ------- -------
Revenues ....................................................... $16,919 $21,748 $45,784 $54,815
------- ------- ------- -------
Operating expenses:
Salaries and related costs .................................. 12,282 15,482 34,747 39,973
General and office expenses ................................. 1,800 2,389 5,702 7,398
Depreciation and amortization ............................... 326 469 769 1,247
------- ------- ------- -------
14,408 18,340 41,218 48,618
Income from operations ......................................... 2,511 3,408 4,566 6,197
Interest income, net ........................................... 148 175 551 452
------- ------- ------- -------
Income before provision for income taxes and
minority interests ............................................ 2,659 3,583 5,117 6,649
Provision for income taxes (Note 2) ............................ 1,133 1,526 2,156 2,875
Minority interests in net earnings of
subsidiaries ................................................... 32 15 32 18
======= ======= ======= =======
Net income ..................................................... $ 1,494 $ 2,042 $ 2,929 $ 3,756
======= ======= ======= =======
Per share information (Note 3):
Net income per common share:
Basic .................................................... $ 0.20 $ 0.26 $ 0.40 $ 0.50
======= ======= ======= =======
Diluted .................................................. $ 0.20 $ 0.26 $ 0.39 $ 0.49
======= ======= ======= =======
Common shares used in computing
per share amounts:
Basic .................................................... 7,415 7,851 7,415 7,568
======= ======= ======= =======
Diluted .................................................. 7,589 7,992 7,607 7,729
======= ======= ======= =======
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
--------------------------------
Sept. 30, 1998 Sept. 30, 1999
-------------- --------------
Cash flows from operating activities:
Net income ........................................................... $ 2,929 $ 3,756
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ..................................... 769 1,247
Deferred rent ..................................................... 73 66
Deferred income taxes ............................................. (29) 30
Minority interests in net earnings of subsidiaries ................ 32 18
Gain on sale of fixed assets ...................................... (14) (28)
Changes in operating assets and liabilities, net of effects from
acquisitions of businesses:
Accounts receivable ............................................... (1,363) (8,031)
Unbilled production charges ....................................... (1,408) 406
Other current assets .............................................. (35) 113
Other assets ...................................................... (117) (154)
Accounts payable .................................................. 285 1,124
Advance billings .................................................. (227) 10,097
Accrued expenses .................................................. 1,344 687
Other liabilities ................................................. (12) 57
-------- --------
Net cash provided by operating activities ............................... 2,227 9,388
-------- --------
Cash flows from investing activities:
Capital expenditures .............................................. (709) (1,012)
Proceeds from the sale of fixed assets ............................ 93 193
Businesses acquired, net of cash received ......................... (10,213) (7,966)
Restricted cash ................................................... (1,698) 16
-------- --------
Net cash used in investing activities ................................... (12,527) (8,769)
-------- --------
Cash flows from financing activities:
Repayments of line of credit ...................................... (634) --
Repayment of bank loans and long term debt ........................ (588) (243)
Capital lease repayments .......................................... (104) (102)
Proceeds from exercise of stock options ........................... -- 156
-------- --------
Net cash used in financing activities ................................... (1,326) (189)
-------- --------
Effect of exchange rates on cash ........................................ 136 (51)
-------- --------
Net (decrease) increase in cash and cash equivalents .................... (11,490) 379
Cash and cash equivalents at beginning of period ........................ 18,092 6,472
-------- --------
Cash and cash equivalents at end of period .............................. $ 6,602 $ 6,851
======== ========
Supplemental disclosure of cash flow information: Cash paid for:
Taxes ............................................................. $ 1,339 $ 2,690
======== ========
Interest .......................................................... $ 57 $ 107
======== ========
Supplemental schedule of noncash investing and financing activities:
Capital leases for new equipment ...................................... $ 42 $ 125
======== ========
Common stock issued in connection with the acquisition of
business .......................................................... $ -- $ 8,165
======== ========
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, 1999
(UNAUDITED)
(In thousands, except per share data)
1. ORGANIZATION AND BASIS OF PRESENTATION
On November 12, 1997, Healthworld Corporation 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.
The Company is an international communications and contract sales
marketing organization specializing in healthcare. The Company provides
many of the world's largest pharmaceutical and healthcare companies with a
comprehensive range of integrated strategic marketing services designed to
accelerate the acceptance of new products and to sustain their growth.
These integrated services include advertising and promotion, contract
sales, consulting, medical education, public relations, marketing
research, publishing, interactive multimedia and database marketing
services. The Company offers its clients global reach and expertise
through its operations in the United States, France, Spain and the United
Kingdom and through Healthworld B.V., a world-wide network of marketing
and communications agencies operating under exclusive licensing
agreements.
