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FILE NO. 333-04349
RULE 424(b)(4)
PROSPECTUS
10,620,000 Shares
LOGO
Common Stock
(par value $.01 per share)
Of the 10,620,000 shares of Common Stock offered hereby, 10,286,000 shares are
being sold by TeleSpectrum Worldwide Inc., a Delaware corporation (the
"Company"), and 334,000 shares are being sold by the Selling Stockholder. See
"Principal and Selling Stockholders." Following the Offering, the Company's
officers, directors and five-percent stockholders will own approximately 56.4%
of the outstanding shares of Common Stock. The Company will not receive any of
the proceeds from the sale of Common Stock by the Selling Stockholder. Of the
net proceeds from the sale of Common Stock by the Company, an aggregate of
approximately $108.9 million will benefit certain persons who are to become
officers, directors or five-percent stockholders of the Company upon the
consummation of the Offering.
Prior to the Offering, there has been no public market for the Common Stock of
the Company. See "Underwriting" for information relating to the factors
considered in determining the initial public offering price.
The Company's Common Stock has been approved for quotation and trading on The
Nasdaq National Market under the symbol "TLSP."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" COMMENCING ON PAGE 9 FOR CERTAIN INFORMATION THAT SHOULD BE CONSIDERED
BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
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<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDER
- -------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share $15.00 $1.05 $13.95 $13.95
- -------------------------------------------------------------
Total(3) $159,300,000 $11,151,000 $143,489,700 $4,659,300
- -------------------------------------------------------------
</TABLE>
(1) The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company, estimated
at $2,600,000.
(3) The Company has granted the Underwriters an option to purchase up to an
additional 1,593,000 shares of Common Stock, on the same terms as set forth
above, solely to cover over-allotments, if any. If such option is exercised in
full, the total Price to Public, Underwriting Discount and Proceeds to Company
will be $183,195,000, $12,823,650 and $165,712,050, respectively. See
"Underwriting."
The shares of Common Stock being offered by this Prospectus are offered by the
Underwriters, subject to prior sale, when, as and if delivered to and accepted
by the Underwriters, and subject to approval of certain legal matters by
Pepper, Hamilton & Scheetz, counsel for the Underwriters. It is expected that
delivery of the shares of Common Stock will be made against payment therefor on
or about August 13, 1996 at the offices of J.P. Morgan Securities Inc., 60 Wall
Street, New York, New York.
J.P. MORGAN & CO.
DILLON, READ & CO. INC.
LEGG MASON WOOD WALKER
INCORPORATED
THE ROBINSON-HUMPHREY COMPANY, INC.
August 8, 1996
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The inside front cover art depicts the TeleSpectrum Worldwide Inc. logo
and includes photographs of call center representatives, a direct mail
production line, the planet Earth, an integrated circuit and a satellite disk.
The inside cover art also includes the following text:
Telespectrum Worldwide Inc.
Single Source Solution
Outbound Telesales
Inbound Customer Service & Care
Telespectrum Worldwide Inc.
. 23 Call Centers in 7 States
. More than 4000 Associates
. More than 600 Licensed Insurance Agents
. More than 1,700 Computerized Workstations
. Capacity for 300 million calls per year
. 24 hours-a-day inbound call operations
Research Services
Direct Mail & Fulfillment
Database Management
Consulting Services
Complete Call Center Management
<PAGE>
No person has been authorized to give any information or to make any
representations not contained in this Prospectus and, if given or made, such
information or representations must not be relied upon as having been
authorized by the Company or any Underwriters. This Prospectus does not
constitute an offer to sell, or a solicitation of an offer to buy, the Common
Stock in any jurisdiction to any person to whom it is unlawful to make such
offer or solicitation.
No action has been or will be taken in any jurisdiction by the Company, the
Selling Stockholder or any Underwriter that would permit a public offering of
the Common Stock or possession or distribution of this Prospectus in any
jurisdiction where action for that purpose is required, other than in the
United States. Persons into whose possession this Prospectus comes are required
by the Company and the Underwriters to inform themselves about and to observe
any restrictions as to the offering of the Common Stock and the distribution of
this Prospectus.
TABLE OF CONTENTS
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Page
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Prospectus Summary.................. 4
Risk Factors........................ 9
Use of Proceeds..................... 17
Dividend Policy..................... 18
Capitalization...................... 19
Dilution............................ 20
Selected Pro Forma Combined
Financial Data..................... 21
Management's Discussion and Analysis
of Pro Forma Financial Condition
and Pro Forma Results of
Operations......................... 23
Selected Financial Data of
TeleSpectrum Worldwide and the
Operating Businesses............... 25
</TABLE>
<TABLE>
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Page
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Management's Discussion and
Analysis of Financial Condition
and
Results of Operations ............ 28
Business........................... 45
Management......................... 54
Certain Relationships and Related
Party Transactions................ 62
Principal and Selling Stockhold-
ers............................... 69
Description of Capital Stock....... 72
Shares Eligible for Future Sale.... 74
Underwriting....................... 75
Legal Matters...................... 76
Experts............................ 76
Additional Information............. 77
Index to Financial Statements...... F-1
</TABLE>
UNTIL SEPTEMBER 2, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
The Company intends to furnish to its stockholders annual reports containing
consolidated financial statements audited by its independent public accountants
and quarterly reports containing unaudited consolidated financial statements
for each of the first three quarters of each fiscal year.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
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PROSPECTUS SUMMARY
Simultaneously with the closing of the offering made by this Prospectus (the
"Offering"), TeleSpectrum Worldwide Inc. will acquire, in separate transactions
(the "Acquisitions"), a number of telemarketing, market research and direct
mail and fulfillment businesses (collectively, the "Operating Businesses") for
an aggregate consideration of $160.8 million, which consists of: (i) $90.9
million in cash to be paid to the Sellers of the Operating Businesses described
in this Prospectus upon the consummation of the Offering; (ii) forgiveness of a
$0.5 million promissory note from one of the Operating Businesses; (iii) the
$44.7 million estimated fair value of 4,403,863 shares of Common Stock to be
issued to the Sellers; (iv) the $2.1 million estimated fair value of warrants
to purchase 593,400 shares of Common Stock at the initial public offering price
of $15.00 per share to be issued in connection with the Acquisitions; (v) the
$18.7 million deemed value for accounting purposes of the CRW Lender Warrants
and CRW Management Warrants as discussed in this Prospectus to purchase
2,272,562 shares of Common Stock currently owned by CRW Financial, Inc. ("CRW
Financial") at $1.50 per share; and (vi) estimated transaction costs of $3.9
million. The estimated purchase price for the Acquisitions is subject to
certain purchase price adjustments at closing and earn-out arrangements. See
"Certain Relationships and Related Party Transactions--The Acquisitions" and
"--CRW Transactions." Unless otherwise indicated, all references herein to the
"Company" include the Operating Businesses after the effectiveness of the
Acquisitions, and references herein to "TeleSpectrum Worldwide" shall mean
TeleSpectrum Worldwide Inc. prior to the effectiveness of the Acquisitions.
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and the financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. Unless
otherwise indicated, all share, per share and financial information set forth
herein: (i) has been adjusted to give effect to the Acquisitions and a
8.510137-for-1 stock split effected through a stock dividend in May 1996; and
(ii) assumes no exercise of the Underwriters' over-allotment option. In
addition, all references to years, unless otherwise noted, refer to the
Company's fiscal year, which ends on December 31.
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this
Prospectus.
THE COMPANY
TeleSpectrum Worldwide was founded in April 1996 to create a premier provider
of integrated teleservices solutions. With the capabilities of the Operating
Businesses, the Company can offer its clients complete direct marketing
solutions that build upon a foundation of outbound and inbound telemarketing
and include inbound customer service, market research, direct mail and
fulfillment and other direct marketing services. The Company operates over
1,700 "workstations" (each of which consists of a telephone- and computer-
equipped work area designed to accommodate one employee) in 23 call centers
located primarily in the eastern United States, and currently has the capacity
to handle over 300 million calls per year. The Company focuses on providing
teleservices to major clients in the telecommunications, insurance, financial
services, pharmaceuticals and healthcare, consumer products and high technology
industries. The Company's pro forma revenues were $88.0 million for 1995 (of
which the Company estimates that approximately 60% was derived from outbound
telemarketing) and $57.7 million for the six months ended June 30, 1996, and
its pro forma net income was $2.6 million for 1995 and $2.5 million for the six
months ended June 30, 1996.
The teleservices industry facilitates the direct communication of marketing
information to and from current and prospective customers by telephone. Direct
marketing methods, such as telemarketing and direct mail, employ a "one-to-one"
approach to deliver a marketing message directly to a specific current or
prospective customer and to elicit immediate customer response. As businesses
seek greater returns from their investments in marketing
4
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activities, they are increasingly coupling traditional indirect marketing
methods such as advertising with direct marketing methods such as
telemarketing. Advances in computer and telecommunications technology are
helping telemarketers to more accurately identify and contact prospective
customers, and are providing call center representatives ("CCRs") with more
complete on-line guidance and support. Improvements in the scale and speed of
computer and telecommunications networking capabilities allow teleservices
providers to implement larger and more complex programs for their clients. As
the trend toward outsourcing continues, the Company believes, based upon
management's experience in the teleservices industry and in other industries
which provide or use outsourced services, that businesses will increasingly
seek to reduce the number of vendors they utilize, and may prefer single-source
providers of integrated solutions drawing upon a variety of related
teleservices capabilities. Moreover, the Company believes that further
opportunities may emerge for an integrated teleservices provider that can
assemble and offer other value-added teleservices, such as inbound customer
service, market research, direct mail and fulfillment, training, consulting,
call center management and electronic order processing. See "Business--Industry
Overview" and "--Competition."
The Company's goal is to become the premier provider of integrated teleservices
solutions. To attain this goal, the Company intends to provide a single source
for complete, integrated solutions to its clients' direct marketing and
customer service needs, establish long-term relationships with major clients,
add new clients in its targeted industries and pursue strategic acquisitions
that will enable the Company to broaden its market reach. See "Business--
Strategy" and "--Sales, Marketing and Clients."
The Company is being formed by the Acquisitions of substantially all of the
assets of the following Operating Businesses from the entities described below
and their affiliates (the "Sellers"):
The SOMAR Business ("SOMAR")--Headquartered in Salisbury, North Carolina,
SOMAR, Inc. operates 712 workstations in seven call centers located in North
Carolina and West Virginia. SOMAR currently focuses on outbound services and
has a diverse portfolio of clients in the insurance, financial services,
telecommunications and retail industries.
The NBG Business ("NBG")--Headquartered in Cambridge, Massachusetts, NBG
Services, Inc. operates 314 workstations in seven call centers located in
Massachusetts and Arizona. NBG provides outbound telemarketing services to
clients in the high technology, financial services and telecommunications
industries. NBG also provides market research, database development and account
management services.
The Harris Businesses ("Harris")--Harris Direct Marketing, Inc. ("HDM"),
headquartered in Philadelphia, Pennsylvania, and Harris Fulfillment, Inc.
("HFI"), headquartered in King of Prussia, Pennsylvania, comprise a regional
vertically-integrated direct mail and fulfillment organization. Harris provides
its services primarily to companies in the pharmaceuticals and healthcare,
financial services and insurance industries. In addition, Harris operates an
automated inbound call center to provide fulfillment services to a client in
the pharmaceuticals and healthcare industry.
The Reich Business ("Reich")--Headquartered in Philadelphia, Pennsylvania, The
Reich Group, Inc. and its affiliates comprise a fully-integrated direct
marketing company with expertise in strategic planning, marketing,
telemarketing and database development services. Reich, which operates 320
workstations in three call centers, specializes in providing services to
companies in the financial services, telecommunications and insurance
industries.
The TeleSpectrum Business ("TeleSpectrum")--Headquartered in Annapolis,
Maryland, TeleSpectrum, Inc. provides inbound and outbound telemarketing and
fulfillment services. TeleSpectrum operates 307 workstations in four call
centers and focuses on providing inbound customer services to companies in the
high technology, pharmaceuticals and healthcare and consumer products
industries. In addition, TeleSpectrum's affiliate provides call center
management outsourcing and telemarketing consulting and training services for
businesses.
5
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The Response Center Business ("The Response Center")--Headquartered in Upper
Darby, Pennsylvania, The Response Center, Inc. and its affiliate provide custom
market research, data tabulation, analysis and consulting, principally to
clients in the telecommunications, financial services, utilities and
pharmaceuticals and healthcare industries. The Response Center operates 130
workstations in one call center.
The Company maintains its principal executive offices at 443 South Gulph Road,
King of Prussia, Pennsylvania 19406, and has facilities in Arizona, California,
Delaware, Maryland, Massachusetts, North Carolina, Pennsylvania and West
Virginia. The telephone number of its principal executive offices is (610)-962-
5140. See "Business--TeleSpectrum Worldwide Facilities."
THE OFFERING
COMMON STOCK OFFERED:
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<S> <C>
By the Company....................... 10,286,000 shares
By the Selling Stockholder........... 334,000 shares
TOTAL OFFERING(1) ..................... 10,620,000 shares
COMMON STOCK OUTSTANDING AFTER THE
OFFERING(2)(3)........................ 23,200,000 shares
USE OF PROCEEDS BY THE COMPANY......... To pay the cash portion of the
purchase price for the Operating
Businesses, to repay indebtedness
assumed in connection with the
Acquisitions, to make certain capital
expenditures and to fund general
corporate purposes, including working
capital and possible acquisitions. See
"Use of Proceeds."
DIVIDEND POLICY........................ The Company intends to retain its
earnings to fund development of its
business and does not anticipate
paying cash dividends in the
foreseeable future. See "Dividend
Policy."
RISK FACTORS........................... For a discussion of certain
considerations relevant to an
investment in the Common Stock, see
"Risk Factors."
NASDAQ NATIONAL MARKET SYMBOL.......... "TLSP"
</TABLE>
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(1)Assumes that the Underwriters' over-allotment option for up to 1,593,000
shares of Common Stock is not exercised. See "Underwriting."
(2)Includes 4,403,863 shares of Common Stock to be issued in connection with
the closing of the Acquisitions. Excludes additional shares of Common Stock
which may be issued to three of the Sellers pursuant to earn-out arrangements.
See "Certain Relationships and Related Party Transactions--The Acquisitions."
(3)Excludes 1,436,100 shares of Common Stock issuable upon the exercise of
options to be granted on the date of this Prospectus under the TeleSpectrum
Worldwide Inc. 1996 Equity Compensation Plan (the "1996 Stock Incentive Plan")
and 593,400 shares of Common Stock issuable upon the exercise of warrants to be
granted on the date of this Prospectus. All of such options and warrants have a
per share exercise price equal to the initial public offering price. Also
excludes 400,000 shares that would be issuable upon the exercise of options
that the Company is to grant, pursuant to employment agreements with two of its
executive officers, ratably over the course of the next four years. As of the
date of this Prospectus, 863,900 additional shares are reserved for future
issuance under the 1996 Stock Incentive Plan (463,900 shares, if all of the
options to be granted to two of its executive officers over the next four years
were to be granted). See "Certain Relationships and Related Party
Transactions--The Acquisitions" and "Management--Employment Agreements" and "--
1996 Stock Incentive Plan."
6
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SUMMARY PRO FORMA COMBINED FINANCIAL DATA
TeleSpectrum Worldwide will acquire, simultaneously with and as a condition to
the consummation of the Offering, the Operating Businesses. These Acquisitions
will be recorded using the purchase method of accounting. The Summary Pro Forma
Combined Financial Data assume the consummation of the Acquisitions and the
consummation of the Offering. See "Certain Relationships and Related Party
Transactions--The Acquisitions," "Pro Forma Combined Financial Statements" and
"Notes to Pro Forma Combined Financial Statements."
--------------------------------
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<CAPTION>
PRO FORMA
YEAR ENDED
DECEMBER 31, SIX MONTHS ENDED JUNE 30,
1995 1995 1996
Dollars in thousands, except per share data ------------ ------------ ------------
<S> <C> <C> <C>
PRO FORMA STATEMENT OF INCOME DATA(1):
Revenues $87,954 $42,588 $57,706
Cost of services 59,597 27,337 39,317
Selling, general and administrative
expense(2) 17,525 8,657 10,956
Goodwill amortization(3) 5,860 2,930 2,930
------- ------------ ------------
Operating income 4,972 3,664 4,503
Interest income 158 28 103
Interest expense(4) (94) (34) (49)
------- ------------ ------------
Income before income taxes 5,036 3,658 4,557
Income taxes(5) 2,407 1,749 2,060
------- ------------ ------------
Net income $ 2,629 $ 1,909 $ 2,497
------- ------------ ------------
Net income per share(6) $ 0.12 $ 0.09 $ 0.12
======= ============ ============
</TABLE>
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<S> <C> <C> <C>
Shares used in computing pro forma net
income per share (6) 21,200,000 21,200,000 21,200,000
----------- ---------- ----------
</TABLE>
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----------
<CAPTION>
AT JUNE 30, 1996
PRO FORMA,
ACTUAL AS ADJUSTED(1)
Dollars in thousands ------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ -- $ 32,384
Working capital (deficit) (1,506) 45,819
Goodwill -- 146,505
Total assets 22,446 218,175
Long-term debt, less current maturities -- --
Stockholders' equity 20,440 208,310
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(1)Assumes that the closings of the Acquisitions and the Offering had occurred
as of January 1, 1995, in the case of the pro forma statement of income data,
and as of June 30, 1996, in the case of the pro forma balance sheet data. The
pro forma combined financial data are based upon preliminary estimates,
available information and certain assumptions that management deems
appropriate. The pro forma combined financial data presented herein are not
necessarily indicative of the results the Company would have obtained had such
events occurred at the beginning of the period or of the future results of the
Company. The pro forma combined financial data should be read in conjunction
with the other financial data and notes thereto included elsewhere in this
Prospectus. The aggregate consideration for the Acquisitions is $160.8 million,
which consists of: (i) $90.9 million of cash to be paid to the Sellers upon the
consummation of the Offering; (ii) forgiveness of a $0.5 million promissory
note from
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one of the Operating Businesses; (iii) the $44.7 million estimated fair value
of 4,403,863 shares of Common Stock to be issued to the Sellers; (iv) the $2.1
million estimated fair value of warrants to purchase 593,400 shares of Common
Stock at the initial public offering price to be issued in connection with the
Acquisitions; (v) the $18.7 million deemed value for accounting purposes of the
CRW Lender Warrants and CRW Management Warrants as discussed in this Prospectus
to purchase 2,272,562 shares of Common Stock currently owned by CRW Financial
at $1.50 per share; and (vi) estimated transaction costs of $3.9 million. The
estimated purchase price for the Acquisitions is subject to certain purchase
price adjustments at closing and earn-out arrangements. See "Certain
Relationships and Related Party Transactions--The Acquisitions" and "--CRW
Transactions."
(2)Includes a pro forma adjustment to reflect compensation expense of the
officers of the Operating Businesses and officers of TeleSpectrum Worldwide
based upon employment agreements to be entered into not later than the closing
of the Acquisitions. Does not reflect costs (which will be significant) related
to other employees of TeleSpectrum Worldwide or corporate expenses related to
being a public company. See "Management's Discussion and Analysis of Pro Forma
Financial Condition and Pro Forma Results of Operations," "Management--
Executive Compensation" and "--Employment Agreements" and Note 2 of Notes to
Pro Forma Combined Financial Statements.
(3)Represents a pro forma adjustment to reflect the amortization expense on the
goodwill recorded in connection with the Acquisitions.
(4)Includes a pro forma adjustment to reflect the elimination of interest
expense resulting from the reduction of debt paid from the net proceeds of the
Offering.