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, 1999 and the results of operations
and cash flows for the interim periods ended September 30, 1998 and 1999.
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, 1998.
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 42.6% for the three months ended
September 30, 1998 and 1999, and at an effective rate of 42.1% and 43.2%
for the nine months ended September 30, 1998 and 1999, respectively)
reflects management's estimation of the effective tax rate that was and is
expected to be applicable for the respective fiscal years. This estimate
is evaluated by management each quarter.
4
HEALTHWORLD CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(UNAUDITED)
(In thousands, except per share data)
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.
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 and 1999:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1998 1999 1998 1999
------- ------- ------- -------
Numerator:
Net income .............................. $ 1,494 $ 2,042 $ 2,929 $ 3,756
------- ------- ------- -------
Denominator for basic
net income per common share ............. 7,415 7,851 7,415 7,568
Effect of dilutive securities:
Stock options ........................... 174 141 192 161
------- ------- ------- -------
Denominator for diluted
net income per share .................... 7,589 7,992 7,607 7,729
======= ======= ======= =======
Basic net income per common share ............ $ 0.20 $ 0.26 $ 0.40 $ 0.50
======= ======= ======= =======
Diluted net income per common share .......... $ 0.20 $ 0.26 $ 0.39 $ 0.49
======= ======= ======= =======
5
HEALTHWORLD CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(UNAUDITED)
(In thousands, except per share data)
4. COMPREHENSIVE INCOME
In 1998, the Company adopted 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. Comprehensive income consists of net income and
foreign currency translation adjustments. No provision for income taxes
has been made with respect to foreign currency translation adjustments
because all earnings of foreign subsidiaries are expected to be
permanently reinvested outside the United States. These amounts have been
included in the accompanying consolidated balance sheet under the caption
"Accumulated other comprehensive income".
Comprehensive income is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1998 1999 1998 1999
----------- ----------- ----------- -----------
Net income......................................... $ 1,494 $ 2,042 $ 2,929 $ 3,756
Other comprehensive income:
Foreign currency translation adjustments........ 130 269 136 (57)
---------- -------- -------- --------
Comprehensive income............................... $ 1,624 $ 2,311 $ 3,065 $ 3,699
========== ======== ======== ========
5. SEGMENT INFORMATION
In 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". SFAS No. 131
establishes standards for reporting information about operating segments
and related disclosures about products and services, geographic areas and
major customers.
The Company is organized based on the services that it offers. Under
this organizational structure, the Company operates in two principal
operating segments: communications and contract sales. The Company's
communications operations provide integrated services to clients which
includes advertising and promotion, consulting, medical education, public
relations, marketing research, publishing, interactive media and database
marketing research services. The Company's contract sales operations
involve forming dedicated sales teams which provide clients with
substantial flexibility in selecting the extent and cost of promoting
products as well as the clients' level of involvement in managing its
sales effort.
6
HEALTHWORLD CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(UNAUDITED)
(In thousands, except per share data)
Segment information is as follows:
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1998 1999 1998 1999
-------- -------- -------- --------
Revenues:
Communications........... $ 8,230 $ 11,449 $ 20,788 $ 28,617
Contract Sales........... 8,689 10,299 24,996 26,198
-------- -------- -------- --------
$ 16,919 $ 21,748 $ 45,784 $ 54,815
======== ======== ======== ========
Income from operations:
Communications........... $ 2,417 $ 2,691 $ 3,839 $ 4,945
Contract Sales........... 94 717 727 1,252
-------- -------- -------- --------
$ 2,511 $ 3,408 $ 4,566 $ 6,197
======== ======== ======== ========
6. ACQUISITION OF BUSINESS
In August 1999, the Company acquired all of the capital stock of
Falk Communications, Inc. ("Falk"), a United States healthcare
communications company. The initial purchase price paid by the Company was
$16,952 consisting of $9,000 in cash, including expenses related to the
acquisition, and Company Common Stock valued at $7,952. Total amounts to
be paid in connection with the acquisition, including expenses related to
the acquisition and potential, future earn-out payments to take place in
April 2000, 2001, 2002 and 2003, based upon a multiple of operating income
of Falk, are not expected to exceed $37,802. However, because the amount
of Common Stock to be paid in connection with additional earn-out payments
is based upon a moving average price of the Common Stock during a 20 day
period ending 3 days before the date payment is made, while such Common
Stock paid in connection with the earn-outs will be valued for accounting
purposes based upon its market price on the date of issuance, it is
possible that as a result of market fluctuations in the price of the
Common Stock the value of the aggregate consideration paid to the Falk
shareholders in connection with the merger could exceed $37,802. 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, $500, was recorded as goodwill. Total
goodwill recorded on the purchase was $16,452. A dividend payable, in the
amount of $1,664, is recorded in other current liabilities in the
accompanying consolidated balance sheet. This dividend represents the
7
HEALTHWORLD CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(UNAUDITED)
(In thousands, except per share data)
difference between the pre-acquisition net assets of Falk and the net
assets at the time of the acquisition.
On September 15, 1999, Healthworld paid $425, consisting of $211
cash and $213 in Common Stock to the Falk shareholders in exchange for
Falk stock received by the Falk Communications, Inc. Defined Contribution
Plan and Trust u/t/a dated July 29, 1999 as consideration to certain Falk
employees. A tax deduction will be taken on Healthworld's income tax
return for the taxable year ending December 31, 1999 with respect thereto.
Upon determination of the final tax deduction, Healthworld will make a
payment of additional consideration paid to acquire the Falk stock, such
payment will be in cash and Common Stock.
The results of operations of the acquisition are included in the
consolidated financial statements from the date of acquisition.
Summarized below are the unaudited pro forma results of operations
for the nine months ended September 30, 1998 and 1999 of the Company as
though the Falk acquisition had occurred at the beginning of the periods
presented. Additionally, the unaudited pro forma results of operations for
the nine months ended September 30, 1998 includes the pro forma effects of
the acquisition of Colwood House Medical Publications (UK) Limited and the
acquisition of 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, as
though these acquisitions had occurred at the beginning of 1998.
Adjustments have been made for income taxes, amortization of goodwill,
salary expense based on employment agreements and interest income related
to these transactions.
Nine Months Ended
September 30,
---------------------------
1998 1999 *
---------- -------------
Pro Forma:
Revenues $ 56,937 $ 59,364
Net income 2,757 1,868
Basic net income per common share $ 0.34 $ 0.23
======== ========
Diluted net income per common share $ 0.33 $ 0.23
======== ========
Common shares used in computing
per share amounts:
Basic 8,080 8,094
======== ========
Diluted 8,272 8,254
======== ========
* Included in the pro forma results of operations for the nine
months ended September 30, 1999 is a charge of approximately $2,100 to the
statement of income of Falk, which represents the compensation expense
related to the issuance in July 1999 of 78 shares of Falk's common stock
to certain of its key employees. Excluding the effect of this
8
HEALTHWORLD CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(UNAUDITED)
(In thousands, except per share data)
stock issuance, pro forma net income would be $3,023 and basic and diluted
pro forma earnings per share would be $0.37.
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 the periods presented or of
results, which may occur in the future.
7. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities".
The statement establishes accounting and reporting standards requiring
that every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded on the Balance Sheet as either an
asset or liability measured at its fair value. The statement requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a
company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting.
Pursuant to SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133 - An Amendment of FASB Statement No. 133", issued in June 1999, SFAS
No. 133 is effective for fiscal years beginning after June 15, 2000. While
the Company operates in international markets, it does so presently
without the use of derivative instruments and therefore SFAS No. 133 is
not currently applicable.
8. SUBSEQUENT EVENT
On November 9, 1999, the Company entered into an agreement (the
"Merger Agreement") to be acquired by Cordiant Communications Group plc
("Cordiant"), pursuant to which a newly-formed wholly-owned subsidiary of
Cordiant will be merged with and into the Company (the "Merger") and, the
Company will become a wholly-owned subsidiary of Cordiant upon the
satisfaction of certain conditions, including the receipt of certain
regulatory approvals and the approval of the Merger by the stockholders of
the Company and Cordiant. Certain management insiders of the Company
beneficially owning approximately 63% of the Company's Common Stock,
namely Steven Girgenti, William Leslie Milton, Spencer Falk, Francis
Hughes, Herbert Ehrenthal, William Butler and Michael Garnham, have
entered into stockholder agreements with Cordiant, pursuant to which,
among other things, such stockholders (i) are obligated to vote in favor
of the Merger and (ii) have granted an option to Cordiant to purchase
their shares of the
9
HEALTHWORLD CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(UNAUDITED)
(In thousands, except per share data)
Company's Common Stock, which options are exercisable only upon the
occurrence of certain events.