(5)Includes a pro forma adjustment to calculate the provision for income taxes
on the pro forma combined results at effective tax rates of 47.8% and 45.2% in
1995 and 1996, respectively.
(6)Computed on a basis described in Note 5 of Notes to Pro Forma Combined
Financial Statements.
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RISK FACTORS
In addition to the other information in this Prospectus, the following factors
should be considered carefully by prospective investors in evaluating the
Company and its business before purchasing shares of Common Stock offered
hereby.
ABSENCE OF COMBINED OPERATING HISTORY
TeleSpectrum Worldwide was founded in April 1996 and has conducted no
operations to date. TeleSpectrum Worldwide has entered into agreements to
acquire the Operating Businesses simultaneously with the consummation of the
sale of the shares of Common Stock offered hereby. The Operating Businesses
have been operating independently and the Company may not be able to
successfully integrate these businesses and their disparate operations,
employees and management. In connection with the Acquisitions, three of the
Sellers and certain of the executives of the Operating Businesses may receive
earn-outs and bonuses based upon the performance of that Operating Business,
and certain of the Acquisition agreements require the Company to maintain the
separate existence of certain of the Operating Businesses pending completion of
earn-out arrangements. Such provisions may delay the integration by the Company
of the Operating Businesses and therefore may adversely impact the Company's
business, financial condition and results of operations. The Company's
management group has been assembled only recently and the management control
structure is still in its formative stages. Management may not be able to
oversee the combined entity and implement effectively the Company's operating
strategies. See "Certain Relationships and Related Party Transactions--The
Acquisitions," "Business--The Operating Businesses" and "Management."
POTENTIAL INABILITY TO MANAGE GROWTH
The Operating Businesses, particularly those engaged primarily in
telemarketing, have expanded significantly in the past several years and this
expansion will place demands on the Company's administrative, operational and
financial resources. Any continued growth of the Company's client base and its
services could place an additional strain on the capacity, management and
operations of the Company and the Operating Businesses. The Company's future
performance and profitability will depend in part on its ability to
successfully implement improved financial and management systems, to add
capacity as and when needed and to hire qualified personnel to respond to
changes in its business. The failure to implement such systems, add any such
capacity or hire such qualified personnel may have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
RELIANCE ON MAJOR CLIENTS AND KEY INDUSTRIES
It is anticipated that a significant portion of the Company's revenues will be
derived from relatively few clients. The Company's ten largest clients in 1995
accounted for approximately 56.4% of the Company's 1995 pro forma revenues, and
one client--Mass Marketing Insurance Group--accounted for approximately 11.9%
of the Company's 1995 pro forma revenues. In addition, each of the Company's
Operating Businesses is substantially dependent on one or a limited number of
clients. Certain of the clients of the Operating Businesses, including certain
material clients of individual Operating Businesses, compete with one another.
When providing services to clients that compete with one another, the Company's
policy is to abide by procedures with respect to the maintenance of
confidentiality or other safeguards that may be requested by either client,
which may include performing services in facilities and with staff that are
separate from those used in performing services for competitors.
Notwithstanding these procedures, competing clients may realign their
outsourcing needs after the Acquisitions so as to avoid potential or perceived
conflicts. The Company's contracts with its clients can generally be canceled
by the client upon relatively short notice. Moreover, the Company does not
believe that it is the sole or primary source for any of the services rendered
to those clients which utilize a number of other teleservices organizations.
The loss of one or more of its major clients could have a material adverse
effect on the Company's business, results of operations and financial
condition. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Overview" and "Business--Sales, Marketing and Clients."
In addition, the Company's future prospects are dependent in large part upon
continued demand from the industries primarily served by the Company. A
significant downturn in the demand for teleservices generally, and particularly
from clients in the insurance, financial services, pharmaceuticals and
healthcare, telecommunications,
9
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consumer products or high technology industries, could have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Business."
RISKS GENERALLY ASSOCIATED WITH ACQUISITIONS
An element of the Company's strategy is to pursue strategic acquisitions that
either expand or complement the Company's business. The Company may not be able
to identify additional attractive acquisition candidates on terms favorable to
the Company or in a timely manner. Acquisitions involve a number of special
risks, including the diversion of management's attention to the assimilation of
the operations and personnel of the acquired companies, adverse short-term
effects on the Company's operating results and the potential inability to
integrate financial and management reporting systems. A significant portion of
the Company's capital resources, including any remaining balance of the net
proceeds of this Offering, could be used for these acquisitions. The Company
may require additional debt or equity financing for future acquisitions, which
may not be available on terms favorable to the Company, if at all. Moreover,
the Company may not be able to successfully integrate any acquired business
into the Company's business or to operate any acquired business profitably. See
"Business--Strategy--Pursue Strategic Acquisitions" and "Use of Proceeds."
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Operating Businesses have in the past experienced, and the Company could in
the future experience, quarterly variations in revenues, operating income and
cash flow as a result of many factors, including the timing and magnitude of
clients' marketing campaigns and customer service programs, the opening of new
call centers, the loss of a major client, weather-related interruptions,
additional selling, general and administrative expenses to acquire and support
new business, the timing and magnitude of required capital expenditures and
changes in the revenue mix among the Company's various service offerings or in
the relative contribution of the several Operating Businesses. In connection
with certain contracts, the Company could incur costs in periods prior to
recognizing revenues under those contracts. In addition, the Company must plan
its operating expenditures based on revenue forecasts, and a revenue shortfall
below such forecasts in any quarter would likely adversely affect the Company's
operating results for that quarter. See "Management's Discussion and Analysis
of Pro Forma Financial Condition and Pro Forma Results of Operations."
POSSIBLE DECLINE IN EFFECTIVENESS OF TELEMARKETING
The Company derives its revenues primarily from telemarketing activities.
Although the telemarketing industry has grown significantly in the last ten
years, advances in new forms of direct marketing, such as the development of
interactive commerce through television, computer networks (including the
Internet) and other media, could have an adverse effect on the demand for
teleservices as a form of direct marketing. As the industry continues to grow,
telemarketing's effectiveness as a direct marketing tool may also decrease as a
result of consumer saturation and consumer resistance to telemarketing
generally. Although the Company attempts to monitor industry trends and respond
accordingly, the Company may not be able to anticipate and successfully respond
to such trends in a timely manner.
RELIANCE ON KEY PERSONNEL
The Company's operations are dependent upon the efforts of the senior
management of the Operating Businesses, as well as J. Brian O'Neill, Chairman
of the Board and Chief Executive Officer, Michael C. Boyd, President and Chief
Operating Officer, Richard C. Schwenk, Jr., Senior Vice President and Chief
Financial Officer, and William F. Rhatigan, who is to be President of the
Company's Telemarketing Group following consummation of the Offering. Although
Mr. O'Neill intends to devote the majority of his time to the Company's
business, he is also Chairman of the Board and Chief Executive Officer of CRW
Financial, a principal stockholder of the Company, and is required to devote a
substantial amount of time to those duties. The Company will likely also be
dependent on the senior management of companies that may be acquired in the
future. If any of these executives become unable to continue in or devote
adequate time to their present roles, or if the Company is unable to attract
and retain other skilled management personnel, the Company's business, results
of operations and financial condition could be adversely affected. See
"Management." The Company does not maintain any policies of key person life
insurance on the lives of any of its senior management personnel.
10
<PAGE>
DEPENDENCE ON LABOR FORCE
Teleservices are labor-intensive and often characterized by high personnel
turnover. Unskilled and semi-skilled employees typically work part-time and
receive relatively modest hourly wages; skilled or licensed employees commonly
work full-time and command higher wages. Some of the Company's telemarketing
activities, particularly insurance product sales and inbound customer service,
require highly-trained employees. A high turnover rate among the Company's
employees would increase the Company's recruiting and training costs, and if
the Company were unable to recruit and retain a sufficient number of employees,
it would be forced to limit its growth or possibly curtail its operations. In
certain markets, the Company competes for qualified personnel with other
teleservices providers, and periodically is required to pay premium hourly
wages to attract and retain personnel. The Company may be unable to continue to
hire and retain a sufficient number of qualified personnel, which would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Personnel and Training."
RELIANCE ON TECHNOLOGY
The Operating Businesses have invested significant resources in sophisticated
telecommunications and computer technology, including universal workstations,
predictive dialers, automated call distributors, digital switches and computer
systems. The Company anticipates that it will be necessary to continue
investing in technology. The Company may not be successful in anticipating
technological changes or in selecting and developing new and enhanced
technology on a timely basis. In addition, the temporary or permanent loss of
telecommunications, computer equipment or software, through casualty or
operating malfunction, could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--The
Operating Businesses."
The telecommunications and computer systems of the Operating Businesses contain
certain incompatible software and hardware systems. Accordingly, it may not be
feasible to integrate such systems and any attempt to do so may cause
disruptions which could delay or prevent the Company from realizing any
benefits that might be derived from integration, such as the elimination of
duplicate functions and the facilitation of capacity shifting. Such disruptions
could have a material adverse effect on the Company.
POSSIBLE ADVERSE IMPACT OF GOVERNMENT REGULATION
The telemarketing industry has become subject to an increasing amount of
federal and state regulation during the past five years. The federal Telephone
Consumer Protection Act of 1991 limits the hours during which telemarketers may
call consumers and prohibits the use of automated telephone dialing equipment
to call certain telephone numbers. The federal Telemarketing and Consumer Fraud
and Abuse Prevention Act of 1994 (the "TCFAPA") broadly authorizes the Federal
Trade Commission (the "FTC") to issue regulations prohibiting
misrepresentations in telemarketing sales. The FTC's new telemarketing sales
rules prohibit misrepresentations of the cost, terms, restrictions, performance
or duration of products or services offered by telephone solicitation, prohibit
a telemarketer from calling a consumer when that consumer has instructed the
telemarketer not to contact him or her, prohibit a telemarketer from calling
prior to 8:00 a.m. or after 9:00 p.m. and specifically address other perceived
telemarketing abuses in the offering of prizes and the sale of business
opportunities or investments. Violation of these rules may result in
injunctions, monetary penalties or disgorgement of profits and can give rise to
private actions for damages. While the FTC's new rules have not caused the
Operating Businesses to alter their operating procedures, additional federal or
state consumer-oriented legislation could limit the telemarketing activities of
the Company or its clients or significantly increase the Company's costs of
regulatory compliance.
Several of the industries served by the Company, particularly the insurance
industry, are subject to varying degrees of government regulation. Although
compliance with these regulations is generally the responsibility of the
Company's clients, the Company could be subject to a variety of enforcement or
private actions for its failure or the failure of its clients to comply with
such regulations. Employees of the Company who sell insurance products are
required to be licensed by various state insurance commissions and participate
in regular continuing education programs, many of which are currently provided
by the Company. This requires the Company to comply
11
<PAGE>
with the extensive regulations of these state commissions, and changes in these
regulations could materially increase the Company's operating costs. See
"Business--Government Regulation."
COMPETITION
The teleservices industry is extremely competitive and highly fragmented. The
Company competes with numerous independent direct marketing services firms,
some of which are larger than the Company, as well as the in-house
telemarketing, customer service, market research and direct mail and
fulfillment operations of many of its clients or potential clients. The
teleservices industry competes with other marketing tools, such as television,
radio, print and other advertising media, as well as electronic commerce media
such as the Internet. The Company's business, financial condition and results
of operations could be materially and adversely affected if additional
competitors with greater resources than the Company were to enter the industry,
or if the Company's clients were to choose to conduct more of their direct
marketing activities internally. See "Business--Competition."
POSSIBLE NEED FOR ADDITIONAL FINANCING
The Company currently estimates that the net proceeds of the Offering, together
with cash generated from operations, will be sufficient to finance its current
operations, potential obligations relating to the Acquisitions and planned
capital expenditure requirements at least through 1997. There can be no
assurance, however, that the Company will not be required to seek additional
capital at an earlier date. In particular, the maximum aggregate amount that
may ultimately be payable by the Company with respect to purchase price
adjustments or earn-out payments related to the Acquisitions cannot currently
be quantified. If such an amount substantially exceeds the Company's
expectations and the benefits to the Company from the operations of the
Operating Business which result in such payment obligations, the Company could
be required to seek additional financing. The Company may, from time to time,
seek additional funding through public or private financing, including equity
financing. There can be no assurance that adequate funding will be available as
needed or, if available, on terms acceptable to the Company. If additional
funds are raised by issuing equity securities, existing shareholders may
experience dilution. Insufficient funds may require the Company to scale back
or eliminate some or all of its teleservices offerings. See "Use of Proceeds"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
AMORTIZATION OF INTANGIBLE ASSETS
Approximately $146.5 million, or 67.2%, of the Company's pro forma total assets
as of June 30, 1996 consists of goodwill arising from the Acquisitions of the
Operating Businesses. Goodwill is an intangible asset that represents the
difference between the aggregate purchase price for the assets acquired and the
amount of such purchase price allocated to such assets for purposes of the
Company's pro forma balance sheet. Goodwill is amortized over a period of time,
with the amount amortized in a particular period constituting an expense that
would reduce the Company's net income in that period. A reduction in net income
resulting from the amortization of goodwill may have an adverse impact upon the
market price of the Company's Common Stock.
PORTIONS OF OFFERING PROCEEDS PAYABLE TO AFFILIATES
Approximately $90.9 million of the net proceeds to the Company from the sale of
the shares of Common Stock offered hereby will be used to pay the cash portion
of the purchase price for the Operating Businesses. Approximately $25.0
million, or 27.5%, of such amount will be paid to SOMAR, Inc., which will
become a greater than 5% stockholder of the Company following consummation of
the Acquisition of the SOMAR Operating Business. Richard W. Virtue, who is
named to become a director of the Company and will enter into a consulting
agreement with the Company upon consummation of the Offering (see "Certain
Relationships and Related Party Transactions--Consulting Agreement with Person
Named to Become Director"), is the Chairman and a principal stockholder of
SOMAR, Inc., and Gregory M. Alcorn, who is to become Chief Executive Officer of
the Company's SOMAR division, is the President and a stockholder of SOMAR,
Inc.; Messrs. Virtue and Alcorn will thus benefit indirectly from amounts to be
received by SOMAR, Inc. Approximately $14.1 million, or 15.5%, of the cash
12
<PAGE>
portion of the purchase price will be paid to NBG Services, Inc. William F.
Rhatigan, who is named to become a director of the Company and the President of
its Telemarketing Group, is the Chairman and a principal stockholder of NBG
Services, Inc., and Michael J. Gallant, who is to become President of the
Company's NBG division, is the President and a principal stockholder of NBG
Services, Inc.; Messrs. Rhatigan and Gallant will thus benefit indirectly from
amounts to be received by NBG Services, Inc. Approximately $12.2 million, or
13.4%, of the cash portion of the purchase price will be paid to HDM and HFI as
the Sellers of the Harris Operating Business. Edward M. Idzik, who is to become
President of the Company's Harris division, is the President and a principal
stockholder of both HDM and HFI, and thus will benefit indirectly from amounts
to be received by HDM and HFI. Approximately $20.0 million, or 22.0%, of the
cash portion of the purchase price will be paid to entities affiliated with The
Reich Group, Inc. as the Sellers of the Reich Operating Business. Morton M.
Reich, who is to become President of the Company's Reich division, is the
President and sole stockholder of the Sellers of the Reich Operating Business,
and thus will benefit indirectly from amounts to be received by such Sellers.
Approximately $8.0 million, or 8.8%, of the cash portion of the purchase price
will be paid to entities affiliated with TeleSpectrum, Inc. as the Sellers of
the TeleSpectrum Operating Business. Karen E. Schweitzer, who is to become
President of the Company's TeleSpectrum division, is the President and a
principal stockholder of the Sellers of the TeleSpectrum Operating Business and
thus will benefit indirectly from amounts to be received by such Sellers.
Approximately $11.6 million, or 12.8%, of the cash portion of the purchase
price will be paid to entities affiliated with The Response Center, Inc. as the
Sellers of The Response Center Operating Business. Patrick M. Baldasare, who is
to become President of the Company's The Response Center division, is the
President and a principal stockholder of the Sellers of The Response Center
Operating Business and thus will benefit indirectly from amounts to be received
by such Sellers. The foregoing affiliates, other than Mr. Virtue, will enter
into employment agreements with the Company upon consummation of the Offering.
See "Management--Employment Agreements."
Simultaneously with the consummation of the Acquisitions, the Company will
repay indebtedness of the Operating Businesses of approximately $17.0 million,
based upon indebtedness outstanding at June 30, 1996; Messrs. Virtue, Alcorn,
Rhatigan, Gallant, Idzik and Reich and Ms. Schweitzer, in their respective
capacities with the Sellers of the Operating Businesses, will benefit
indirectly from such repayments. The Company has entered into earn-out
arrangements with the Sellers of the SOMAR, NBG and Reich Operating Businesses,
pursuant to which the Sellers may receive payments based upon the performance
of the Operating Businesses. Messrs. Virtue, Rhatigan, Gallant and Reich, in
their respective capacities with the Sellers of the Operating Businesses, will
benefit indirectly from such payments. See "Certain Relationships and Related
Party Transactions--The Acquisitions."
The Company has agreed to pay certain fees and expenses of the Sellers of the
respective Operating Businesses incurred in connection with the Acquisitions;
the maximum amount of such fees and expenses cannot be determined in advance,
but is expected to be approximately $1.0 million. Messrs. Virtue, Alcorn,
Rhatigan, Gallant, Idzik, Reich and Baldasare and Ms. Schweitzer, in their
respective capacities with the Sellers of the Operating Businesses, will
benefit indirectly from such payments.
NBG Services, Inc. is the Selling Stockholder in the Offering. The net proceeds
to the Selling Stockholder are expected to be approximately $5.0 million.
Messrs. Rhatigan and Gallant, in their respective capacities with NBG Services,
Inc., will benefit indirectly from such net proceeds.
POTENTIAL INFLUENCE OF EXISTING STOCKHOLDERS
After the sale of shares of Common Stock offered hereby, the Company's
executive officers, directors and 5% stockholders will own beneficially an
aggregate of approximately 56.4% of the outstanding shares of Common Stock
(approximately 52.2% if the Underwriters' over-allotment option is exercised in
full). In particular, CRW Financial will own approximately 36.7% of the
outstanding shares of Common Stock (approximately 34.3% if the Underwriters'
over-allotment option is exercised in full). J. Brian O'Neill, Chairman of the
Board and Chief Executive Officer of the Company, is the Chairman of the Board
and Chief Executive Officer of CRW Financial.
13
<PAGE>
The Company's officers, directors and 5% stockholders if acting together would,
and CRW Financial may, be able to control the election of directors and matters
requiring the approval of stockholders of the Company. This concentration of
ownership by existing stockholders may also have the effect of delaying or
preventing a change in control of the Company. See "Principal and Selling
Stockholders."
POTENTIAL CONFLICTS OF INTEREST
The Company is subject to risks associated with potential conflicts of interest
that may arise out of the interrelationships among certain of its officers,
directors, significant stockholders and third parties. J. Brian O'Neill,
Chairman of the Board and Chief Executive Officer of the Company, is the
Chairman of the Board and Chief Executive Officer of CRW Financial. CRW
Financial is a principal stockholder of the Company. Mark J. DeNino, a director
of the Company, is a director of CRW Financial and a general partner of
Technology Leaders II Management L.P., which is the sole general partner of
Technology Leaders II L.P. Technology Leaders II L.P. is a principal
stockholder of CRW Financial. See "Principal and Selling Stockholders." William
F. Rhatigan, who will serve as President of the Company's Telemarketing Group
and is a person named to become a director of the Company upon consummation of
the Offering, and Michael J. Gallant, who will serve as President of the
Company's NBG division upon consummation of the Offering, together own all of
the common stock of the Seller of the NBG Operating Business. In connection
with the Acquisition of the NBG Operating Business, the Seller of the NBG
Operating Business may receive a payment from the Company based upon 1996
earnings of the NBG Operating Business. See "Certain Relationships and Related
Party Transactions--The Acquisitions--NBG." Richard W. Virtue, who will be
engaged as a consultant to the Company and who is a person named to become a
director of the Company upon consummation of the Offering, is a principal
stockholder of the Seller of the SOMAR Operating Business, and Gregory M.
Alcorn, who will serve as the President of the Company's SOMAR division upon
consummation of the Offering, is a minority stockholder of the Seller of the
SOMAR Operating Business. In connection with the Acquisition of the SOMAR
Operating Business, the Seller of the SOMAR Operating Business may receive
payments from the Company based upon 1996 and 1997 earnings of the SOMAR
Operating Business. See "Certain Relationships and Related Party Transactions--
The Acquisitions--SOMAR." Morton M. Reich, who will serve as the President of
the Company's Reich division upon consummation of the Offering, is the sole
stockholder of the Seller of the Reich Operating Business. In connection with
the Acquisition of the Reich Operating Business, the Seller of the Reich
Operating Business may receive payments from the Company based upon 1996
earnings of the Reich Operating Business. See "Certain Relationships and
Related Party Transaction--The Acquisitions--Reich." In addition to the
possible effect upon the Company's ability to integrate the Operating
Businesses described in "--Absence of Combined Operating History" above, the
interests of the foregoing persons in their capacities with the third parties
identified may come into conflict with the interests of such persons in their
respective capacities with the Company in ways that cannot currently be
foreseen.
DEPENDENCE ON TELEPHONE AND POSTAL SERVICE
The Company's business is materially dependent upon service provided by various
local and long distance telephone companies and the United States Postal
Service. Rate increases imposed by these organizations will increase the
Company's operating expenses and adversely affect its operating results to the
extent that the Company is unable to pass the increases through to its clients.
Any significant interruption or capacity limitation in either service would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business--Services Overview."
SHARES ELIGIBLE FOR FUTURE SALE
The 10,620,000 shares being sold in this Offering will be freely tradeable
unless acquired by affiliates of the Company; an aggregate of 12,580,000
unregistered shares of Common Stock will be outstanding immediately following
consummation of the Offering. The market price of the Common Stock could be
adversely affected by the sale of substantial amounts of Common Stock in the
public market following the Offering.
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<PAGE>
Simultaneously with the closing of this Offering, the Sellers will receive, in
the aggregate, 4,403,863 shares of Common Stock as a portion of the
consideration for their businesses; except for the 334,000 shares of Common
Stock to be sold by the Selling Stockholder, these shares are not being offered
by this Prospectus. The Company, each of its directors and officers, the holders
of all of the shares of Common Stock and options or warrants to purchase shares
of Common Stock that are or will be outstanding prior to the consummation of the
Acquisitions, certain related persons and all of the holders of the CRW Lender
Warrants and CRW Management Warrants have agreed with the Underwriters not to
offer, sell or otherwise dispose of any shares of Common Stock or securities
convertible into or exercisable or exchangeable for such shares for a period of
180 days after the date of this Prospectus without the prior written consent of
J.P. Morgan Securities Inc. The holders of the shares of Common Stock and
warrants issued or to be issued in the Acquisitions and certain related persons
have agreed not to offer, sell or otherwise dispose of any shares of Common
Stock or securities convertible into or exercisable or exchangeable for such
shares for a period of 360 days after the date of this Prospectus without the
prior written consent of J.P. Morgan Securities Inc. In connection with the
Acquisitions, the Company has granted certain stockholders the right to include
up to 4,069,863 shares of Common Stock in certain registrations of Common Stock
under the Securities Act of 1933, as amended (the "Securities Act"), effected
following consummation of the Offering. In addition, certain of such
stockholders have the right to demand or piggyback registration of all or a
portion of the shares of Common Stock that may be issued to them in payment of
the earn-out component of the purchase price for their Operating Businesses. In
connection with the CRW Lender Warrants and the CRW Management Warrants (each as
defined in "Certain Relationships and Related Party Transactions--CRW
Transactions--Initial Capitalization"), the Company has granted demand and
piggyback registration rights with respect to 2,272,562 shares of Common Stock
purchasable from CRW Financial upon exercise thereof. In addition, the Company
intends to file a registration statement under the Securities Act to register
initially the issuance or, if applicable, resale of an aggregate of 2,300,000
shares of Common Stock reserved for issuance in connection with the 1996 Stock
Incentive Plan (less any shares theretofore issued upon exercise of any options
exercisable prior to the filing of such registration statement, as to which
shares the exemption provided pursuant to Rule 701 under the Securities Act may
be available). The issuance of shares upon the exercise of options or warrants
could result in the dilution of the voting power of the shares of Common Stock
purchased in the Offering and could have a dilutive effect on earnings per
share. None of the securities described above was acquired in a transaction
registered under the Securities Act, and, accordingly, such securities may not
be sold except in transactions registered under the Securities Act or pursuant
to an exemption from registration. See "Certain Relationships and Related Party
Transactions" and "Shares Eligible for Future Sale."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has not been a public market for the Common Stock,
and there can be no assurance that an active trading market will develop and
continue after the Offering is completed or that the market price of the Common
Stock will not decline below the initial public offering price. The initial
public offering price was determined by negotiations between the Company and
the representatives of the Underwriters. See "Underwriting" for a discussion of
the factors considered in determining the initial public offering price. The
trading price of the Common Stock could be subject to significant fluctuations
in response to introduction of new products or services by competitors,
variations in quarterly operating results, changes in government regulations or
market conditions affecting the teleservices and direct marketing industries
and other events or factors. In addition, the stock market in the past has
experienced significant price and value fluctuations, which have not
necessarily been related to corporate operating performance. The volatility of
the market could adversely affect the market price of the Common Stock and the
ability of the Company to raise equity in the public markets. See
"Underwriting."
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Bylaws impose certain procedures and
limitations applicable to stockholders' meetings, proposal of business and
nomination of directors that could have the effect of making it more difficult
for a third party to acquire, or discouraging a third party from attempting to
acquire, control of the Company. Such provisions may limit the price that
certain investors may be willing to pay in the future for shares of the Common
Stock. These provisions may also reduce the likelihood of an acquisition of the
Company at a premium price by
15
<PAGE>
another person or entity. In addition, under the Company's Certificate of
Incorporation, the Board of Directors has the authority to fix the rights and
preferences of, and issue shares of, preferred stock without further action of
the stockholders. Therefore, preferred stock could be issued, without
stockholder approval, that could have voting, liquidation and dividend rights
superior to that of existing stockholders. The issuance of preferred stock
could adversely affect the voting power of holders of Common Stock and the
likelihood that such holders would receive dividend payments and payments on
liquidation, and could have the effect of delaying, deferring or preventing a
change in control of the Company. The Company has no present plan to issue any
shares of preferred stock. See "Description of Capital Stock."
DILUTION
After giving effect to the Acquisitions, the purchasers of the shares of Common
Stock offered hereby will experience immediate and substantial dilution of
$12.34 per share in the pro forma as adjusted net tangible book value of their
shares. See "Dilution." In the event the Company issues additional Common Stock
in the future, including shares which may be issued in connection with earn-out
arrangements relating to the Acquisitions or with future acquisitions,
purchasers of Common Stock in this Offering may experience further dilution in
the net tangible book value per share of the Common Stock.
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<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby, after deducting underwriting discounts and other estimated
offering expenses, all of which are payable by the Company, will be
approximately $140.9 million (approximately $163.1 million if the Underwriters'
over-allotment option is exercised in full). The Company will not receive any
of the net proceeds from the sale of shares of Common Stock by the Selling
Stockholders. The principal uses of such net proceeds to the Company are
described below.
Consummation of Acquisitions
Approximately $90.9 million of the net proceeds will be used to pay the cash
portion of the aggregate purchase price for the Operating Businesses at closing
of the Acquisitions. See "Certain Relationships and Related Party
Transactions--The Acquisitions." In addition, approximately $3.9 million of the
net proceeds will be used to pay fees and expenses incurred in connection with
the negotiation and consummation of the Acquisitions.
Repayment of Indebtedness
An aggregate of approximately $17.0 million of the net proceeds will be used to
repay indebtedness of the Operating Businesses assumed in the Acquisitions,
based upon indebtedness outstanding at June 30, 1996. See "Certain
Relationships and Related Party Transactions--The Acquisitions." As of June 30,
1996 the following indebtedness was to be repaid:
<TABLE>
<CAPTION>
PRINCIPAL-6/30/96
------------------------- 6/30/96 PURPOSE OF DEBT
SHORT INTEREST INCURRED SINCE INCURRED SINCE
Dollars in TERM LONG TERM TOTAL RATE MATURITY 1/1/95 1/1/95
thousands ------- --------- ------- -------- --------- -------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
SOMAR
Note Payable $ 1,149 $ 0 $ 1,149 9.75% 1997 $ 1,149 Working capital
Bank Notes Payable 347 401 748 4-9.75% 1996-99 748 Capital expenditures
Bank Payable 266 323 589 4-9.75% 1998-99 589 Capital expenditures
Note Payable 0 300 300 10.00% 1997 30 Capital expenditures
Notes Payable 36 50 86 9.00% 1998 86 Capital expenditures
Bank Payable 24 0 24 9.25% Demand 24 Working capital
Line of Credit 4,413 0 4,413 9.25% Demand 4,413 Working capital
Capital Leases 1,059 2,145 3,204 6-21% 1996-2006 2,948 Capital expenditures
------- ------ -------
Totals $ 7,294 $3,219 $10,513
======= ====== =======
NBG
Capital Leases $ 434 $ 760 $ 1,194 4-18% 1996-2000 $ 1,135 Capital expenditures
------- ------ -------
Totals $ 434 $ 760 $ 1,194
======= ====== =======
Harris
Mortgage Payable $ 101 $1,102 $ 1,203 9.00% 2005 Not Applicable Not Applicable
Equipment Loan 206 275 481 8.25% 1998 Not Applicable Not Applicable
Equipment Loan 2 14 16 16.00% 2001 $ 16 Capital expenditures
------- ------ -------
Totals $ 309 $1,391 $ 1,700
======= ====== =======
Reich
Note Payable $ 35 $ 45 $ 80 8.90% 1998 Not Applicable Not Applicable
Loan Payable 38 49 87 8.75% 1998 Not Applicable Not Applicable
Loan Payable 31 108 139 5.00% 2000 $ 139 Capital expenditures
Capital Leases 142 212 354 11-15.5% 1996-1999 345 Capital expenditures
------- ------ -------
Totals $ 246 $ 414 $ 660
======= ====== =======
Telespectrum
Line of Credit $ 2,289 $ 0 $ 2,289 9.75% Demand $ 2,289 Working capital
Note Payable 24 0 24 15.00% 1997 24 Capital expenditures
Note Payable 500 0 500 9.00% 1997 500 Capital expenditures
Capital Leases 70 3 73 12-18.5% 1998 Not Applicable Not Applicable
------- ------ -------
Totals $ 2,883 $ 3 $ 2,886
======= ====== =======
Grand Totals $11,166 $5,787 $16,953
======= ====== =======
</TABLE>
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Capital Expenditures
Approximately $16.0 million of the net proceeds will be used to make certain
anticipated capital expenditures related to telephone equipment, computer
hardware and software and purchases in connection with the opening of new call
center facilities for SOMAR and TeleSpectrum. Of this amount, the Company is
committed to expend up to $14.0 million for the purpose of meeting SOMAR's
capital expenditure requirements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources"
and "Certain Relationships and Related Party Transactions--The Acquisitions--
SOMAR."
Working Capital and General Corporate Purposes
The balance of the net proceeds, approximately $13.1 million (approximately
$35.4 million if the Underwriters' over-allotment option is exercised in full),
will be added to the Company's working capital and used for general corporate
purposes, including possible acquisitions and capital expenditures associated
with integrating the Operating Businesses. In addition, a portion of the net
proceeds may be used for closing purchase price adjustments in connection with
the Acquisitions and to pay that portion of the purchase price of certain
Acquisitions that is subject to earn-out arrangements, as well as to repay
additional indebtedness of the Operating Businesses that may be outstanding and
assumed by the Company in the Acquisitions; the Company cannot currently
quantify the maximum amount that it may ultimately be required to pay for these
purposes. See "Certain Relationships and Related Party Transactions--The
Acquisitions." With the exception of the Acquisitions, the Company is not
currently involved in negotiations and has no current commitments or agreements
with respect to any acquisitions, and no such acquisitions may ever be
consummated.
Pending application of the net proceeds as described above, the Company intends
to invest the net proceeds in short-term investment grade securities.
DIVIDEND POLICY
The Company does not anticipate paying any cash dividends on its Common Stock
in the foreseeable future because it intends to retain its earnings, if any, to
finance the expansion of its business and for general corporate purposes. Any
payment of future dividends will be at the discretion of the Board of Directors
and will depend upon, among other factors, the Company's earnings, financial
condition, capital requirements, level of indebtedness, contractual
restrictions with respect to the payment of dividends and other considerations
that the Company's Board of Directors deems relevant.
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<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at June 30,
1996, on a pro forma as adjusted basis to reflect (i) the sale of 10,286,000
shares of Common Stock offered hereby at the initial public offering price of
$15.00 per share and the application of a portion of the net proceeds therefrom
and (ii) the consummation of the Acquisitions and the issuance of 4,403,863
shares of Common Stock in connection therewith. See "Selected Financial Data of
TeleSpectrum Worldwide and the Operating Businesses" and "Use of Proceeds."
This table should be read in conjunction with the pro forma financial
statements and the related notes thereto included elsewhere in this Prospectus.
<TABLE>
-----------------
<CAPTION>
AT JUNE 30, 1996
PRO FORMA,
ACTUAL AS ADJUSTED(1)
Dollars in thousands ------- --------------
<S> <C> <C>
Long-term debt and capital lease obligations, less
current portion $ -- $ --
------- --------
Stockholders' equity:
Preferred stock, $.01 par value per share,
5,000,000 shares authorized, no shares issued and
outstanding -- --
Common stock, $.01 par value per share, 200,000,000
shares authorized, 8,510,137 shares issued and
outstanding, actual, 23,200,000 shares issued and
outstanding, pro forma as adjusted 85 232
Additional paid-in capital 20,774 208,497
Retained earnings (deficit) (419) (419)
------- --------
Total stockholders' equity 20,440 208,310
------- --------
Total capitalization $20,440 $208,310
======= ========
</TABLE>
- --------
(1)Excludes additional shares of Common Stock which may be issued to three of
the Sellers pursuant to earn-out arrangements. Also excludes 2,029,500 shares
of Common Stock issuable upon the exercise of options and warrants to be
granted on the date of this Prospectus, with a per share exercise price equal
to the initial public offering price. As of the date of this Prospectus,
863,900 additional shares are reserved for future issuance under the 1996 Stock
Incentive Plan (463,900 shares, if all of the options to be granted ratably
over the next four years to two executive officers of the Company pursuant to
their employment agreements were to be granted). See "Certain Relationships and
Related Party Transactions--The Acquisitions" and "Management--1996 Stock
Incentive Plan."
19
<PAGE>
DILUTION
The Company had a net tangible book value at June 30, 1996, of $279,000, or
$.03 per share of Common Stock. Net tangible book value per share is determined
by dividing the net tangible book value of the Company (tangible assets less
liabilities) by the number of shares of Common Stock outstanding. Adjusting for
the Acquisitions and the sale by the Company of the 10,286,000 shares of Common
Stock offered hereby at the initial public offering price of $15.00 per share,
and the application of the net proceeds therefrom as described under "Use of
Proceeds," the pro forma net tangible book value of the Company, as adjusted,
at June 30, 1996 would have been $61,805,000, or $2.66 per share. This amount
represents an immediate dilution to new investors of $12.34 per share and an
immediate increase in pro forma as adjusted net tangible book value per share
to existing stockholders of $2.63 per share. The following table illustrates
this per share dilution to new investors:
<TABLE>
----------
<S> <C> <C>
Initial public offering price per share $15.00
Net tangible book value per share at June 30, 1996 $ .03
Increase in net tangible book value per share resulting from the
Acquisitions
and the Offering (1) 2.63
-----
Pro forma as adjusted net tangible book value per share after the
Acquisitions
and the Offering 2.66
------
Pro forma as adjusted dilution to new investors(2) $12.34
======
</TABLE>
- --------
(1)The increase in net tangible book value per share consists of a decrease of
$3.44 to the net tangible book value per share resulting from the Acquisitions
and an increase of $6.07 to the net tangible book value per share resulting
from the Offering.
(2)Determined by subtracting the pro forma as adjusted net tangible book value
per share after the Offering from the initial public offering price per share.
If the Underwriters' over-allotment option is exercised in full, the increase
in pro forma net tangible book value per share attributable to the Offering,
pro forma as adjusted net tangible book value per share after the Offering, and
pro forma as adjusted dilution to new investors would be $3.36, $3.39 and
$11.61, respectively.
The following table sets forth at June 30, 1996, after giving effect to the
Acquisitions and the sale of the Common Stock offered by the Company in the
Offering: (i) the number of shares of Common Stock purchased by existing
stockholders from the Company and the total consideration (including the fair
value of the shares of Common Stock issued to the Sellers) and average price
per share paid to the Company for such shares; (ii) the number of shares of
Common Stock purchased by new investors in the Offering from the Company and
the total consideration and the price per share paid by them for such shares;
and (iii) the percentage of shares purchased from the Company by existing
stockholders and the new investors and the percentages of consideration paid to
the Company for such shares by existing stockholders and new investors.
<TABLE>
<CAPTION>
--------------------------------------------------------
SHARES PURCHASED TOTAL CONSIDERATION
AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1) 12,914,000 55.7% $ 46,800,000 23.3% $ 3.62
New investors 10,286,000 44.3 154,290,000 76.7 $15.00
---------- ----- ------------- -----
Total 23,200,000 100.0% $ 201,090,000 100.0%
========== ===== ============= =====
</TABLE>
- --------
(1)Consists of the Sellers and the stockholders of TeleSpectrum Worldwide prior
to the consummation of the sale of the shares of Common Stock offered hereby.
Sales by the Selling Stockholder in the Offering will reduce the outstanding
number of shares held by existing stockholders to 12,580,000 shares, or
approximately 54.2% of the total number of shares of Common Stock outstanding
after the Offering, and will increase the number of shares to be held by new
stockholders to 10,620,000 shares, or approximately 45.8% of the total number
of shares of Common Stock outstanding after the Offering. See "Principal and
Selling Stockholders."
20
<PAGE>
SELECTED PRO FORMA COMBINED FINANCIAL DATA
TeleSpectrum Worldwide will acquire, simultaneously with and as a condition to
the consummation of the Offering, the Operating Businesses. These Acquisitions
will be recorded using the purchase method of accounting. The Selected Pro
Forma Combined Financial Data assume the consummation of the Acquisitions and
the consummation of the Offering. See "Certain Relationships and Related Party
Transactions--The Acquisitions," and the Pro Forma Combined Financial
Statements and Notes to Pro Forma Combined Financial Statements included
elsewhere in this Prospectus.