Pursuant to the terms of the Merger Agreement, the Company's
stockholders will receive, in exchange for their shares of Common Stock,
either Cordiant's American Depositary Receipts, each representing five
Cordiant ordinary shares ("ADRs"), or, at such stockholder's election,
Cordiant ordinary shares. The actual amount of ADRs and ordinary shares to
be issued to the Company's stockholders at the time of the Merger will be
based upon the average of the price of Cordiant's ordinary shares during a
10-day trading period ending three trading days prior to the Company's
stockholder meeting. Depending upon the market price of Cordiant's
ordinary shares and the currency exchange rate between the British Pound
Sterling and the United States Dollar during such period, Cordiant will be
obligated to issue an amount of ADRs or ordinary shares for each share of
the Company's Common Stock valued at between $17.00 and $23.00 per share.
If Cordiant's stock price drops by more than 25% from the time of entering
into the Merger Agreement and the time prior to the anticipated closing of
the Merger, Cordiant has the right to terminate the Merger, subject to the
Company's right to revoke such termination and consummate the Merger,
provided that Company stockholders will receive 7.6902 Cordiant ordinary
shares (or the corresponding amount of ADRs) per share of the Company's
Common Stock held by them in such event.
10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This September 30, 1999 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 healthcare 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, and in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998.
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, 1998.
Recent Events
On November 9, 1999, the Company entered into an agreement (the
"Merger Agreement") to be acquired by Cordiant Communications Group plc
("Cordiant"), pursuant to which a newly-formed wholly-owned subsidiary of
Cordiant will be merged with and into the Company (the "Merger") and, the
Company will become a wholly-owned subsidiary of Cordiant upon the
satisfaction of certain conditions, including the receipt of certain
regulatory approvals and the approval of the Merger by the stockholders of
the Company and Cordiant. Certain management insiders of the Company
beneficially owning approximately 63% of the Company's Common Stock,
namely Steven Girgenti, William Leslie Milton, Spencer Falk, Francis
Hughes, Herbert Ehrenthal, William Butler and Michael Garnham, have
entered into stockholder agreements with Cordiant, pursuant to which,
among other things, such stockholders (i) are obligated to vote in favor
of the Merger and (ii) have granted an option to Cordiant to purchase
their shares of the Company's Common Stock, which options are exercisable
only upon the occurrence of certain events.
Pursuant to the terms of the Merger Agreement, the Company's
stockholders will receive, in exchange for their shares of Common Stock,
either Cordiant's American Depositary Receipts, each representing five
Cordiant ordinary shares ("ADRs"), or, at such stockholder's election,
Cordiant ordinary shares. The actual amount of ADRs and ordinary shares to
be issued to the Company's stockholders at the time of the Merger will be
based upon the average of the price of Cordiant's ordinary shares during a
10-day trading period ending three trading days prior to the Company's
stockholder meeting. Depending upon the market price of Cordiant's
ordinary shares and the currency exchange rate between the
11
British Pound Sterling and the United States Dollar during such period,
Cordiant will be obligated to issue an amount of ADRs or ordinary shares
for each share of the Company's Common Stock valued at between $17.00 and
$23.00 per share. If Cordiant's stock price drops by more than 25% from
the time of entering into the Merger Agreement and the time prior to the
anticipated closing of the Merger, Cordiant has the right to terminate the
Merger, subject to the Company's right to revoke such termination and
consummate the Merger, provided that Company stockholders will receive
7.6902 Cordiant ordinary shares (or the corresponding amount of ADRs) per
share of the Company's Common Stock held by them in such event.
Results of Operations
The following table sets forth certain consolidated income statement
data of the Company as a percentage of revenues for the periods indicated:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------ ------------------------
1998 1999 1998 1999
------- ------- ------- -------
Statement of Income Data:
Revenues ..................................... 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Salaries and related costs .............. 72.6 71.2 75.9 72.9
General and office expenses ............. 10.6 11.0 12.4 13.5
Depreciation and amortization ........... 1.9 2.1 1.7 2.3
------- ------- ------- -------
85.1 84.3 90.0 88.7
Income from operations ....................... 14.9 15.7 10.0 11.3
Interest income, net ......................... 0.8 0.8 1.2 0.8
------- ------- ------- -------
Income before provision for income taxes
and minority interests .................. 15.7 16.5 11.2 12.1
Provision for income taxes ................... 6.7 7.0 4.7 5.2
Minority interests ........................... 0.2 0.1 0.1 --
------- ------- ------- -------
Net income ................................... 8.8% 9.4% 6.4% 6.9%
======= ======= ======= =======
Note: Percentages may not correspond to financial statements due to rounding.