---------------------------------
<TABLE>
<CAPTION>
Dollars in thousands, except per
share data PRO FORMA
YEAR ENDED
DECEMBER 31, SIX MONTHS ENDED JUNE 30,
1995 1995 1996
------------ ---------- --------------
<S> <C> <C> <C>
PRO FORMA STATEMENT OF INCOME DA-
TA(1):
Revenues $87,954 $42,588 $57,706
Cost of services 59,597 27,337 39,317
Selling, general and administrative
expense(2) 17,525 8,657 10,956
Goodwill amortization(3) 5,860 2,930 2,930
---------- ---------- ----------
Operating income 4,972 3,664 4,503
Interest income 158 28 103
Interest expense(4) (94) (34) (49)
---------- ---------- ----------
Income before income taxes 5,036 3,658 4,557
Income taxes(5) 2,407 1,749 2,060
---------- ---------- ----------
Net income $ 2,629 $ 1,909 $ 2,497
---------- ---------- ----------
Net income per share(6) $ 0.12 $ 0.09 $ 0.12
========== ========== ==========
Shares used in computing pro forma
net income
per share(6) 21,200,000 21,200,000 21,200,000
---------- ---------- ----------
-------------------------
<CAPTION>
JUNE 30, 1996
PRO FORMA
ACTUAL AS ADJUSTED(1)
Dollars in thousands ---------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ -- $ 32,384
Working capital (deficit) (1,506) 45,819
Goodwill -- 146,505
Total assets 22,446 218,175
Long-term debt, less current maturi-
ties -- --
Stockholders' equity 20,440 208,310
</TABLE>
- --------
(1)Assumes that the closings of the Acquisitions and the Offering had occurred
as of January 1, 1995, in the case of the pro forma statement of income data,
and as of June 30, 1996, in the case of the pro forma balance sheet data. The
pro forma combined financial data are based upon preliminary estimates,
available information and certain assumptions that management deems
appropriate. The pro forma combined financial data presented herein are not
necessarily indicative of the results the Company would have obtained had such
events occurred at the beginning of the period, or of the future results of the
Company. The pro forma combined financial data should be read in conjunction
with the other financial data and notes thereto included elsewhere in this
Prospectus. The aggregate consideration for the Acquisitions is $160.8 million
which consists of: (i) $90.9 million in cash to be paid to the Sellers upon the
consummation of the Offering; (ii) forgiveness of a $0.5 million promissory
note from one of the Operating Businesses; (iii) the $44.7 million estimated
fair value of 4,403,863 shares of Common Stock to be issued to the Sellers;
(iv) the $2.1 million estimated fair value of warrants to purchase 593,400
shares of
21
<PAGE>
Common Stock at the initial public offering price of $15.00 per share to be
issued in connection with the Acquisitions; (v) the $18.7 million deemed value
for accounting purposes of the CRW Lender Warrants and CRW Management Warrants
as discussed in this Prospectus to purchase 2,272,562 shares of Common Stock at
$1.50 per share; and (vi) estimated transaction costs of $3.9 million. The
estimated purchase price for the Acquisitions is subject to certain purchase
price adjustments at closing and earn-out arrangements. See "Certain
Relationships and Related Party Transactions--The Acquisitions."
(2)Includes a pro forma adjustment to reflect compensation expense of the
officers of the Operating Businesses and officers of TeleSpectrum Worldwide
based upon employment agreements to be entered into not later than the closing
of the Acquisitions. Does not reflect costs (which will be significant) related
to other employees of TeleSpectrum Worldwide or corporate expenses related to
being a public company. See "Management's Discussion and Analysis of Pro Forma
Financial Condition and Pro Forma Results of Operations," "Management--
Executive Compensation" and "--Employment Agreements" and Note 2 of Notes to
Pro Forma Combined Financial Statements.
(3)Represents a pro forma adjustment to reflect the amortization expense on the
goodwill recorded in connection with the Acquisitions.
(4)Includes a pro forma adjustment to reflect the elimination of interest
expense resulting from the reduction of debt paid from the net proceeds of the
Offering.
(5)Includes a pro forma adjustment to calculate the provision for income taxes
on the pro forma combined results at effective tax rates of 47.8% and 45.2% in
1995 and 1996, respectively.
(6)Computed on a basis described in Note 5 of Notes to Pro Forma Combined
Financial Statements.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PRO FORMA FINANCIAL CONDITION AND PRO
FORMA RESULTS OF OPERATIONS
GENERAL
TeleSpectrum Worldwide was founded in April 1996 to create a premier provider
of integrated teleservices solutions that build upon a foundation of outbound
and inbound telemarketing and include inbound customer service, market
research, direct mail and fulfillment and other direct marketing services. The
Company focuses on providing teleservices to major clients in the
telecommunications, insurance, financial services, pharmaceuticals and
healthcare, consumer products and high technology industries.
The Company's revenues are derived primarily from service fees charged to
clients on an hourly or project basis and commissions charged on a per result
basis. A majority of the Company's pro forma 1995 revenues were derived from
service fees. In the aggregate, the revenues of the Operating Businesses have
grown from $23.7 million in 1991 to $88.0 million in 1995. This growth
primarily resulted from the Operating Businesses' ability to meet their
clients' increasing demands to deliver new services as the market required and
to attract new clients with quality service at competitive prices.
The Company's cost of services consists primarily of compensation, telephone
and other call center-related operating and support expenses. Cost of services
as a percentage of revenues has fluctuated during the period 1991 through 1995
as a result of call center start-up costs, offset in certain periods by
efficiencies associated with increased operations. The Company anticipates
continued fluctuations in cost of services as a percentage of revenues.
TeleSpectrum Worldwide, which has conducted no operations to date, has entered
into agreements to acquire the Operating Businesses simultaneously with the
consummation of the sale of the Common Stock offered hereby. The Operating
Businesses have been operating independently. The Company intends to integrate
these businesses, their operations and administrative functions over a period
of time, subject to contractual obligations in the agreements relating to the
Acquisitions. See "Certain Relationships and Related Party Transactions--The
Acquisitions." Such integration may present opportunities to reduce costs
through the elimination of duplicate functions and through economies of scale,
particularly in obtaining greater volume discounts from telecommunications
service providers, but may also necessitate additional costs and expenditures
for corporate management and administration, corporate expenses related to
being a public company, systems integration, employee relocation and severance
and facilities expansion. These various costs and possible cost-savings may
make comparison of future operating results with historical results difficult.
See "Management--Executive Compensation" and "--Employment Agreements."
PRO FORMA RESULTS OF OPERATIONS
The following discussions should be read in conjunction with the Selected Pro
Forma Combined Financial Data, the Selected Financial Data of TeleSpectrum
Worldwide and the Operating Businesses and the Financial Statements and related
notes appearing elsewhere in this Prospectus.
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995
Revenues. Revenues increased to $57.7 million in the six months ended June 30,
1996 from $42.6 million in the six months ended June 30, 1995, an increase of
$15.1 million, or 35.5%. The increase in revenues resulted primarily from
increased call volume from existing clients and the addition of new clients.
Cost of Services. Cost of services increased to $39.3 million in the six months
ended June 30, 1996 from $27.3 million in the six months ended June 30, 1995,
an increase of $12.0 million, or 43.8%. As a percentage of revenues, cost of
services increased to 68.1% in the six months ended June 30, 1996 from 64.2% in
the six months ended June 30, 1995. This percentage increase was primarily the
result of start-up costs associated with adding new capacity to support the
Operating Businesses' growth and a temporary shift at one of the Operating
23
<PAGE>
Businesses to lower margin services to fill capacity resulting from an
unexpected reduction in demand from a major client.
Selling, General and Administrative. Selling, general and administrative
expenses, excluding goodwill, increased to $11.0 million in the six months
ended June 30, 1996 from $8.7 million in the six months ended June 30, 1995, an
increase of $2.3 million, or 26.6%. The increase was primarily the result of
additional administrative, personnel and related corporate expenses associated
with the Operating Businesses' growth. As a percentage of revenues, selling,
general and administrative expenses decreased to 19.0% in the six months ended
June 30, 1996 from 20.3% in the six months ended June 30, 1995, primarily as a
result of the spreading of expenses over increased revenues.
LIQUIDITY AND CAPITAL RESOURCES
The Company will utilize proceeds from the Offering to repay substantially all
of the Operating Businesses' existing short-term and long-term debt. In
addition, TeleSpectrum Worldwide has obtained a commitment for a bank credit
facility with a borrowing limit of $50.0 million. Interest on borrowings under
the credit facility will accrue at an annual rate equal to LIBOR plus a
percentage that will range from 0.75% to 1.50% based on the Company's debt to
earnings before interest, taxes, depreciation and amortization ratio. The
closing of the credit facility is subject to: (i) the consummation of the
Offering, with gross proceeds to the Company of at least $144.0 million
resulting in cash remaining on the balance sheet of the Company (following
consummation of the Acquisitions and payment of the consideration therefor, and
the repayment of indebtedness assumed in the Acquisitions) of no less than
$22.0 million; and (ii) customary conditions. The Company does not believe that
the credit facility will be required to meet the Company's planned capital
expenditures through at least 1997.
In connection with the acquisition of the assets of the SOMAR Operating
Business, the Company has agreed to expend up to $14.0 million, if necessary,
to meet that Operating Business's capital expenditures requirements, which
primarily relate to potential openings of additional call centers. The Company
may also be required to expend certain amounts in payment of the cash portion
of earn-out provisions and purchase price adjustments related to the
Acquisitions. The Company does not have any other commitments for significant
capital expenditures, although it anticipates expanding and upgrading existing
call centers and opening new call centers in the ordinary course of business.
The Company believes that funds generated from operations, together with the
net proceeds of the Offering, will be sufficient to finance its current
operations, potential obligations relating to the Acquisitions and planned
capital expenditure requirements at least through 1997. In the longer term, the
Company may require additional sources of liquidity to fund future growth. Such
sources of liquidity may include additional offerings or debt financings.
INFLATION
The Company does not believe that inflation has had a material effect on the
operating results of the Operating Businesses. However, there can be no
assurance that the Company's business will not be affected by inflation in the
future.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Operating Businesses have in the past experienced, and the Company could in
the future experience, quarterly variations in revenues, operating income and
cash flow as a result of many factors, including the timing and magnitude of
clients' marketing campaigns and customer service programs, the opening of new
call centers, the loss of a major client, weather-related interruptions,
additional selling, general and administrative expenses to acquire and support
new business, the timing and magnitude of required capital expenditures and
changes in the revenue mix among the Company's various service offerings or in
the relative contribution of the several Operating Businesses. In connection
with certain contracts, the Company could incur costs in periods prior to
recognizing revenues under those contracts. In addition, the Company must plan
its operating expenditures based on revenue forecasts, and a revenue shortfall
below such forecasts in any quarter would likely adversely affect the Company's
operating results for that quarter.
24
<PAGE>
SELECTED FINANCIAL DATA OF TELESPECTRUM WORLDWIDE
AND THE OPERATING BUSINESSES
The selected financial data of TeleSpectrum Worldwide and the Operating
Businesses are derived in part from the more detailed financial statements and
notes thereto of TeleSpectrum Worldwide and the Operating Businesses included
elsewhere in this Prospectus. The balance sheet data at June 30, 1996, and the
statement of income data for the period from inception through June 30, 1996,
for TeleSpectrum Worldwide have been derived from the audited financial
statements included elsewhere herein. The balance sheet data as of December 31,
1994 and 1995, and the statement of income data for each of the three years in
the period ended December 31, 1995, for SOMAR, Harris and Reich have been
derived from the audited financial statements included elsewhere herein. The
balance sheet data as of December 31, 1991, 1992 and 1993, and the statement of
income data for each of the two years in the period ended December 31, 1992,
for SOMAR, Harris and Reich have been derived from unaudited data. The balance
sheet data at September 30, 1994 and 1995 and the statement of income data for
each of the two years in the period ended September 30, 1995 for The Response
Center have been derived from the audited financial statements included
elsewhere herein. The balance sheet data as of September 30, 1991, 1992 and
1993 and the statement of income data for each of three years in the period
ended September 30, 1993 for The Response Center have been derived from
unaudited data. The balance sheet data as of December 30, 1994 and December 29,
1995, and the statement of income data for the years ended December 31, 1993,
December 30, 1994 and December 29, 1995, for NBG have been derived from the
audited financial statements included elsewhere herein. The balance sheet data
as of December 27, 1991, December 25, 1992 and December 31, 1993 and the
statement of income data for December 27, 1991 and December 25, 1992, for NBG
have been derived from unaudited data. The balance sheet data at December 31,
1995, and the statement of income data for the year then ended, for
TeleSpectrum have been derived from the audited financial statements included
elsewhere herein. The balance sheet data as of December 31, 1991, 1992, 1993
and 1994, and the statement of income data for each of the four years in the
period ended December 31, 1994, for TeleSpectrum have been derived from
unaudited data.
The selected individual financial data of the Operating Businesses for the six
months ended June 30, 1995 and 1996 have been derived from the unaudited
financial statements included elsewhere herein. Such selected financial data
are not necessarily indicative of the results to be expected for the full year.
In the opinion of the Company, the unaudited financial statements of the
Operating Businesses reflect all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the financial
position and results of operations of the Operating Businesses for those
periods in accordance with generally accepted accounting principles. Selected
Financial Data of the Operating Businesses should be read in conjunction with
the financial statements and notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in this Prospectus. All Operating Businesses have fiscal years ending December
31, with the exceptions of The Response Center, whose year end is September 30,
and NBG, which operates on a fifty-two, fifty-three week fiscal year ending on
the last Friday of the calendar year.
25
<PAGE>
<TABLE>
-------------------------------------------------
<CAPTION>
SIX MONTHS
ENDED
FISCAL YEAR ENDED JUNE 30,
1991 1992 1993 1994 1995 1995 1996
Dollars in thousands ------ ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME
DATA:
SOMAR
Revenues $4,674 $6,594 $10,703 $20,785 $31,900 $14,795 $20,803
Cost of services 2,712 5,194 7,731 15,623 25,048 11,221 16,888
Selling, general and
administrative
expenses 1,712 1,775 2,787 4,115 5,162 2,620 3,092
Operating income
(loss) 250 (375) 185 1,047 1,690 954 823
Income (loss) before
income taxes 217 (474) 96 627 979 655 379
NBG
Revenues $814 $ 2,875 $ 4,849 $ 5,778 $12,829 $ 5,599 $ 8,924
Cost of services 533 1,838 3,200 4,259 8,572 3,556 5,995
Selling, general and
administrative
expenses 169 1,028 1,289 1,443 2,115 1,046 1,389
Operating income 112 9 360 76 2,142 997 1,540
Income (loss) before
income taxes 112 (35) 285 33 2,106 967 1,518
Harris
Revenues $5,944 $5,734 $ 7,018 $10,115 $12,690 $ 7,525 $ 5,367
Cost of services 3,192 3,008 3,834 5,530 6,402 3,543 2,762
Selling, general and
administrative
expenses 2,223 2,273 2,473 2,680 2,986 1,431 1,521
Operating income 529 453 711 1,905 3,302 2,551 1,084
Income before income
taxes 322 281 569 1,719 3,158 2,454 1,051
Reich
Revenues $5,009 $3,252 $ 4,375 $ 5,424 $12,253 $ 5,521 $11,347
Cost of services 3,981 2,388 3,172 4,225 7,836 3,417 6,692
Selling, general and
administrative
expenses 1,429 1,019 1,111 976 2,534 665 1,199
Operating income
(loss) (401) (155) 92 223 1,883 1,439 3,456
Income (loss) before
income taxes (553) (220) 71 199 1,840 1,412 3,425
TeleSpectrum
Revenues $4,167 $6,827 $ 9,916 $ 9,386 $11,854 $ 5,592 $ 8,034
Cost of services 3,017 4,555 7,429 6,754 8,338 3,828 5,290
Selling, general and
administrative
expenses 1,144 1,622 2,628 2,636 3,072 1,652 2,121
Operating income
(loss) 6 650 (141) (4) 444 112 623
Income (loss) before
income taxes (81) 552 (240) (154) 278 27 504
The Response Center
Revenues $3,057 $3,946 $ 6,061 $ 6,183 $ 6,719 $ 3,556 $ 3,231
Cost of services 1,360 1,771 2,911 3,426 3,583 1,772 1,690
Selling, general and
administrative
expenses 661 972 2,806 2,800 2,717 1,617 1,296
Operating income
(loss) 1,036 1,203 344 (43) 419 167 245
Income (loss) before
income taxes 1,033 1,208 356 (37) 429 167 245
TeleSpectrum Worldwide
(1)
Revenues $ -- $ -- $ -- $ -- $ -- $ -- $ --
Cost of services -- -- -- -- -- -- --
Selling, general and
administrative
expenses -- -- -- -- -- -- 419
Operating income
(loss) -- -- -- -- -- -- (419)
Income (loss) before
income taxes -- -- -- -- -- -- (419)
</TABLE>
- --------
(1)TeleSpectrum Worldwide was incorporated on April 26, 1996; accordingly there
were no historical operating results prior to that date.
26
<PAGE>
<TABLE>
----------------------------------------
<CAPTION>
AT FISCAL YEAR END AT JUNE 30,
1991 1992 1993 1994 1995 1996
Dollars in thousands ------ ------ ------ ------ ------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
SOMAR
Cash and cash
equivalents $ 10 $ 1 $ 16 $ 2 $ 25 $ 4
Working capital
(deficit) (147) (280) (149) (242) (1,990) (2,129)
Total assets 1,644 1,694 2,014 5,526 10,792 15,287
Long-term debt,
including capital
lease obligations,
less current
portion 238 786 755 1,145 1,639 3,219
Stockholders' equity
(deficit) 123 (487) (391) 478 771 918
NBG
Cash and cash
equivalents $ 2 $ 14 $ 9 $ -- $ 700 $ 1,959
Working capital
(deficit) 12 (95) (102) (238) 1,270 2,411
Total assets 488 616 1,162 1,483 4,234 5,663
Long-term debt,
including capital
lease obligations,
less current
portion 202 208 265 277 454 760
Stockholders' equity 113 78 363 396 2,254 3,652
Harris
Cash and cash
equivalents $ 232 $ 469 $ 334 $ 975 $ 2,919 $ 877
Working capital 529 623 931 2,260 3,741 3,442
Total assets 5,365 5,679 7,101 8,773 10,803 9,401
Long-term debt less
current portion 1,948 2,006 1,818 1,863 1,530 1,390
Stockholders' equity 2,254 2,465 3,007 4,580 6,375 6,070
Reich
Cash and cash
equivalents $ 66 $ 30 $ 28 $ 31 $ 220 $ 371
Working capital
(deficit) (575) (220) (243) (59) 821 2,654
Total assets 1,175 795 827 1,111 4,318 6,360
Long-term debt,
including capital
lease obligations,
less current
portion 26 159 226 273 371 414
Stockholder's equity
(deficit) (637) (541) (470) (272) 1,668 4,363
TeleSpectrum
Cash and cash
equivalents $ 100 $ 330 $ 28 $ 163 $ 15 $ 605
Working capital
(deficit) (296) (97) (85) (241) 37 (34)
Total assets 2,051 3,217 3,224 3,182 3,549 5,590
Long-term debt,
including capital
lease obligations,
less current
portion 659 293 470 217 57 3
Stockholders' equity 92 765 481 409 687 1,191
The Response Center
Cash and cash
equivalents $ 293 $ 98 $ 213 $ 72 $ 282 $ 744
Working capital 1,053 1,508 1,179 1,111 1,665 1,802
Total assets 1,369 1,947 2,034 1,863 2,298 2,934
Long-term debt less
current portion -- -- -- -- -- --
Stockholders' equity 1,124 1,569 1,353 1,283 1,812 2,130
TeleSpectrum Worldwide
(1)
Cash and cash
equivalents $ -- $ -- $ -- $ -- $ -- $ --
Working capital
(deficit) -- -- -- -- -- (1,506)
Total assets -- -- -- -- -- 22,446
Long-term debt,
including capital
lease obligations,
less current
portion -- -- -- -- -- --
Stockholders' equity -- -- -- -- -- 20,440
</TABLE>
- --------
(1)TeleSpectrum Worldwide was incorporated on April 26, 1996; accordingly,
there were no historical results prior to that date.