12
The following table sets forth certain operating data with respect
to the Company's communications and contract sales operations for the
periods indicated:
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1998 1999 1998 1999
--------------- -------------- ------------- -------------
Revenues:
Communications ......................... $ 8,230 $11,449 $20,788 $28,617
Contract Sales ......................... 8,689 10,299 24,996 26,198
------- ------- ------- -------
$16,919 $21,748 $45,784 $54,815
======= ======= ======= =======
Income from operations:
Communications ......................... $ 2,417 $ 2,691 $ 3,839 $ 4,945
Contract Sales ......................... 94 717 727 1,252
------- ------- ------- -------
$ 2,511 $ 3,408 $ 4,566 $ 6,197
======= ======= ======= =======
Fiscal Three Months Ended September 30, 1999 Compared to Fiscal Three
Months Ended September 30, 1998
Revenues
Revenues for the three months ended September 30, 1999 were $21.7
million, an increase of $4.8 million, or 28.5%, from $16.9 million for the
three months ended September 30, 1998.
Communications revenues for the quarter ended September 30, 1999
increased to $11.4 million, an increase of $3.2 million, or 39.1%, from
$8.2 million in the third quarter of 1998. This increase was primarily
attributable to the additional revenues derived as a result of the
acquisitions of Falk Communications Inc., CPA Espana, S.L., Colwood House
Medical Publications (UK) Limited and 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 (collectively, the "Healthworld Acquisitions").
Contract sales revenues for the quarter ended September 30, 1999
increased to $10.3 million, an increase of $1.6 million, or 18.5%, from
$8.7 million in the third quarter of 1998. This increase was attributable
to (i) the growth of the consumer contract sales operations in the U.K.,
which resulted from additional business from new and existing clients, and
(ii) increased revenues generated by the U.S. contract sales division from
new clients.
13
Salaries and Related Costs
Salaries and related costs for the three months ended September 30,
1999 were $15.5 million, an increase of $3.2 million, or 26.1%, from $12.3
million for the three months ended September 30, 1998. Salaries and
related costs includes all compensation and related benefits for all
employees and contracted talent. Such increase was primarily attributable
to (i) approximately $1.7 million of salaries and related costs associated
with the staffing needed to support the additional revenues generated by
the Healthworld Acquisitions, (ii) approximately $1.0 million relating to
the additional compensation costs to support the growth of the U.S. and
U.K. contract sales business, and (iii) $423,000 related to increased
communications salaries. Salaries and related costs represented 71.2% of
revenues in the third quarter of 1999, compared to 72.6% in the third
quarter of 1998. Such decrease, as a percentage of revenues, was primarily
attributable to the revenue growth of the Company's communications
operations as a percentage of total revenues. Generally, labor costs
associated with the Company's communications operations are less as a
percentage of corresponding revenues than those for contract sales
services.
General and Office Expenses
General and office expenses for the three months ended September 30,
1999 was $2.4 million, an increase of $589,000, or 32.7%, from $1.8
million for the three months ended September 30, 1998. General and office
expenses includes occupancy and related costs, client development and
other related administrative costs. Such increase was attributable to
$370,000 of additional expenses in connection with the Healthworld
Acquisitions and increased business activity. General and office expenses
represented 11.0% of revenues in the third quarter of 1999, compared to
10.6% of the revenues in the third quarter of 1998.
Depreciation and Amortization
Depreciation and amortization expense for the three months ended
September 30, 1999 was $469,000, an increase of $143,000, or 43.9%, from
$326,000 for the three months ended September 30, 1998. The increase was
primarily related to amortization expense associated with the goodwill
generated in connection with the Healthworld Acquisitions, which
acquisitions were accounted for by the purchase method of accounting.
Depreciation and amortization expense represented 2.2% of revenues for the
third quarter of 1999, compared to 1.9% for the third quarter of 1998.
Income From Operations
Income from operations for the three months ended September 30, 1999
was $3.4 million, an increase of $897,000, or 35.7%, from $2.5 million for
the three months ended September 30, 1998. Income from operations
represented 15.7% of revenues in the third quarter of 1999, compared to
14.8% in the second quarter of 1998.
14
Interest Income, net
Interest income, net for the three months ended September 30, 1999
was $175,000, an increase of $27,000 from $148,000 for the three months
ended September 30, 1998, primarily due to the higher cash and cash
equivalents balances during the third quarter of 1999.
Provision for Income Taxes
The provision for income taxes for the three months ended September
30, 1999 was $1.5 million, an increase of $393,000 from $1.1 million for
the three months ended September 30, 1998. The provision for income taxes,
based on management's estimates of the effective year-end rate, was
recorded at an effective rate of 42.6% for the three months ended
September 30, 1998 and 1999.