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Selected
Financial Data of TeleSpectrum Worldwide and the Operating Businesses and the
Financial Statements and related notes thereto appearing elsewhere in this
Prospectus.
TELESPECTRUM WORLDWIDE
TeleSpectrum Worldwide was formed on April 26, 1996 and incurred a net loss for
the period from April 26, 1996 (inception) to June 30, 1996 of $419,000 of
general and administrative expenses. These expenses consisted of officers'
salary, an executive placement fee and other start-up expenses.
OPERATING BUSINESSES
Each of the Sellers (other than TeleSpectrum Training Services, Inc., an
affiliate of TeleSpectrum, Inc.) has elected to be treated as an "S
corporation" under Subchapter S of the Internal Revenue Code of 1986, as
amended (the "Code"). As a result, no Seller (other than TeleSpectrum Training
Services, Inc.) was subject to federal income taxes.
SOMAR
Founded in 1982, SOMAR is one of the nation's largest providers of outsourced
telephone-based sales, marketing and customer management services, principally
to clients in the insurance industry and also to clients in the financial
services, telecommunications and consumer products industries. SOMAR typically
receives payment on an hourly basis for services rendered.
Results of Operations
The following table sets forth selected financial data and data as a percentage
of revenues for the periods indicated.
<TABLE>
-------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
1993 1994 1995 1995 1996
Dollars in thousands ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $10,703 100.0% $20,785 100.0% $31,900 100.0% $14,795 100.0% $20,803 100.0%
Cost of services 7,731 72.2 15,623 75.2 25,048 78.5 11,221 75.8 16,888 81.2
Selling, general and
administrative
expenses 2,787 26.1 4,115 19.8 5,162 16.2 2,620 17.8 3,092 14.9
------- ------- ------- ------- -------
Total operating
expenses 10,518 98.3 19,738 95.0 30,210 94.7 13,841 93.6 19,980 96.1
Operating income 185 1.7 1,047 5.0 1,690 5.3 954 6.4 823 3.9
Interest expense, net 89 0.8 420 2.0 711 2.2 299 2.0 444 2.1
------- ------- ------- ------- -------
Pre-tax income $ 96 0.9 $ 627 3.0 $ 979 3.1 $ 655 4.4 $ 379 1.8
======= ======= ======= ======= =======
</TABLE>
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995
Revenues. Revenues increased to $20.8 million in the six months ended June 30,
1996 from $14.8 million in the six months ended June 30, 1995, an increase of
$6.0 million, or 40.6%. The increase in revenues resulted primarily from
increased call volume from existing insurance clients and the addition of new
telecommunications clients.
Cost of Services. Cost of services, which primarily consists of labor,
telephone and other call center-related operating and support expenses,
increased to $16.9 million in the six months ended June 30, 1996 from $11.2
million in the six months ended June 30, 1995, an increase of $5.7 million, or
50.5%. As a percentage of revenues, cost of services increased to 81.2% in the
six months ended June 30, 1996 from 75.8% in the six months ended June 30,
1995. This percentage increase was primarily the result of a temporary shift to
lower
28
<PAGE>
margin services to fill capacity resulting from an unexpected reduction in
demand from SOMAR's largest client, costs associated with revenues lost due to
inclement weather and start-up costs associated with the opening of the
Beckley, West Virginia call center on March 1, 1996. Start-up costs included
recruiting and education of new call center management and staff.
Selling, General and Administrative. Selling, general and administrative
expenses increased to $3.1 million in the six months ended June 30, 1996 from
$2.6 million in the six months ended June 30, 1995, an increase of $0.5
million, or 18.0%. The increase was primarily the result of additional
administrative, personnel and related corporate expenses associated with
SOMAR's growth. As a percentage of revenues, selling, general and
administrative expenses decreased to 14.9% in the six months ended June 30,
1996 from 17.8% in the six months ended June 30, 1995, primarily as a result of
the spreading of expenses over increased revenues.
Interest Expenses, Net. Interest expense, net, increased to $0.4 million in the
six months ended June 30, 1996 from $0.3 million in six months ended June 30,
1995, an increase of $0.1 million, or 48.5%. The increase resulted from higher
average borrowings outstanding during the six months ended June 30, 1996
compared with the six months ended June 30, 1995. The borrowed funds were used
primarily to finance working capital requirements, to open the Beckley, West
Virginia call center and to purchase new equipment. As a percentage of
revenues, interest expense, net, increased to 2.1% in the six months ended June
30, 1996 from 2.0% in the six months ended June 30, 1995.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenues. Revenues increased to $31.9 million in 1995 from $20.8 million in
1994, an increase of $11.1 million, or 53.5%. This increase primarily resulted
from increased call volume from existing insurance clients and the addition of
new insurance clients.
Cost of Services. Cost of services increased to $25.0 million in 1995 from
$15.6 million in 1994, an increase of $9.4 million, or 60.3%. As a percentage
of revenues, cost of services increased to 78.5% in 1995 from 75.2% in 1994.
This increase resulted primarily from start-up costs related to the opening of
two new call centers in Huntington, West Virginia in March and August 1995, and
a delay in anticipated new business. The start-up costs included new management
and staff, insurance licensing and education.
Selling, General and Administrative. Selling, general and administrative
expenses increased to $5.2 million in 1995 from $4.1 million in 1994, an
increase of $1.1 million, or 25.4%. This increase primarily resulted from
additional administrative, personnel and corporate expenses associated with the
growth in existing facilities. As a percentage of revenues, selling, general
and administrative expenses decreased to 16.2% in 1995 from 19.8% in 1994,
primarily as a result of the spreading of expenses over increased revenues.
Interest Expense, Net. Interest expense, net, increased to $0.7 million in 1995
from $0.4 million in 1994, an increase of $0.3 million, or 69.3%. This increase
resulted from higher average borrowings outstanding during 1995 compared to
1994. The borrowed funds were used primarily to finance working capital
requirements, to open the Huntington, West Virginia call centers and to
purchase new equipment. As a percentage of revenues, interest expense, net,
increased to 2.2% in 1995 from 2.0% in 1994.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
Revenues. Revenues increased to $20.8 million in 1994 from $10.7 million in
1993, an increase of $10.1 million, or 94.2%. This increase primarily resulted
from increased call volume from existing clients and the addition of new
clients, primarily in the financial services industry.
Cost of Services. Cost of services increased to $15.6 million in 1994 from $7.7
million in 1993, an increase of $7.9 million, or 102.1%. As a percentage of
revenues, cost of services increased to 75.2% in 1994 from 72.2% in 1993. This
increase resulted primarily from start-up costs related to the opening of two
new call centers in
29
<PAGE>
Fayetteville, North Carolina and Asheville, North Carolina in January 1994 and
September 1994, respectively. These costs included new management and staff,
insurance licensing and education.
Selling, General and Administrative. Selling, general and administrative
expenses increased to $4.1 million in 1994 from $2.8 million in fiscal 1993, an
increase of $1.3 million, or 47.7%. This increase primarily resulted from
additional administrative, personnel and corporate expenses associated with the
growth in existing facilities. As a percentage of revenues, selling, general
and administrative expenses decreased to 19.8% in 1994 from 26.1% in 1993,
primarily as a result of the spreading of expenses over the increased revenues.
Interest Expense, Net. Interest expense, net, increased to $0.4 million in 1994
from $0.1 million in 1993, an increase of $0.3 million. This increase resulted
from higher average borrowings outstanding during 1994 compared to 1993. The
borrowed funds were primarily to finance working capital requirements, to open
the Asheville and Fayetteville, North Carolina call centers and to purchase new
equipment. As a percentage of revenues, interest expense, net, increased to
2.0% in 1994 from 0.8% in 1993.
Liquidity and Capital Resources
SOMAR's principal source of liquidity has been available borrowings under
credit facilities. The following table sets forth selected information from
SOMAR's statements of cash flows for the periods indicated:
<TABLE>
-------------------------------------------------
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
1993 1994 1995 1995 1996
Dollars in thousands ----- ----- ------- ------ -----
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities $ 254 $ 57 $ 441 $ 142 $ (720)
Net cash provided by (used in)
investment activities (444) 346 (2,870) (1,186) (657)
Net cash provided by (used in)
financing activities 205 (417) 2,452 1,080 1,356
</TABLE>
From 1993 through the end of 1995, SOMAR generated $0.8 million in net cash
from operating activities. During this period, $3.2 million of cash was
generated primarily from pre-tax income plus non-cash charges, and was reduced
by $2.4 million of cash used to fund increases in working capital resulting
from the increase in revenues over the same period. Net cash used in the six
months ended June 30, 1996 principally reflects increases in accounts
receivable resulting from the increase in revenues.
Cash used in investment activities was attributable to equipment and other
capital to support SOMAR's growth, namely through additions to SOMAR's number
of call centers and expenditures for information technology equipment and
through investments in database management, telephone systems and management
information systems. From the beginning of 1993 through June 30, 1996, SOMAR
opened five new call centers, adding approximately 506 workstations. Capital
expenditures during this period of $7.5 million were funded with borrowings and
capitalized leases.
Financing activities have included distributions to shareholders and borrowing
activity. Dividends paid to shareholders from the beginning of 1993 through
June 30, 1996 of $1.6 million were primarily payments to cover shareholder
taxes related to SOMAR's S-corporation status.
On December 29, 1995, SOMAR entered into an agreement with a bank for a one-
year revolving line of credit (the "Credit Facility") which now has a maximum
borrowing limit applicable to SOMAR of $6.5 million and an interest rate equal
to the bank's prime rate plus one percentage point. The Credit Facility is
secured by trade accounts receivable, equipment and other assets of SOMAR. The
agreement terminates on January 1, 1997, and contains certain restrictive
covenants which, among other things, require the maintenance of certain
financial ratios, limit capital expenditures and bonuses and restrict future
indebtedness.
30
<PAGE>
On December 31, 1995, SOMAR borrowed $1.0 million from a bank on a short-term
basis in connection with the transition of its line of credit from another
lender. This short-term note was repaid on January 3, 1996, with proceeds from
the new Credit Facility.
From 1993 through June 30, 1996, SOMAR financed certain equipment purchases
through term financing agreements and capital leases with various lending
institutions and a government agency. The financing agreements are secured by
the related equipment and other assets of SOMAR. As of June 30, 1996,
outstanding obligations under term financing agreements with the various
lending institutions totaled $2.9 million, with a weighted average interest
rate of 9.9%, and outstanding capital leases were $3.2 million, with a weighted
average interest rate of 9.4%. The outstanding amounts under these financing
arrangements and leases will be paid in connection with the closing of the
Offering. On July 5, 1996 SOMAR obtained term financing of $0.7 million with an
annual interest rate of 4.0% from the West Virginia Economic Development
Authority ("WVEDA"). This financing replaced $0.7 million of term financing
used to finance SOMAR's Huntington, West Virginia call centers.
31
<PAGE>
NBG
Founded in 1991, NBG provides outbound telemarketing services to clients in the
financial services, telecommunications and high technology industries. NBG's
revenues are derived primarily from service fees charged to clients on a
performance/results basis, rather than on an hourly basis.
Results of Operations
The following table sets forth selected financial data and data as a percentage
of revenues for the periods indicated.
<TABLE>
<CAPTION>
---------------------------------------------------------------------
YEAR ENDED TWENTY-SIX WEEKS ENDED
DECEMBER 31, DECEMBER 30, DECEMBER 29, JUNE 30, JUNE 28,
1993 1994 1995 1995 1996
Dollars in thousands ------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $4,849 100.0% $5,778 100.0% $12,829 100.0% $5,599 100.0% $8,924 100.0%
Cost of services 3,200 66.0 4,259 73.7 8,572 66.8 3,556 63.5 5,995 67.2
Selling, general and
administrative
expenses 1,289 26.6 1,443 25.0 2,115 16.5 1,046 18.7 1,389 15.5
------ ------ ------- ------ ------
Total operating
expenses 4,489 92.6 5,702 98.7 10,687 83.3 4,602 82.2 7,384 82.7
Operating income 360 7.4 76 1.3 2,142 16.7 997 17.8 1,540 17.3
Interest expense, net 75 1.5 43 0.7 36 0.3 30 0.5 22 0.3
------ ------ ------- ------ ------
Pre-tax income $ 285 5.9 $ 33 0.6 $ 2,106 16.4 $ 967 17.3 $1,518 17.0
====== ====== ======= ====== ======
</TABLE>
Twenty-Six Weeks Ended June 28, 1996 Compared to Twenty-Six Weeks Ended June
30, 1995
Revenues. Revenues increased to $8.9 million in the twenty-six weeks ended June
28, 1996 from $5.6 million in the twenty-six weeks ended June 30, 1995, an
increase of $3.3 million, or 59.4%. This increase was primarily a result of an
increase in revenues from two of NBG's most significant clients to $8.3 million
in the twenty-six weeks ended June 28, 1996 from $5.1 million in the twenty-six
weeks ended June 30, 1995, an increase of $3.2 million, or 62.7%. Revenues from
these clients increased primarily as a result of increased telemarketing call
volume.
Cost of Services. Cost of services, which primarily consists of labor,
telephone and other call center-related operating and support expenses,
increased to $6.0 million in the twenty-six weeks ended June 28, 1996 from $3.6
million in the twenty-six weeks ended June 30, 1995, an increase of $2.4
million, or 68.6%. As a percentage of revenues, cost of services increased to
67.2% in the twenty-six weeks ended June 28, 1996 from 63.5% in the twenty-six
weeks ended June 30, 1995. This increase primarily resulted from higher
performance-based revenue per unit of cost in the twenty-six weeks ended June
30, 1995 than in the twenty-six weeks ended June 28, 1996.
Selling, General, and Administrative. Selling, general, and administrative
expenses increased to $1.4 million in the twenty-six weeks ended June 28, 1996
from $1.0 million in the twenty-six weeks ended June 30, 1995, an increase of
$0.4 million, or 32.8%. As a percentage of revenues, selling, general, and
administrative expenses decreased to 15.5% in the twenty-six weeks ended June
28, 1996 from 18.7% in the twenty-six weeks ended June 30, 1995, primarily as a
result of the spreading of expenses over increased revenues.
Year Ended December 29, 1995 Compared to Year Ended December 30, 1994
Revenues. Revenues increased to $12.8 million in 1995 from $5.8 million in
1994, an increase of $7.0 million, or 122.0%. This increase was primarily a
result of an increase in revenues from two of NBG's most significant clients to
$11.9 million in 1995 from $5.2 million in 1994, an increase of $6.7 million,
or 128.9%. Revenues from these clients increased primarily as a result of
increased telemarketing call volume and in particular, a full year of revenues
in 1995 from one of these clients, compared to approximately four months of
revenues in 1994. The remaining increase was due to the addition of several
clients in the high technology and financial services industries.
32
<PAGE>
Cost of Services. Cost of services increased to $8.6 million in 1995 from $4.3
million in 1994, an increase of $4.3 million, or 101.3%. As a percentage of
revenues, cost of services decreased to 66.8% in 1995 from 73.7% in 1994. This
decrease primarily resulted from the spreading of certain fixed costs over
increased revenues.
Selling, General and Administrative. Selling, general and administrative
expenses increased to $2.1 million in 1995 from $1.4 million in 1994, an
increase of $0.7 million, or 46.6%. This increase primarily resulted from
additional administrative, personnel and related corporate expenses associated
with NBG's growth. As a percentage of revenues, selling, general and
administrative expenses decreased to 16.5% in 1995 from 25.0% in 1994,
primarily as a result of the spreading of expenses over increased revenues.
Year Ended December 30, 1994 Compared to Year Ended December 31, 1993
Revenues. Revenues increased to $5.8 million in 1994 from $4.8 million in 1993,
an increase of $1.0 million, or 19.2%. This increase was primarily a result of
an increase in revenues from two of NBG's most significant clients to $5.2
million in 1994 from $4.6 million in 1993. The remaining increase was a result
of increased telemarketing call volume from other existing clients and the
addition of new clients.
Cost of Services. Cost of services increased to $4.3 million in 1994 from $3.2
million in 1993, an increase of $1.1 million, or 33.1%. As a percentage of
revenues, cost of services increased to 73.7% in 1994 from 66.0% in 1993. This
increase resulted primarily from investments to increase capacity.
Selling, General and Administrative. Selling, general and administrative
expenses increased to $1.4 million in 1994 from $1.3 million in 1993, an
increase of $0.1 million, or 11.9%. This increase resulted primarily from
additional administrative, personnel and related corporate expenses associated
with NBG's growth. As a percentage of revenues, selling, general and
administrative expenses decreased to 25.0% in 1994 from 26.6% in 1993,
primarily as a result of the spreading of expenses over increased revenues.
Liquidity and Capital Resources
NBG's primary sources of liquidity have historically been cash flows from
operating activities and available borrowing capacity under credit facilities.
The following table sets forth selected information from NBG's statements of
cash flows for the period indicated.
<TABLE>
-----------------------------------------------------------------
<CAPTION>
YEAR ENDED TWENTY-SIX WEEKS ENDED
DECEMBER 31, DECEMBER 30, DECEMBER 29, JUNE 30, JUNE 28,
1993 1994 1995 1995 1996
Dollars in thousands ------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Net cash provided by
(used in) operating
activities $ 280 $215 $1,383 $ 1,287 $ 2,163
Net cash provided by
(used in) investing
activities (78) (42) (594) (143) (52)
Net cash provided by
(used in) financing
activities (207) (182) (89) (216) (852)
</TABLE>
From 1993 through the twenty-six weeks ended June 28, 1996, NBG generated net
cash of $4.0 million from operating activities. This amount was generated
primarily from pre-tax income plus depreciation and amortization.
Historically, net cash used in investing activities has been expended for
equipment and other capital to support expansion of NBG's call center
operations, including additions to NBG's data management, telephone and
management information systems. Financing activities have included limited
borrowings, and distributions to stockholders. NBG finances the majority of its
equipment purchases with capital leases. The Company has a line of credit with
a bank, which expires in May 1997 and provides for a maximum borrowing of
$500,000. As of June 28, 1996, there were no outstanding borrowings under this
line of credit.
33
<PAGE>
HARRIS
Founded in 1931, Harris is a regional, vertically-integrated direct mail and
fulfillment organization which provides its services primarily to companies in
the pharmaceuticals and healthcare, financial services and insurance
industries. Harris operates two wholly-owned subsidiaries, Harris Direct
Marketing, Inc. ("HDM") and Harris Fulfillment, Inc. ("HFI"). HDM clients and
certain of HFI clients compensate Harris on a per project basis.
Results of Operations
The following table sets forth selected financial data and data as a percentage
of revenues for the periods indicated.
<TABLE>
---------------------------------------------------------------------
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
1993 1994 1995 1995 1996
Dollars in thousands ------------ ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $7,018 100.0% $10,115 100.0% $12,690 100.0% $7,525 100.0% $5,367 100.0%
Cost of services 3,834 54.6 5,530 54.7 6,402 50.5 3,543 47.1 2,762 51.5
Selling, general and
administrative
expenses 2,473 35.3 2,680 26.5 2,986 23.5 1,431 19.0 1,521 28.3
------ ------- ------- ------ ------
Total operating
expenses 6,307 89.9 8,210 81.2 9,388 74.0 4,974 66.1 4,283 79.8
Operating income 711 10.1 1,905 18.8 3,302 26.0 2,551 33.9 1,084 20.2
Interest expense, net 142 2.0 186 1.8 144 1.1 97 1.3 33 0.6
------ ------- ------- ------ ------
Pre-tax income $ 569 8.1 $ 1,719 17.0 $ 3,158 24.9 $2,454 32.6 $1,051 19.6
====== ======= ======= ====== ======
</TABLE>
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995
Revenues. Revenues decreased to $5.4 million in the six months ended June 30,
1996 from $7.5 million in the six months ended June 30, 1995, a decrease of
$2.1 million, or 28.7%. This decrease resulted from a 30.1% decrease in HFI
revenue and a 26.2% decrease in HDM revenue. The decrease in HFI revenue to
$3.4 million in the six months ended June 30, 1996 from $4.8 million in the six
months ended June 30, 1995 was primarily a result of a $1.2 million decrease in
revenue from a single pharmaceutical client. The decrease in HDM revenue to
$2.0 million in the six months ended June 30, 1996 from $2.7 million in the six
months ended June 30, 1995 was due to the loss of $0.5 million in revenue
resulting from the loss of a significant client and a $0.4 million decrease in
revenue from another significant client, partially offset by revenue growth in
the remaining HDM client base and revenue generated from new clients.
Cost of Services. Cost of services, which primarily consists of labor and other
direct mail and fulfillment-related operating and support expenses, decreased
to $2.8 million in the six months ended June 30, 1996 from $3.5 million in the
six months ended June 30, 1995, a decrease of $0.7 million, or 22.0%. As a
percentage of revenues, cost of services increased to 51.5% in the six months
ended June 30, 1996 from 47.1% in the six months ended June 30, 1995. This
increase primarily resulted from the spreading of certain fixed costs of HFI's
operations over decreased revenues.
Selling, General and Administrative. Selling, general and administrative
expenses remained relatively constant at $1.5 million in the six months ended
June 30, 1996 and $1.4 million in the six months ended June 30, 1995. As a
percentage of revenues, selling, general and administrative expenses increased
to 28.3% in the six months ended June 30, 1996 from 19.0% in the six months
ended June 30, 1995. This increase was primarily a result of a decrease in
revenues at HFI. Selling, general and administrative expenses remained
relatively consistent at HDM as a percentage of HDM revenues for the six months
ended June 30, 1996 compared to the six months ended June 30, 1995, as HDM was
able to reduce its fixed costs at a rate consistent with the decrease in HDM
revenue.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenues. Revenues increased to $12.7 million in 1995 from $10.1 million in
1994, an increase of $2.6 million, or 25.5%. This increase primarily resulted
from an increase in HFI revenues to $8.3 million in 1995 from $5.4
34
<PAGE>
million in 1994. The increase in HFI revenues reflected a $2.4 million increase
generated from a single pharmaceuticals client and a 23.5% increase from the
remaining HFI client base. The increase in HFI revenues was partly offset by a
decrease in HDM revenues to $4.6 million in 1995 from $5.0 million in 1994,
primarily as a result of the loss of two significant direct mail clients,
partially offset by revenues from several new clients.
Cost of Services. Cost of services increased to $6.4 million in 1995 from $5.5
million in 1994, an increase of $0.9 million, or 15.8%. As a percentage of
revenues, cost of services decreased to 50.5% in 1995 from 54.7% in 1994. This
decrease primarily resulted from the spreading of certain fixed costs of HFI's
operations over increased revenues. HDM's cost of services as a percentage of
revenues in 1995 remained consistent with that of 1994.
Selling, General and Administrative. Selling, general and administrative
expenses increased to $3.0 million in 1995 from $2.7 million in 1994, an
increase of $0.3 million, or 11.4%. This increase primarily resulted from
additional infrastructure needed to support Harris's growth. As a percentage of
revenues, selling, general and administrative expenses decreased to 23.5% in
1995 from 26.5% in 1994. This decrease was primarily a result of the spreading
of expenses over increased revenues.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
Revenues. Revenues increased to $10.1 million in 1994 from $7.0 million in
1993, an increase of $3.1 million, or 44.1%. This increase primarily resulted
from an increase in HFI revenues to $5.4 million in 1994 from $3.2 million in
1993, $2.2 million of which was generated from an HFI pharmaceuticals client.
HDM revenues increased to $5.0 million in 1994 from $4.0 million in 1993. This
increase was primarily a result of an investment made in printing and insertion
equipment which generated an additional $0.8 million in HDM revenues from HDM's
two most significant clients.
Cost of Services. Cost of services increased to $5.5 million in 1994 from $3.8
million in 1993, an increase of $1.7 million, or 44.2%. As a percentage of
revenues, cost of services remained stable.
Selling, General and Administrative. Selling, general and administrative
expenses increased to $2.7 million in 1994 from $2.5 million in 1993, an
increase of $0.2 million, or 8.4%. The increase was primarily due to additional
infrastructure needed to support Harris's growth. As a percentage of revenues,
selling, general and administrative expenses decreased to 26.5% in 1994 from
35.3% in 1993, primarily as a result of the spreading of expenses over
increased revenues.
Liquidity and Capital Resources
Harris's primary sources of liquidity have been cash flows from operating
activities, availability of borrowings on its lines of credit, and bank
financing for equipment purchases. The following table sets forth selected
information from Harris's statements of cash flows for the periods indicated.
<TABLE>
-------------------------------------------------
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
1993 1994 1995 1995 1996
Dollars in thousands ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities $ 230 $ 1,883 $ 4,149 $ 2,136 $ (251)
Net cash provided by (used in)
investing activities (429) (903) (460) (325) (305)
Net cash provided by (used in)
financing activities 64 (339) (1,745) (1,234) (1,486)
</TABLE>
From 1993 through June 30, 1996, Harris generated $6.0 million in net cash from
operating activities. During this period, $8.7 million of cash was generated
from pre-tax income plus non-cash charges, reduced by $2.7 million of cash used
for working capital. Harris's working capital needs have been supplemented by
advances from customers for freight and postage. In the six months ended June
30, 1996, Harris used net cash in operating activities due to the timing of its
clients' payments.
35
<PAGE>
Net cash used in investing activities has supported HDM equipment purchases and
growth of HFI. Harris has incurred significant capital equipment expenditures
in its HDM operations, including expenditures for printing, insertion and
commingler equipment. In 1993, Harris generated $0.3 million in proceeds from
the sale of certain property and equipment.
Financing activities have included payments on HDM's facility mortgage and
distributions to stockholders. Stockholder distributions totaled $27,000, $0.1
million, $1.4 million and $1.4 million in 1993, 1994, 1995 and the six months
ended June 30, 1996, respectively. Harris's two lines of credit expired in
April 1996 and Harris did not elect to renew them. Harris has secured several
equipment loans from a bank, which are being paid down by cash generated from
operating activities.
36
<PAGE>
REICH
Founded in 1978, Reich offers telemarketing services to clients in the
financial services, telecommunications and insurance industries. Reich also
offers additional value-added services to its clients, such as marketing
planning, database marketing, creative development, situation analysis, in-
house copy and art services and production management. Reich earns revenue for
telemarketing services on an hourly basis and is compensated for planning and
marketing services on a fee-for-service basis.
Results of Operations
The following table sets forth selected financial data and data as a percentage
of revenues for the periods indicated.
<TABLE>
-------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
1993 1994 1995 1995 1996
Dollars in thousands ------------ ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $4,375 100.0% $5,424 100.0% $12,253 100.0% $5,521 100.0% $11,347 100.0%
Cost of services 3,172 72.5 4,225 77.9 7,836 63.9 3,417 61.9 6,692 58.9
Selling, general and
administrative expenses 1,111 25.4 976 18.0 2,534 20.7 665 12.0 1,199 10.6
------ ------ ------- ------ -------
Total operating
expenses 4,283 97.9 5,201 95.9 10,370 84.6 4,082 73.9 7,891 69.5
Operating income 92 2.1 223 4.1 1,883 15.4 1,439 26.1 3,456 30.5
Interest expense, net 21 0.5 24 0.4 43 0.4 27 0.5 31 0.3
------ ------ ------- ------ -------
Pre-tax income $ 71 1.6 $ 199 3.7 $ 1,840 15.0 $1,412 25.6 $ 3,425 30.2
====== ====== ======= ====== =======
</TABLE>
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995
Revenues. Revenues increased to $11.3 million in the six months ended June 30,
1996 from $5.5 million in the six months ended June 30, 1995, an increase of
$5.8 million, or 106.0%. This increase primarily resulted from increased
telemarketing call volume from two existing clients in the financial services
industry and one existing client in the telecommunications industry. Reich's
call center in West Virginia, which opened in May 1995, and the relocation and
expansion of its Delaware and West Virginia call centers provided additional
capacity for the increased call volume.
Cost of Services. Cost of services, which primarily consists of labor,
telephone and other call center-related operating, support, relocation and
expansion expenses, increased to $6.7 million for the six months ended June 30,
1996 from $3.4 million for the six months ended June 30, 1995, an increase of
$3.3 million or 95.8%. As a percentage of revenues, cost of services decreased
to 58.9% in the six months ended June 30, 1996 from 61.9% in the six months
ended June 30, 1995. This decrease primarily resulted from lower long-distance
service rates and a lower average cost of labor.
Selling, General and Administrative. Selling, general and administrative costs
increased to $1.2 million for the six months ended June 30, 1996 from $0.7
million for the six months ended June 30, 1995, an increase of $0.5 million, or
80.3%. The increase primarily resulted from increases in salaries and related
expenses attributable to the existing personnel as well as personnel added to
the executive management team. The remaining increase was primarily the result
of increases in general and administrative costs associated with the increased
business activity.As a percentage of revenues, selling, general and
administrative expenses decreased to 10.6% for the six months ended June 30,
1996 from 12.0% for the six months ended June 30, 1995 primarily as a result of
the spreading of expenses over increased revenues.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenues. Revenues increased to $12.3 million in 1995 from $5.4 million in
1994, an increase of $6.9 million, or 126.0%. This increase primarily resulted
from increased telemarketing call volume from a financial services
37
<PAGE>
client and the addition of new clients in the telecommunications and financial
services industries. The opening of Reich's call center in West Virginia in May
1995 provided the capacity for the increased call volume. Revenues from non-
telemarketing-related services decreased to $0.9 million in 1995 from $1.3
million in 1994, as Reich focused its attention on telemarketing activities.
Cost of Services. Cost of services increased to $7.8 million in 1995 from $4.2
million in 1994, an increase of $3.6 million, or 85.5%. As a percentage of
revenues, however, cost of services decreased to 63.9% in 1995 from 77.9%. This
decrease primarily resulted from the increased utilization of existing
capacity.
Selling, General and Administrative. Selling, general and administrative
expenses increased to $2.5 million in 1995 from $1.0 million in 1994, an
increase of $1.5 million, or 160.0%. The majority of this increase was due to a
one-time $0.8 million increase in compensation to Reich's president and sole
shareholder to $0.9 million in 1995 from $0.1 million in 1994. The remaining
increase was primarily due to salaries and related expenses attributable to
personnel added to the executive management team in 1995, as well as additional
general and administrative costs associated with the increase in business
activity.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
Revenues. Revenues increased to $5.4 million in 1994 from $4.4 million in 1993,
an increase of $1.0 million, or 24.0%. This increase primarily resulted from
increased telemarketing call volume from financial services clients.
Cost of Services. Cost of services increased to $4.2 million in 1994 from $3.2
million in 1993, an increase of $1.0 million, or 33.2%. As a percentage of
revenues, cost of services increased to 77.9% in 1994 from 72.5% in 1993. This
increase primarily resulted from increased costs for additional management and
other infrastructure required to handle the revenue growth. Other
infrastructure costs were primarily attributable to additional account
management, information services and operation management personnel.
Selling, General and Administrative. Selling, general and administrative
expenses decreased to $1.0 million in 1994 from $1.1 million in 1993, a
decrease of $0.1 million, or 12.2%. As a percentage of revenues, selling,
general and administrative expenses decreased to 18.0% in 1994 from 25.4% in
1993. This decrease primarily resulted from enhanced control and management of
expenses, particularly the reduction of administrative and office support
expenses.
Liquidity and Capital Resources
Reich's principal sources of liquidity have been cash flows from operating
activities and available borrowing capacity under credit facilities and capital
leases. The following table sets forth selected information from Reich's
statements of cash flows for the periods indicated.
<TABLE>
-----------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
1993 1994 1995 1995 1996
Dollars in thousands ---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C>
Net cash provided by
(used in)
operating
activities $ (4) $ 219 $ 745 $ 1,091 $ 2,326
Net cash provided by
(used in)
investing
activities (37) (138) (1,212) (595) (829)
Net cash provided by
(used in)
financing
activities 39 (78) 656 (115) (1,346)
</TABLE>
From 1993 through June 30, 1996, Reich's net cash provided by operating
activities of $3.3 million was primarily generated from pre-tax income. During
the period, operating cash flow was negatively impacted by increases in working
capital (excluding cash and current maturities on long-term debt). The
additional working capital was principally related to the increase in accounts
receivable that resulted from the growth in the telemarketing business over the
same period.
38
<PAGE>
Net cash used in investing activities was attributable to equipment and other
capital to support the opening of a new call center and relocation and
expansion of Reich's Delaware and West Virginia call center facilities. The
significant increase in 1995 capital expenditures related to the opening of
Reich's new call center operation in West Virginia. The continued capital
expenditures during the six months ended June 30, 1996 related to the expansion
and relocation of the Delaware and West Virginia call center facilities.
Financing activities primarily have included borrowing activities under various
long-term debt arrangements, capital leases and shareholder loans. In December
1995, Reich received commitments for low interest loans of up to $0.7 million
from the City of Wheeling, West Virginia and the WVEDA. These loans will be
used to fund the cost associated with the relocation and expansion of Reich's
West Virginia call center which was originally funded by operating cash flows.
39
<PAGE>
TELESPECTRUM
Founded in 1984, TeleSpectrum specializes in providing both inbound and
outbound telemarketing services to the high technology, pharmaceuticals and
healthcare and consumer products industries. TeleSpectrum's revenues primarily
derive from inbound teleservices and call center management services.
TeleSpectrum is typically paid on an hourly basis for telemarketing services
and on a negotiated, project-by-project basis for other services.
Results of Operations
The following table sets forth selected financial data and data as a percentage
of revenues for the period indicated.
<TABLE>
<CAPTION>
------------------------------------------------------------------------
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
1993 1994 1995 1995 1996
Dollars in thousands -------------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 9,916 100.0% $9,386 100.0% $11,854 100.0% $5,592 100.0% $8,034 100.0%
Cost of services 7,429 74.9 6,754 72.0 8,338 70.2 3,828 68.5 5,290 65.8
Selling, general and
administrative
expenses 2,628 26.5 2,636 28.0 3,072 26.0 1,652 29.5 2,121 26.4
------- ------ ------- ------ ------
Total operating
expenses 10,057 101.4 9,390 100.0 11,410 96.2 5,480 98.0 7,411 92.2
Operating income
(loss) (141) (1.4) (4) -- 444 3.8 112 2.0 623 7.8
Interest expense, net 99 1.0 150 1.6 184 1.6 85 1.5 119 1.5
------- ------ ------- ------ ------
Pre-tax income (loss) $ (240) (2.4) $ (154) (1.6) $ 260 2.2 $ 27 0.5 $ 504 6.3
======= ====== ======= ====== ======
</TABLE>
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995
Revenues. Revenues increased to $8.0 million in the six months ended June 30,
1996 from $5.6 million in the six months ended June 30, 1995, an increase of
$2.4 million, or 43.7%. This increase primarily resulted from increased call
volume from existing clients and the addition of several new clients.
Cost of Services. Cost of services, which primarily consists of labor,
telephone and other call center-related operating and support expenses,
increased to $5.3 million in the six months ended June 30, 1996 from $3.8
million in the six months ended June 30, 1995, an increase of $1.5 million, or
38.2%. As a percentage of revenues, cost of services decreased to 65.8% in the
six months ended June 30, 1996 from 68.5% in the six months ended June 30,
1995. This decrease primarily resulted from increased utilization of existing
capacity.
Selling, General and Administrative. Selling, general and administrative
expenses increased to $2.1 million in the six months ended June 30, 1996 from
$1.7 million in the six months ended June 30, 1995, an increase of $0.4
million, or 28.4%. This increase was principally the result of additional
administrative, personnel and related corporate expenses associated with
TeleSpectrum's growth. As a percentage of revenues, selling, general and
administrative expenses decreased to 26.4% in 1996 from 29.5% in 1995,
primarily as a result of the spreading of expenses over increased revenues.
Interest Expense, Net. Interest expense, net, increased to $119,000 in the six
months ended June 30, 1996 from $85,000 in the six months ended June 30, 1995.
This increase primarily reflected higher average outstanding borrowings during
the six months ended June 30, 1996 compared to borrowings in the six months
ended June 30, 1995. Borrowings were used to finance working capital needs.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenues. Revenues increased to $11.9 million in 1995 from $9.4 million in
1994, an increase of $2.5 million, or 26.3%. This increase primarily resulted
from increased call volume from existing inbound clients and the addition of
new inbound clients, principally in the pharmaceuticals and healthcare
industry.
Cost of Services. Cost of services increased to $8.3 million in 1995 from $6.8
million in 1994, an increase of $1.5 million, or 23.5%. As a percentage of
revenues, cost of services decreased to 70.2% in 1995 from 72.0% in 1994,
primarily as a result of the spreading of fixed costs over increased revenues.
40
<PAGE>
Selling, General and Administrative. Selling, general and administrative
expenses increased to $3.1 million in 1995 from $2.6 million in 1994, an
increase of $0.5 million, or 16.5%. This increase primarily resulted from
additional administrative, personnel and corporate expenses associated with the
growth in revenues. As a percentage of revenues, selling, general and
administrative expenses decreased to 26.0% in 1995 from 28.0% in 1994,
primarily as a result of the spreading of expenses over increased revenues.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
Revenues. Revenues decreased to $9.4 million in 1994 from $9.9 million in 1993,
a decrease of $0.5 million, or 5.3%. This decrease was primarily the result of
a loss of revenues of approximately $0.4 million from a pharmaceuticals and
healthcare client.
Cost of Services. Cost of services decreased to $6.8 million in 1994 from $7.4
million in 1993, a decrease of $0.6 million, or 9.1%. As a percentage of
revenues, cost of services decreased to 72.0% in 1994 from 74.9% in 1993,
primarily as a result of the closing of a software products distribution
division.
Selling, General and Administrative. Selling, general and administrative
expenses were $2.6 million in 1993 and 1994. As a percentage of revenues,
selling, general and administrative expenses increased to 28.0% in 1994 from
26.5% in 1993, primarily as a result of the decrease in revenues.
Liquidity and Capital Resources
TeleSpectrum's primary sources of liquidity have been cash flows from operating
activities and available borrowing capacity under credit facilities. The
following sets forth selected information from TeleSpectrum's statement of cash
flows for the periods indicated:
<TABLE>
--------------------------------------------
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
Dollars in thousands 1993 1994 1995 1995 1996
<S> <C> <C> <C> <C> <C>
--------- --------- -------- --------- ----------
Net cash provided by
(used in) operating
activities $(412) $(260) $ (4) $ (8) $ (170)
Net cash provided by
(used in) investing
activities (69) 37 (99) (288) (526)
Net cash provided by
(used in) financing
activities 179 359 (45) 133 1,286
</TABLE>
Net cash used in operating activities from 1993 through June 30, 1996 resulted
principally from increases in working capital to support increases in revenue,
offset by net income. Net cash used in investing activities was expended
primarily for the purchase of telecommunications and computer equipment. Net
cash provided by financing activities included borrowings under TeleSpectrum's
line of credit facility and payments of debt and capital lease obligations.