Net Income
Net income for the three months ended September 30, 1999 was $2.0
million, an increase of $548,000, or 36.7%, from $1.5 million for the
three months ended September 30, 1998. Net income represented 9.4% of
revenues in the third quarter of 1999 compared to 8.8% in the third
quarter of 1998.
Fiscal Nine Months Ended September 30, 1999 Compared to Fiscal Nine Months
Ended September 30, 1998
Revenues
Revenues for the nine months ended September 30, 1999 was $54.8
million, an increase of $9.0 million, or 19.7%, from $45.8 million for the
nine months ended September 30, 1998.
Communications revenues for the nine months ended September 30, 1999
increased to $28.6 million, an increase of $7.8 million, or 37.7%, from
$20.8 million for the same period in the prior year. Of such increase,
approximately $7.3 million was attributable to the additional revenues
derived as a result of the Healthworld Acquisitions, while the remaining
increase was attributable to the growth of advertising and promotion
services in the U.S.
Contract sales revenues increased to $26.2 million, an increase of
$1.2 million, or 4.8%, from $25.0 million for the same period in the prior
year. This increase was attributable to (i) an increase in U.S. contract
sales revenues from primarily new clients of $1.7 million, (ii) an
increase in U.K. consumer contract sales of $1.1 million, offset by a
decrease in U.K. medical contract sales revenues of approximately $1.6
million resulting from the discontinuation of the U.K. syndicated, medical
contract sales business.
15
Salaries and Related Costs
Salaries and related costs for the nine months ended September 30,
1999 was $40.0 million, an increase of $5.2 million, or 15.0%, from $34.7
million for the nine months ended September 30, 1998. Salaries and related
costs includes all compensation and related benefits for all employees and
contracted talent. Such increase was primarily attributable to (i)
approximately $4.2 million of salaries and related costs associated with
the compensation expense generated by the inclusion of the Healthworld
Acquisitions, (ii) approximately $665,000 relating to additional staffing
costs to support the growth in communications services, and (iii) $330,000
to support the growth in contract sales services. Salaries and related
costs represented 72.9% of revenues for the first nine months of 1999,
compared to 75.9% for the first nine months of 1998. Such decrease, as a
percentage of revenues, was primarily attributable to the growth of the
Company's communications operations as a percentage of total revenues.
Generally, labor costs associated with the Company's communications
operations are less as a percentage of corresponding revenues than those
for the contract sales services.
General and Office Expenses
General and office expenses for the nine months ended September 30,
1999 was $7.4 million, an increase of $1.7 million, or 29.7%, from $5.7
million for the nine months ended September 30, 1998. General and office
expenses include occupancy and related costs, client development and other
related administrative costs. Such increase was primarily attributable to
$1.2 million of expenses related to the inclusion of the Healthworld
Acquisitions and increased occupancy and related costs and business
development costs commensurate with the growth in business activity.
General and office expenses represented 13.5% of revenues for the first
nine months of 1999, compared to 12.5% of revenues for the first nine
months of 1998.
Depreciation and Amortization
Depreciation and amortization expense for the nine months ended
September 30, 1999 was $1.2 million, an increase of $478,000, or 62.2%,
from $769,000 for the nine months ended September 30, 1998. The increase
was related to (i) amortization expense associated with the goodwill
generated in connection with the Healthworld Acquisitions, which
acquisitions were accounted for by the purchase method of accounting, and
(ii) additional depreciation expense attributable to property and
equipment acquired in connection with such acquisitions. Depreciation and
amortization expense represented 2.3% of revenues for the first nine
months of 1999, compared to 1.7% for the first nine months of 1998.
Income From Operations
Income from operations for the nine months ended September 30, 1999
was $6.2 million, an increase of $1.6 million, or 35.7%, from $4.6 million
for the nine months ended September 30, 1998. Income from operations
represented 11.3% of revenues for the first nine months of 1999, compared
to 10.0% for the first nine months of 1998.
16
Interest Income, net
Interest income, net for the nine months ended September 30, 1999
was $452,000, a decrease of $99,000 from $551,000 for the nine months
ended September 30, 1998, primarily due to lower interest rates received
on cash balances and the lower cash and cash equivalents balances
throughout the nine months ended September 30, 1999.
Provision for Income Taxes
The provision for income taxes for the nine months ended September
30, 1999 was $2.9 million; an increase of $719,000 from $2.2 million for
the nine months ended September 30, 1998. The provision for income taxes,
based on management's estimates of the effective year-end rate, was
recorded at effective rates of 42.1% and 43.2% for the nine months ended
September 30, 1998 and 1999, respectively. The increase in the estimated
effective rate reflects nondeductible amortization expense in connection
with the acquisitions.