In May 1996, TeleSpectrum obtained a $4.0 million revolving line of credit with
interest at the bank's prime rate plus 1.5%. This revolving credit facility is
to be used for refinancing of existing debt, working capital purposes and
capital expenditure purposes. This credit facility contains a financial
covenant which requires TeleSpectrum to maintain a prescribed interest coverage
ratio.
In connection with the agreement for the Acquisition of the TeleSpectrum
Operating Business, CRW Financial advanced TeleSpectrum $0.5 million, evidenced
by a promissory note due one year from the date the proceeds were received with
interest at 9.0%. The note has been contributed by CRW Financial to
TeleSpectrum Worldwide as part of the Initial Capitalization. Upon the closing
of the Acquisition of the TeleSpectrum Operating Business, TeleSpectrum
Worldwide will pay a portion of the purchase price by cancellation of the
promissory note.
41
<PAGE>
THE RESPONSE CENTER
Founded in 1987, The Response Center is a full service custom market research
firm which primarily serves clients in the telecommunications, financial
services, utilities, pharmaceuticals and healthcare industries. The Response
Center derives its revenues from the provision of market research services and
is paid on a per-project basis.
Results of Operations
The following table sets forth selected financial data and data as a percentage
of revenues for the periods indicated.
<TABLE>
---------------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31, JUNE 30,
1993 1994 1995 1995 1996 1995 1996
Dollars in thousands ------------- ------------- ------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $6,061 100.0% $6,183 100.0% $6,719 100.0% $3,584 100.0% $2,781 100.0% $5,199 100.0% $4,583 100.0%
Cost of services 2,911 48.0 3,426 55.4 3,583 53.3 1,811 50.5 1,534 55.2 2,702 52.0 2,438 53.2
Selling, general
and
administrative
expenses 2,806 46.3 2,800 45.3 2,717 40.5 1,551 43.3 1,310 47.1 2,107 40.5 1,731 37.8
------ ------ ------ ------ ------ ------ ------
Total
operating
expenses 5,717 94.3 6,226 100.7 6,300 93.8 3,362 93.8 2,844 102.3 4,809 92.5 4,169 91.0
Operating income
(loss) 344 5.7 (43) (0.7) 419 6.2 222 6.2 (63) (2.3) 390 7.5 414 9.0
Interest expense
(income), net (12) (0.2) (6) (0.1) (10) (0.2) -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------
Pre-tax income
(loss) $ 356 5.9 $ (37) (0.6) $ 429 6.4 $ 222 6.2 $ (63) (2.3) $ 390 7.5 $ 414 9.0
====== ====== ====== ====== ====== ====== ======
</TABLE>
Nine Months Ended June 30, 1996 Compared to Nine Months Ended June 30, 1995
Revenues. Revenues decreased to $4.6 million in the nine months ended June 30,
1996 from $5.2 million in the nine months ended June 30, 1995, a decrease of
$0.6 million, or 11.9%. This decrease was the result of reduced revenues from
The Response Center's largest client and revenues from tracking surveys related
to federal elections performed in the nine months ended June 30, 1995, which
were not repeated in the nine months ended June 30, 1996.
Cost of Services. Cost of services, which primarily consists of labor,
telephone and other call center-related operating and support expenses,
decreased to $2.4 million in the nine months ended June 30, 1996 from $2.7
million in the nine months ended June 30, 1995, a decrease of $0.3 million, or
9.8%. As a percentage of revenues, cost of services increased to 53.2% in the
nine months ended June 30, 1996 from 52.0% in the nine months ended June 30,
1995, as a result of the spreading of relatively fixed call center-related
operating and support expenses over reduced revenues.
Selling, General and Administrative. Selling, general and administrative
expenses decreased to $1.7 million in the nine months ended June 30, 1996 from
$2.1 million in the nine months ended June 30, 1995, a decrease of $0.4
million, or 17.9%. As a percentage of revenues, selling, general and
administrative expenses decreased to 37.8% in the nine months ended June 30,
1996 from 40.5% in the nine months ended June 30, 1995 as a result of lower
executive compensation which was $0.7 million in the nine months ended June 30,
1996 and $1.1 million in the nine months ended June 30, 1995.
Six Months Ended March 31, 1996 Compared to Six Months Ended March 31, 1995
Revenues. Revenues decreased to $2.8 million in the six months ended March 31,
1996 from $3.6 million in the six months ended March 31, 1995, a decrease of
$0.8 million, or 22.4%. This decrease was primarily the result of reduced
revenues from The Response Center's largest client and revenues from tracking
surveys related to federal elections performed in the six months ended March
31, 1995, which were not repeated in the six months ended March 31, 1996.
42
<PAGE>
Cost of Services. Cost of services decreased to $1.5 million in the six months
ended March 31, 1996 from $1.8 million in the six months ended March 31, 1995,
a decrease of $0.3 million, or 15.3%. As a percentage of revenues, cost of
services increased to 55.2% in the six months ended March 31, 1996 from 50.5%
in the six months ended March 31, 1995 as a result of the spreading of
relatively fixed call center-related operating and support expenses over
reduced revenues.
Selling, General and Administrative. Selling, general and administrative
expenses decreased to $1.3 million in the six months ended March 31, 1996 from
$1.6 million in the six months ended March 31, 1995, a decrease of $0.3
million, or 15.5%. As a percentage of revenues, selling, general and
administrative expenses increased to 47.1% in the six months ended March 31,
1996 from 43.3% in the six months ended March 31, 1995, primarily as a result
of the decrease in revenues. Selling, general and administrative expenses
include compensation paid to The Response Center's officers totaling $0.6
million in the six months ended March 31, 1996 and $0.7 million in the six
months ended March 31, 1995.
Year Ended September 30, 1995 Compared to Year Ended September 30, 1994
Revenues. Revenues increased to $6.7 million in 1995 from $6.2 million in 1994,
an increase of $0.5 million, or 8.7%. The Response Center generated
approximately 20.0% of 1995 revenues from new clients. This increase in
revenues was partially offset by a decrease in revenues from an existing
client.
Cost of Services. Cost of services increased to $3.6 million in 1995 from $3.4
million in 1994, an increase of $0.2 million, or 4.6%. As a percentage of
revenues, cost of services decreased to 53.3% in 1995 from 55.4% in 1994. This
decrease primarily resulted from reduced recruitment cost due to more cost
effective agreements with temporary agencies, and reduced telephone expense as
a percentage of revenues, partially offset by increased interviewer payroll
costs as a percentage of revenues. Reduced telephone expense resulted from
lower rates negotiated in a new long distance contract.
Selling, General and Administrative. Selling, general and administrative
expenses decreased to $2.7 million in 1995 from $2.8 million in 1994, a
decrease of $0.1 million, or 3.0%. As a percentage of revenues, selling,
general and administrative expenses decreased to 40.5% in 1995 from 45.3% in
1994, primarily as a result of economies of scale related to increased revenues
despite increased data processing payroll costs. Selling, general and
administrative expenses include compensation paid to The Response Center's
officers totaling $1.5 million in each of 1994 and 1995.
Year Ended September 30, 1994 Compared to Year Ended September 30, 1993
Revenues. Revenues increased to $6.2 million in 1994 from $6.1 million in 1993,
an increase of $0.1 million, or 2.0%. This increase in revenues was due to
increased revenues from new and existing clients, partly offset by a decrease
in revenues from The Response Center's largest client.
Cost of Services. Cost of services increased to $3.4 million in 1994 from $2.9
million in 1993, an increase of $0.5 million, or 17.7%. As a percentage of
revenues, cost of services increased to 55.4% in 1994 from 48.0% in 1993. This
increase was primarily the result of a single, large project in 1993 which was
billed at a higher-than-standard rate.
Selling, General and Administrative. As a percentage of revenues, selling,
general and administrative expenses decreased to 45.3% in 1994 from 46.3% in
1993. Selling, general and administrative expenses include compensation paid to
The Response Center's officers of $1.5 million in 1994 as compared to $1.7
million in 1993.
43
<PAGE>
Liquidity and Capital Resources
The Response Center's principal source of liquidity has historically been cash
flows from operating activities and loans from shareholders. The following
table sets forth selected information from The Response Center's statements of
cash flows for the periods indicated.
<TABLE>
----------------------------------------------------------------------
<CAPTION>
SIX MONTHS NINE MONTHS
YEAR ENDED SEPTEMBER 30, ENDED MARCH 31, ENDED JUNE 30,
1993 1994 1995 1995 1996 1995 1996
Dollars in thousands ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Net cash provided by
(used in)
operating
activities $ 368 $ 111 $188 $ 130 $ 529 $ 81 $ 693
Net cash provided by
(used in)
investing
activities 158 (59) 44 23 (148) 18 (156)
Net cash provided by
(used in)
financing
activities (412) (193) (22) (22) (22) (22) (75)
</TABLE>
From fiscal 1993 through June 30, 1996, The Response Center generated $1.4
million in cash from operating activities. During this period, $1.3 million of
cash was generated from pre-tax income plus noncash charges, and $0.1 million
of cash was generated from working capital (excluding cash and current
maturities of long-term debt). Additional working capital changes were
principally related to a decrease in accounts payable and increase in accounts
receivable resulting from the increase in revenues.
Investing activities have included purchases of property and equipment, sales
of short term investments and purchases of short term investments.
Financing activities have included distributions to and borrowing activity from
shareholders.
44
<PAGE>
BUSINESS
TeleSpectrum Worldwide was founded in 1996 to create a premier provider of
integrated teleservices solutions. With the capabilities of the Operating
Businesses, the Company can offer its clients complete solutions that build
upon a foundation of outbound and inbound telemarketing and include inbound
customer service, market research, direct mail and fulfillment and other direct
marketing services. The Company operates over 1,700 workstations in 23 call
centers located primarily in the eastern United States, and, assuming an
average per workstation of 45 calls per hour, 16 hours per day, 6 days per
week, has the capacity to handle over 300 million calls per year. The Company
focuses on providing teleservices to major clients in the telecommunications,
insurance, financial services, pharmaceuticals and healthcare, consumer
products and high technology industries.
ORGANIZATION
Simultaneously with the closing of this Offering, TeleSpectrum Worldwide will
acquire six teleservices and related businesses. The aggregate consideration to
be paid by TeleSpectrum Worldwide for the Operating Businesses is $160.8
million which consists of: (i) $90.9 million in cash to be paid to the Sellers
upon the consummation of the Offering; (ii) forgiveness of a $0.5 million
promissory note from one of the Operating Businesses; (iii) the $44.7 million
estimated fair value of 4,403,863 shares of Common Stock to be issued to the
Sellers; (iv) the $2.1 million estimated fair value of warrants to purchase
593,400 shares of Common Stock at the initial public offering price of $15.00
per share to be issued in connection with the Acquisitions; (v) the $18.7
million deemed value for accounting purposes of the CRW Lender Warrants and CRW
Management Warrants as discussed in this Prospectus to purchase 2,272,562
shares of Common Stock currently owned by CRW Financial at $1.50 per share; and
(vi) estimated transaction costs of $3.9 million. The estimated purchase price
for the Acquisitions is subject to certain purchase price adjustments at
closing and earn-out arrangements. The Company has entered into earn-out
arrangements with the Sellers of the SOMAR, NBG and Reich Operating Businesses,
pursuant to which the Sellers may receive payments based upon the performance
of the Operating Businesses. The amount of each earn-out payment, if any, is
based on the Operating Business' earnings before interest and taxes, for each
of the Operating Businesses for 1996, and for SOMAR for 1997 as well. In
calculating the earnings of each Operating Business, the Company will not
allocate any Company expenses to the Operating Business, other than expenses
directly incurred by that Operating Business. See "Certain Relationships and
Related Party Transactions--The Acquisitions."
The consummation of each Acquisition is subject to customary conditions. These
conditions include, among others, the continuing accuracy as of the closing
date of the representations and warranties of the Operating Businesses and of
TeleSpectrum Worldwide, the performance by each of them of all covenants
included in the agreements relating to the Acquisition and the nonexistence of
a material adverse change in the results of operations, financial condition or
business of each Operating Business.
INDUSTRY OVERVIEW
The teleservices industry facilitates the direct communication of marketing
information to and from current and prospective customers by telephone.
Indirect marketing methods, such as radio, television and print advertising,
employ a "one-to-many" approach to convey marketing information that can
position products and services within a broad market context. Direct marketing
methods, such as telemarketing and direct mail, employ a "one-to-one" approach
to deliver a marketing message directly to a specific current or prospective
customer and to elicit immediate customer response. In addition to traditional
outbound and inbound telemarketing, teleservices include inbound telephone-
based customer service and support and related value-added services such as
market research, direct mail and fulfillment, training, consulting, call center
management and electronic order processing.
As businesses seek greater returns from their investments in marketing
activities, they are increasingly coupling traditional indirect marketing
methods such as advertising with direct marketing methods such as
telemarketing. Advances in computer and telecommunications technology are
helping telemarketers to more accurately identify and contact potential
customers, and are providing CCRs with more complete on-line guidance and
support.
45
<PAGE>
Improvements in the scale and speed of computer and telecommunications
networking capabilities allow teleservices providers to implement larger and
more complex programs for their clients. As a result, clients in a variety of
industries have the opportunity to increase the breadth and depth of their
telemarketing efforts. Industry sources estimate that companies in the United
States spent approximately $77 billion on telemarketing activities in 1995.
To date, businesses have relied overwhelmingly upon in-house call center
personnel to provide telemarketing and telephone-based customer support
services. However, the Company believes that businesses are increasingly
outsourcing their ancillary needs to third party providers as they focus more
closely upon their core businesses. This trend toward outsourcing may be
reinforced by the rising level of capital expenditures necessary to provide
telemarketing services that can take full advantage of recent advances in
computer and telecommunications technology. Providers of outsourced
teleservices can offer clients economies of scale in sharing the cost of new
technology among a larger base of users than might be possible with in-house
telemarketing, while at the same time better matching available capacity to
fluctuating client demand.
As the trend toward outsourcing continues, the Company believes that businesses
will increasingly seek to reduce the number of vendors they utilize, and may
prefer single-source providers of integrated solutions drawing upon a variety
of related services and capabilities. Such a trend could encourage
consolidation within the currently fragmented teleservices industry. The
Company thus believes that further opportunities may emerge for an integrated
teleservices provider that can assemble and offer other value-added services,
such as inbound customer service, market research, direct mail and fulfillment
and other direct marketing services, which together can create complete
solutions to clients' direct marketing needs.
STRATEGY
The Company's goal is to become the premier national provider of integrated
teleservices solutions. To attain this goal, the Company intends to employ the
following strategies:
Offer a Single Source for Complete, Integrated Solutions
The Company intends to offer its clients a single source for all of their
outsourced teleservices needs. To effect this strategy, the Company is focused
upon assembling the full spectrum of teleservices resources, including outbound
and inbound calling, customer service, market research, direct mail and
fulfillment, training, consulting, call center management and electronic order
processing. In particular, the Company will utilize its expertise and expand
its capacity to provide sophisticated and flexible inbound customer service
solutions for its clients. The Company will seek to craft tailored, value-added
teleservices solutions that are designed to achieve clients' intended marketing
results.
Establish Long-Term Relationships with Major Clients
The Company seeks to establish associations with major clients whose
outsourcing needs foster long-term, significant relationships. As clients
continue to outsource an increasing portion of their direct sales and customer
service activities, the Company will endeavor to capitalize upon its
relationships and past performance to expand the range of services that it
provides to each of its clients.
Add New Clients in Targeted Industries
The Company is focused upon expanding its client base in those industries
currently utilizing teleservices, including telecommunications, insurance,
financial services, pharmaceuticals and healthcare and high technology. The
Company believes that within these industries there are many large corporations
which may employ the services offered by the Company for a substantial portion
of their direct sales and customer service needs. The Company will seek to
provide services to new clients in its existing targeted industries, and to add
clients in new targeted industries where it believes that it can utilize its
capabilities and expertise. In particular, due to increased competition for
local and long-distance telephone customers anticipated to result from recent
deregulation, the Company has identified additional teleservices opportunities
and is targeting new clients in the telecommunications industry.
46
<PAGE>
Pursue Strategic Acquisitions
The Company intends to complement internal growth through aggressive pursuit of
acquisitions to expand the Company's capacity, add new services and products
and extend its market reach. The Company's management team includes individuals
with significant experience in effecting strategic acquisitions and integrating
acquired businesses.
SERVICES OVERVIEW
Simultaneously with the closing of the Offering, TeleSpectrum Worldwide will
acquire, in the Acquisitions, the Operating Businesses. The Operating
Businesses provide the following services:
Outbound Telemarketing
The Company provides both business-to-consumer and business-to-business
outbound telemarketing services, which consist primarily of direct sales
activities initiated by the Company on behalf of clients. These activities are
directed towards client-generated, electronically transmitted lists of
customers who have been selected to match the demographic profile of the
targeted customer for the offered product or service. The Company's
computerized call management systems utilize predictive dialers to
automatically dial telephone numbers, determine if a live connection is made
and present connected calls to a CCR who has been trained for the client's
program. The client or the Company provides a prepared script to assist the CCR
in marketing the product or service to the call recipient. SOMAR, NBG, Reich
and TeleSpectrum provide outbound telemarketing services.
Inbound Teleservices
The Company provides inbound teleservices support for activities such as
customer service, catalog sales, response to customer inquiries and electronic
order processing. Inbound callers typically call toll-free numbers to request
product or service information, place orders for advertised products or obtain
assistance with a previous order or purchase. The Company uses automated call
distributors to direct callers to appropriate CCRs, who have access to on-line
support databases to address customers' needs. TeleSpectrum and Harris provide
inbound teleservices.
Market Research
The Company's market research capabilities include problem conceptualization,
program design, data gathering by telephone, mail and focus groups, data
tabulation and results analysis. Interviewing personnel use advanced data
collection technology to obtain data from a statistically projectable sample of
survey contacts. The Company then tabulates and analyzes fielded data using
multi-variate statistical techniques, and produces detailed reports that can
answer clients' marketing questions and suggest further avenues of inquiry
where appropriate. The Response Center provides market research services.
Direct Mail and Fulfillment
The Company's direct mail services include preparing, addressing, coordinating,
sorting and mailing materials to current and potential customers of the
Company's clients. The Company also provides fulfillment services, which
involve filling orders received through outbound telemarketing, direct mail
solicitation and inbound customer service calls, including automated inbound
call center services. In its direct mail operations, the Company obtains name
and address data from clients, processes the data to eliminate duplicates and
correct errors and addresses pre-printed materials, in some cases with
personalized greetings and messages. Mailings are then coordinated and collated
by automated folding and inserting equipment, sorted by zip code to obtain the
fullest available postal discounts for mass-mailings, and in most instances
mailed from the Company's in-house postal facility. In its fulfillment
operations, the Company maintains warehouse space for storage of client-
supplied products and literature, which are sorted and bar-coded for inventory
control. Harris provides direct mail services; Harris and TeleSpectrum provide
fulfillment services.
Additional Value-Added Services
The Company offers additional value-added services, such as strategic
marketing, planning and consulting services, database marketing and management,
training and call center management, to complement its core
47
<PAGE>
teleservices offerings. Planning and consulting services include product
development and program design. Call center management involves all aspects of
recruiting, staffing, managing operations, providing analysis and reports to
clients at their own on-site telemarketing facilities and providing call center
technology and systems integration for database development. Reich and
TeleSpectrum provide additional value-added services.
THE OPERATING BUSINESSES
The following table sets forth certain information about the Operating
Businesses as of August 5, 1996.