Net Income
Net income for the nine months ended September 30, 1999 was $3.8
million, an increase of $827,000, or 28.2%, from $2.9 million for the nine
months ended September 30, 1998. Net income represented 6.9% of revenues
for the nine months ended September 30, 1999 compared to 6.4% for the nine
months ended September 30, 1998.
Liquidity and Capital Resources
During the first nine months of 1999, cash provided by operations
was approximately $9.4 million, which consisted of net income for the
period of $3.8 million, non-cash charges of $1.3 million, an increase in
advance billings of $10.1 million and an aggregate increase of accounts
payable and accrued expenses of $1.8 million. This was partially offset by
an increase in accounts receivable of approximately $8.0 million. Cash
used in investing activities was $8.8 million and was primarily
attributable to the initial cash payment for Falk, net of cash received of
$8.0 million, and capital expenditures of $1.0 million offset by proceeds
from the sale of fixed assets of $193,000. Cash used in financing
activities was $189,000, and primarily resulted from $345,000 for
repayments of bank loans and capital leases offset by cash provided by
stock option exercises of $156,000.
The decrease in working capital at September 30, 1999 as compared to
December 31, 1998 was primarily attributable to the cash payments in
connection with the Falk acquisition, partially offset by net income from
operations for the nine months.
The Company maintains relationships with one bank in the United
States and a number of banks in Europe which have extended various secured
and unsecured, committed and uncommitted lines of credit in amounts
sufficient to meet the Company's
17
cash needs. In July 1999, Girgenti, Hughes, Butler and McDowell, Inc., a
wholly-owned subsidiary of the Company, with operations in the U.S.,
entered into a $5.0 million uncommitted line of credit with a bank of
which no amounts are outstanding to date. Amounts outstanding under the
line of credit accrue interest at the bank's prime rate or at LIBOR plus
1.75%. The line of credit is guaranteed by the other entities comprising
the Company's U.S. operations, including Healthworld Corporation, and is
secured by a security interest in all of the personal property owned by
certain of the entities comprising the Company's U.S. operations. The line
expires in September 2000. The Company is also a party to various secured
and unsecured, committed lines of credit and overdraft facilities outside
of the United States in an aggregate amount of approximately $2.8 million.
The Company has no amounts outstanding to date under such facilities
outside of the United States.
In July 1998, the Company acquired the HFT Group Companies. The
Company's initial cash purchase price was 20.3 million French Francs
(approximately US$3.4 million), including expenses related to the
acquisition. Total amounts to be paid in connection with the acquisition,
including potential, future 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 48.0 million French Francs (approximately US$8.1
million).
In July 1998, the Company acquired all of the capital stock of
Colwood, a United Kingdom medical education company. The Company's initial
cash purchase price 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, future 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, future earn-out payments to be made in
April 2000 and August 2001, and may be required to deposit into such
escrow account additional amounts based on net operating profits to be
applied towards such potential, 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 Spain, a healthcare communications agency located in Madrid, Spain.
The Company's initial cash purchase price was approximately 261 million
Spanish Pesetas (approximately US$1.9 million) including expenses related
to the acquisition. Total amounts to be paid in connection with the
acquisition, including potential, future 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 710 million
Spanish Pesetas (approximately US$5.1 million).
18
In August 1999, the Company acquired 100% of the capital stock of
Falk, a healthcare communications agency located in New York City. The
Company's initial purchase price, including expenses related to the
acquisition, was approximately $17.0 million, consisting of approximately
$9.0 million in cash and 649,111 shares of the Company's Common Stock.
Total amounts to be paid in cash and the Company's Common Stock in
connection with the acquisition, including potential, future earn-out
payments to take place on or prior to April 30, 2000, 2001, 2002 and 2003
based upon a multiple of operating income of Falk, are not expected to
exceed $37.8 million. However, because the amount of Common Stock to be
paid in connection with additional earn-out payments is based upon a
moving average price of the Common Stock during a 20 day period ending 3
days before the date payment is made, while such Common Stock paid in
connection with the earn-outs will be valued for accounting purposes based
upon its market price on the date of issuance, it is possible that as a
result of market fluctuations in the price of the Common Stock the value
of the aggregate consideration paid to the Falk Shareholders in connection
with the merger could exceed $37.8 million.
Management believes that cash generated from the Company's
operations and available to the Company under various lines of credit are
adequate to support its short-term cash requirements for capital
expenditures, earn-outs and maintenance of working capital.
19
Impact of Year 2000
The Year 2000 issue results from the inability of some computer
programs to identify the year 2000 properly, potentially leading to errors
or system failure. A company's business may be adversely affected if it,
or any of its suppliers, customers or other third parties with whom it
transacts business (including banks and governmental agencies) have not
resolved the Year 2000 issue in a timely manner.
The Company's internal computing systems are primarily limited to
hardware and software for its financial systems, such as general ledger,
accounts receivable and accounts payable systems, and word processing,
database and graphic design systems. The Company is not dependent on large
legacy systems, and the Company believes that it could replace any of its
software or systems, if necessary, quickly and at reasonable expense.
The Company has completed its internal review with respect to Year
2000 issues. The Company does not believe Year 2000 issues, within its
internal information systems, will have a material adverse effect on the
Company's business, financial condition or results of operations. The
Company believes that its internal computer systems used in its U.S.
Operations, Spain and France are currently Year 2000 compliant, and that
those used in its United Kingdom operations, to the extent not already
Year 2000 compliant, will be made Year 2000 compliant by year end.
The Company has completed its review of the Year 2000 readiness of
its material clients and vendors in the United States and France and
believes, based solely upon inquiries made to such clients and vendors,
that such parties should not cause a material disruption in the Company's
business due to Year 2000 issues. The Company is currently working with
critical third parties in the United Kingdom and Spain to determine the
impact of Year 2000 issues on the various third party businesses and
operations in the United Kingdom and Spain and the collateral impact, if
any, on the business and operations of the Company and the plans to
address Year 2000 issues where third party systems interface with the
Company's systems.
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 1999. The Company is not aware,
at this time, of any Year 2000 non-compliance that will materially affect
the Company.
20
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 11, 1999, the Company filed with the Securities and
Exchange Commission a Current Report on Form 8-K, for which the Date of
Report was August 3, 1999, reporting the acquisition by the Company on
August 3, 1999 of Falk. On October 18, 1999, 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 Falk, a Balance Sheet, a
Statement of Income, a Statement of Shareholders' Equity and a Statement
of Cash Flows as of and for the years ended December 31, 1997 and 1998,
and, with respect to Healthworld Corporation, on an unaudited pro forma
combining basis, Balance Sheets as of June 30, 1999 and Statements of
Income for the six months ended June 30, 1999 and for the year ended
December 31, 1998.
21
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 15, 1999 By: /s/ STEVEN GIRGENTI
----------------------------------
Steven Girgenti
Chairman of the Board and
Chief Executive Officer
Date: November 15, 1999 By: /s/ STUART DIAMOND
----------------------------------
Stuart Diamond
Executive Vice President,
Chief Financial Officer, Treasurer
and Secretary
22
EXHIBIT INDEX
Number Description of Exhibits
- ------ -----------------------
2.01 -- Agreement and Plan of Merger among Cordiant Communications Group
plc ("CCG"), Healthworld Acquisition Corp. ("HAC") and Healthworld
Corporation, dated November 9, 1999.
20.01 -- Healthworld Corporation Press Release, dated November 9, 1999.
27.01 -- Financial Data Schedule.
99.01 -- Stockholder Agreement between CCG, HAC and Steven Girgenti, dated
November 9, 1999.
99.02 -- Stockholder Agreement between CCG, HAC and Steven Girgenti
Grantor Retained Annuity Trust, dated November 9, 1999.
99.03 -- Stockholder Agreement between CCG, HAC and The Girgenti Family
Limited Partnership, dated November 9, 1999.
99.04 -- Stockholder Agreement between CCG, HAC and The Steve Girgenti
Charitable Lead Annuity Trust, dated November 9, 1999.
99.05 -- Stockholder Agreement between CCG, HAC and William Leslie Milton,
dated November 9, 1999.
99.06 -- Stockholder Agreement between CCG, HAC and William Butler, dated
November 9, 1999.
99.07 -- Stockholder Agreement between CCG, HAC and Herbert Ehrenthal,
dated November 9, 1999.
99.08 -- Stockholder Agreement between CCG, HAC and Michael Garnham, dated
November 9, 1999.
99.09 -- Stockholder Agreement between CCG, HAC and The Spencer Falk
Grantor Retained Annuity Trust u/t/a/d March 5, 1999, dated November
9, 1999.
99.10 -- Stockholder Agreement between CCG, HAC and Spencer Falk, dated
November 9, 1999.
99.11 -- Stockholder Agreement between CCG, HAC and Francis Hughes, dated
November 9, 1999.
23