<TABLE>
<CAPTION>
EMPLOYEES CCRS
(FULL- (FULL- INSURANCE
TIME/ TIME/ AGENTS
PART- PART- (FULL-
TIME) TIME) TIME) WORKSTATIONS CALL CENTERS
--------- --------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
SOMAR 1,750/0 1,501/0 517* 712 7
NBG 123/624 50/621 0 314 7
Harris 144/6 0/0 0 0 1
Reich 848/0 722/0 65** 320 3
TeleSpectrum 487/8 347/8 19*** 332 4
The Response Center 85/100 38/98 0 130 1
--------- --------- --- ----- ---
Total 3,437/738 2,658/727 601 1,808 23
</TABLE>
- --------
* Holding an aggregate of 2,582 insurance licenses in 35 states.
** Holding an aggregate of 649 insurance licenses in 46 states.
*** Holding an aggregate of 19 insurance licenses in 2 states.
SOMAR
Founded in 1982, SOMAR is a nationwide provider of outsourced telephone-based
sales, marketing and customer management services, principally to clients in
the insurance industry and also to clients in the financial services,
telecommunications and consumer products industries. SOMAR's three principal
clients in 1995 were in the insurance industry and accounted for 32.7%, 15.7%
and 15.0% of SOMAR's 1995 revenues of $31.9 million. For the six months ended
June 30, 1996, these same clients accounted for 22.2%, 21.6% and 6.1% of
SOMAR's revenues of $20.8 million in that period. As of August 5, 1996, SOMAR's
1,501 CCRs (of whom 517 were licensed insurance agents) operated 712
workstations in seven call centers located in North Carolina and West Virginia.
These call centers are managed from SOMAR's headquarters facility in Salisbury,
North Carolina through local- and wide-area networking telecommunications and
computer technology.
NBG
Founded in 1991, NBG provides nationwide outbound telemarketing services to
clients in the financial services, telecommunications and high technology
industries. NBG's principal clients in 1995 were a financial services industry
client and an outsourcing contractor, which coordinated the provision of
services to a telecommunications industry company and a financial services
industry company; these two principal clients accounted for 52.7% and 40.2%,
respectively, of NBG's 1995 revenues of $12.8 million. For the twenty-six weeks
ended June 28, 1996, these same clients accounted for 66.2% and 26.7%,
respectively, of NBG's revenues of $8.9 million in that period. As of August 5,
1996, NBG's 671 CCRs operated 314 workstations in seven call centers located in
Massachusetts and Arizona. These call centers are managed from NBG's
headquarters in Cambridge, Massachusetts.
Harris
Founded in 1931, Harris is a regional, vertically-integrated direct mail and
fulfillment organization which provides its services primarily to companies in
the pharmaceuticals and healthcare, financial services and insurance
industries, principally in the Middle Atlantic states. Harris operates a full
service direct mail organization that provides data processing, lettershop,
printing and bindery and postal services. Utilizing electronic tracking and
automated customer interface technologies, Harris also provides turnkey
fulfillment services including warehousing, inventory management, packing and
shipping. Harris's principal client in 1995 was a
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<PAGE>
pharmaceuticals industry client, which accounted for 44.7% of Harris's 1995
revenues of $12.7 million. For the six months ended June 30, 1996, this same
client accounted for 46.2% of Harris' revenues of $5.4 million in that period.
Reich
Founded in 1978, Reich offers nationwide telemarketing services to clients in
the financial services, telecommunications and insurance industries. Reich also
offers additional value-added services to its clients, such as marketing
planning, database marketing, creative development, situation analysis, in-
house copy and art services and production management. Reich's principal
clients in 1995 were two financial services industry clients, an insurance
industry client and a telecommunications industry client, which accounted for
46.2%, 12.3%, 14.7% and 14.7%, respectively, of Reich's 1995 revenues of $12.3
million. For the six months ended June 30, 1996, these same clients accounted
for 42.5%, 0.4%, 10.3% and 33.8%, respectively, of Reich's revenues of $ 11.3
million in that period. As of August 5, 1996, Reich's 722 CCRs (of whom 65 were
licensed insurance agents) operated 320 workstations in Reich's three call
centers in Pennsylvania, Delaware and West Virginia. These call centers are
managed from Reich's headquarters in Philadelphia, Pennsylvania.
TeleSpectrum
Founded in 1984, TeleSpectrum specializes in providing nationwide inbound and
outbound telemarketing and fulfillment services to the high technology,
pharmaceuticals and healthcare and consumer products industries. Based in
Annapolis, Maryland, TeleSpectrum also provides call center management and
telephone marketing, consulting and training services. As of August 5, 1996,
TeleSpectrum's 355 CCRs (of whom 19 were licensed insurance agents) operated
332 workstations in four call centers located in Maryland and Pennsylvania.
TeleSpectrum's proprietary training services include both customized and off-
the-shelf solutions. TeleSpectrum's principal client in 1995 was a high
technology industry client, which accounted for 21.7% of TeleSpectrum's 1995
revenues of $11.9 million. For the six months ended June 30, 1996,
TeleSpectrum's principal client was a high technology industry client, which
accounted for 8.2%, of TeleSpectrum's revenues of $8.0 million in that period.
The Response Center
Founded in 1987, The Response Center is a nationwide, full service custom
market research firm which primarily serves clients in the telecommunications,
financial services, utilities, pharmaceuticals and healthcare industries. The
Response Center designs and implements, through the use of customized software,
research programs in areas such as customer satisfaction, advertising tracking,
product positioning, pricing strategies and concept testing. The Response
Center then analyzes the results of its research and presents those results to
clients. As of August 5, 1996, 136 CCRs operated 130 workstations from The
Response Center's call center in Upper Darby, Pennsylvania. The Response
Center's principal client in 1995 was in the telecommunications industry and
accounted for 27.5% of 1995 revenues of $6.7 million. For the nine months ended
June 30, 1996, The Response Center's principal client was in the
telecommunications industry, and accounted for 25.2% of The Response Center's
revenues of $4.6 million in that period.
No client referred to above was a significant client of more than one Operating
Business.
COMPETITION
The telemarketing industry is intensely competitive. Industry participants
compete primarily on price, available capacity, range of service offerings,
quality and customer service. The Company competes with numerous independent
telemarketing firms, as well as the in-house telemarketing operations of many
of its clients or potential clients. The Company's competitors include APAC
TeleServices Inc., ICT Group, Inc., ITI Marketing Services, Inc., MATRIXX
Marketing Inc., SITEL Corporation and West Telemarketing Corporation. In
addition, most businesses that are significant consumers of teleservices
utilize more than one telemarketing firm at a time and reallocate work among
various firms from time to time. A significant amount of such work is
contracted on an individual project basis, with the effect that the Company and
other firms seeking such business are required to compete with each other
frequently as individual projects are initiated. Further, the Company believes
that
49
<PAGE>
businesses with telemarketing operations will continue to outsource the
management of those operations and that this trend may attract new competitors,
including competitors that are substantially larger and better capitalized than
the Company, into the Company's market. The Company may not be able to compete
effectively against its current competitors, and the Company cannot assure that
additional competitors with greater resources than the Company will not enter
the industry and compete effectively against the Company or that the trend
toward outsourcing telemarketing activity will continue. To the extent that the
Company is unable to compete successfully against its existing and future
competitors, its business, operating results and financial condition could be
materially adversely affected.
SALES, MARKETING AND CLIENTS
The Company's marketing strategy centers around providing tailored solutions to
each client's teleservices needs. Each Operating Business has its own sales
personnel and, as of August 5, 1996, there were a total of 27 sales personnel
employed by all of the Operating Businesses. The Company intends to enable
sales personnel from all of its Operating Businesses to work together to take
advantage of potential cross-selling opportunities. Sales personnel are
compensated by salary and bonuses based on individual performance and overall
profitability.
Sales teams work directly with each client or potential client to develop an
effective solution to the client's teleservices needs. Often, the Company
initially develops a pilot program for a new client to demonstrate the
Company's abilities and the effectiveness of its teleservices offerings. The
Company's sales personnel often communicate results of teleservices programs
and assist clients in modifying programs for future use.
The Company generally operates under short-term contractual relationships with
its clients. Pricing often includes an initial fee, a base service charge and
separate charges for ancillary services. Service charges for telemarketing
services are based upon hourly rates for outbound calls, per minute rates for
inbound calls or a commission or performance payment on successful sales or
results. Charges for other services such as consulting, market research,
training, direct mail and fulfillment may be computed on a fee-for-service or
piecework basis.
Historically, the Operating Businesses have acquired new clients and marketed
their services primarily by attending trade shows, advertising in industry
publications, responding to requests for proposals, pursuing client referrals
and cross-selling to existing clients. The Company targets those companies with
the greatest potential to generate recurring revenues because of their ongoing
direct sales and customer service needs, and also those which have large
customer bases which can benefit from targeted telemarketing programs. Many of
the Company's current clients have sizable in-house telemarketing operations,
and the Company often competes against those in-house operations for the
client's business. During 1995, the Company provided, on a pro forma basis,
services to approximately 400 clients. Mass Marketing Insurance Group accounted
for approximately 11.9% of the Company's pro forma 1995 revenues. No other
client accounted for more than 10.0% of the Company's pro forma revenues in
1995.
TARGETED INDUSTRIES
The Company targets its teleservices solutions toward clients in the following
industries:
Telecommunications
The Company provides telemarketing programs for major telecommunications
companies for long distance, cellular and cable products and services, as well
as regional telecommunications companies marketing advanced telephone features.
The Company offers its telecommunications industry clients a range of services,
including customer service, sales and survey campaigns.
Insurance
The Company works with large consumer insurance companies and their agents,
complementing its clients' own sales efforts by offering products such as life
and accidental death and dismemberment insurance. On a pro forma combined basis
as of August 5, 1996, the Company employed 601 agents collectively holding
3,250 state insurance licenses from 46 states.
50
<PAGE>
Financial Services
The Company provides banks and other financial services clients with a wide
range of services, which primarily consist of credit cardholder acquisitions
and also include active account generation, account balance transfer, account
retention and customer service.
Pharmaceuticals and Healthcare
The Company provides pharmaceuticals clients with product support, customer
service and fulfillment services. In addition, the Company performs market
research and analysis for clients in the healthcare industry.
Consumer Products
The Company provides its consumer products clients with customer service, order
entry and new customer acquisition services and can support inbound calls 24
hours per day and 365 days per year.
High Technology
The Company provides product support and customer service inbound teleservices
for clients in the computer hardware and software industry. In addition, the
Company provides business-to-business teleservices such as lead generation,
customer qualification and account management, as well as call center
management, for high technology clients.
PERSONNEL AND TRAINING
On a pro forma combined basis as of August 5, 1996, the Company employed 3,437
individuals on a full-time basis and 738 individuals on a part-time basis,
3,385 of whom were CCRs. The Company's ability to hire, train and manage
qualified employees is critical to its ability to provide high quality services
to its clients. The Company's service centers are located in areas that give
the Company access to a capable labor supply. The Company provides training
upon hire, as well as advanced and follow-up training. This training includes
instruction in proper direct marketing and customer service techniques, as well
as instruction in the specific characteristics of the industries which the
Company serves. In addition, the Company has 601 insurance CCRs on a pro forma
combined basis as of August 5, 1996, each of whom is licensed to sell insurance
in one or more states, and all of whom collectively are licensed to sell
insurance in 46 states.
QUALITY ASSURANCE
The Operating Businesses have consistently emphasized quality service and
extensive employee training. The Company's quality assurance program includes
the selection and training of qualified CCRs, the training and professional
development of call center management personnel, monitoring of calls and sales
verification and editing. Both the Company and its clients are able to perform
real time on-site and remote call monitoring to maintain quality and
efficiency. Sales confirmations may be recorded (with the customer's consent),
and callers may also be monitored by management personnel to verify the
accuracy and authenticity of transactions. Additionally, the Company is able to
provide its clients with current updates on the progress of an ongoing
telemarketing effort. Access to this data allows the Company and its clients to
identify previously unrecognized potential campaign opportunities and to
immediately modify or enhance a telemarketing effort.
GOVERNMENT REGULATION
Telemarketing sales practices are regulated at both the federal and state
level. The federal Telephone Consumer Protection Act of 1991 (the "TCPA"),
enforced by the Federal Communications Commission, imposes restrictions on
unsolicited automated telephone calls to residential telephone subscribers.
Under the TCPA it is unlawful to initiate telephone solicitations to
residential telephone subscribers before 8:00 a.m. or after 9:00 p.m., local
time at the subscriber's location, or to use automated telephone dialing
systems or artificial or prerecorded voices to call certain subscribers.
Additionally, the TCPA requires telemarketing firms to develop a written policy
implementing a "do not call" list, including the training of its telemarketing
personnel to comply with these restrictions. Currently, the Company trains its
service representatives to comply with the regulations of the TCPA
51
<PAGE>
and programs its call management system to prevent initiating telephone calls
during restricted hours or to individuals maintained on the Company's "do not
call" list.
The Federal Trade Commission (the "FTC") regulates both general sales
practices, and telemarketing specifically. Under the Federal Trade Commission
Act (the "FTC Act"), the FTC has broad authority to prohibit a variety of
advertising or marketing practices that may constitute "unfair or deceptive
acts and practices."
The FTC also administers the federal Telemarketing and Consumer Fraud and Abuse
Prevention Act of 1994 (the "TCFAPA"). Under the TCFAPA, the FTC has issued
regulations prohibiting a variety of deceptive, unfair or abusive practices in
telemarketing sales. Generally, these rules prohibit misrepresentations of the
cost, quantity, terms, restrictions, performance or characteristics of products
or services offered by telephone solicitation or of refund, cancellation or
exchange policies. The regulations also regulate the use of prize promotions in
telemarketing to prevent deception and require that a telemarketer identify
promptly and clearly the seller on whose behalf the telemarketer is calling,
the purpose of the call, the nature of the goods or services offered and, if
applicable, that no purchase or payment is necessary to win a prize. The
regulations also require that telemarketers maintain records on various aspects
of their business. The Company believes that it is in compliance with the TCPA
and the regulations promulgated pursuant to the TCFAPA.
Violation of the rules and regulations applicable to telemarketing practices
may result in injunctions against certain operations, in monetary penalties or
disgorgement of profits; moreover, such violations may give rise to private
actions for damages.
From time to time, bills are introduced in Congress which, if enacted, would
regulate the use of credit information. There can be no assurance that any such
legislation, if enacted, will not have an adverse effect on the telemarketing
industry generally or the Company's operations specifically.
Most states have enacted statutes similar to the FTC Act prohibiting unfair or
deceptive acts and practices. A number of states have enacted legislation and
other states are considering enacting legislation to regulate telemarketing.
For example, telephone sales in certain states are not final until a written
contract is delivered to and signed by the buyer, and such a contract often may
be canceled within three business days. At least one state also prohibits
telemarketers from requiring credit card payment, and several other states
require certain telemarketers to obtain licenses, post bonds or submit sales
scripts to the state's attorney general.
The industries served by the Company's Operating Businesses are also subject to
government regulation. Company employees who complete the sale of insurance
products are required to be licensed by various state insurance commissions and
to participate in regular continuing education programs, which currently are
provided by the Company.
52
<PAGE>
TELESPECTRUM WORLDWIDE FACILITIES
The Company's corporate headquarters are located in 3,000 square feet of leased
space in King of Prussia, Pennsylvania, where it shares office space with CRW
Financial, a principal stockholder of the Company. See "Certain Relationships
and Related Party Transactions--Headquarters Lease." In addition, as of August
5, 1996 the Company maintained the following material facilities:
<TABLE>
<CAPTION>
OPERATING DATE
BUSINESS LOCATION OPENED WORKSTATIONS
- ------------------- ------------------- -------------- ------------
<S> <C> <C> <C>
SOMAR Salisbury, NC February 1991 96
Winston-Salem, NC December 1992 84
Fayetteville, NC January 1994 104
Asheville, NC September 1994 81
Huntington, WV March 1995 103
Huntington, WV August 1995 103
Beckley, WV March 1996 141
NBG Cambridge, MA November 1991 32
Andover, MA November 1994 48
Westborough, MA June 1995 40
Burlington, MA December 1995 40
Phoenix, AZ December 1995 66
Phoenix, AZ July, 1996 48
Cambridge, MA January 1996 40
Harris Philadelphia, PA February 1976 *
King of Prussia, PA May 1987 **
Reich Philadelphia, PA February 1989 64
Wilmington, DE January 1996 60
Wheeling, WV April 1996 196
TeleSpectrum Annapolis, MD June 1989 117
San Francisco, CA June 1989 ***
Annapolis, MD September 1992 **
Linthicum, MD July 1996 72
King of Prussia, PA July 1996 73
Baltimore, MD August 1996 70
The Response Center Upper Darby, PA July 1994 130
-----
1,808
=====
</TABLE>
- --------
* Direct mail services.
** Fulfillment services.
*** Consulting and training services.
All of the Company's material facilities are leased, with the exception of the
Harris facility in Philadelphia, which is owned.
The Company believes that its existing and planned facilities are adequate for
the Company's current and near-term anticipated operations.
LEGAL PROCEEDINGS
The Company is not currently engaged in any legal proceedings that are
expected, individually or in the aggregate, to have a material adverse effect
on the business, results of operation or financial condition of the Company.
53
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning each of the
executive officers and directors of the Company following the consummation of
this Offering:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
<S> <C> <C>
J. Brian O'Neill 36 Chairman of the Board and Chief Executive Officer
Michael C. Boyd 55 President, Chief Operating Officer and Director
Richard C. Schwenk, Jr. 46 Senior Vice President and Chief Financial Officer
William F. Rhatigan 51 President of the Company's Telemarketing Group and Person
Named to Become a Director
Mark J. DeNino 42 Director
Richard W. Virtue 51 Person Named to Become a Director
Kevin W. Walsh 40 Person Named to Become a Director
Gregory M. Alcorn 38 Chief Executive Officer of the Company's SOMAR division
Patrick M. Baldasare 40 President of the Company's Market Research division
Michael J. Gallant 54 President of the Company's NBG division
Edward M. Idzik 54 President of the Company's Harris division
Morton M. Reich 56 President of the Company's Reich division
Karen E. Schweitzer 53 President of the Company's TeleSpectrum division
</TABLE>
J. BRIAN O'NEILL has been Chairman of the Board and Chief Executive Officer
since the formation of TeleSpectrum Worldwide in April 1996. Mr. O'Neill is
also Chairman of the Board of Directors and Chief Executive Officer of CRW
Financial, a receivables management company which was spun off from Casino and
Credit Services, Inc., a casino credit database and collection service
provider, in May 1995. Although Mr. O'Neill intends to devote the majority of
his time to the Company's business, he is also required to devote a substantial
amount of his time to his duties at CRW Financial. From July 1992 to May 1995,
Mr. O'Neill was Chairman and Chief Executive Officer of Casino and Credit
Services, Inc. From May 1988 to July 1992, Mr. O'Neill was Chairman of O'Neill
Properties, Inc., a real estate development company.
MICHAEL C. BOYD has been President and Chief Operating Officer of TeleSpectrum
Worldwide since its formation in April 1996 and a director since May 1996. Mr.
Boyd was a co-founder of QVC Network, Inc., a home shopping television company,
in 1986, and served as President and Chief Operating Officer until 1994. From
1994 to 1996, Mr. Boyd was an independent consultant.
RICHARD C. SCHWENK, JR. has served as Senior Vice President and Chief Financial
Officer of TeleSpectrum Worldwide since May 1996. Mr. Schwenk served as Chief
Financial Officer and Executive Vice President of Electronic Payment Services,
Inc., a provider of automated teller machine and point-of-sale transaction
processing services, from November 1992 to January 1996. From January 1991 to
July 1992, Mr. Schwenk was the Chief Financial Officer and Vice President of
Finance for Harris Adacom Corporation, a manufacturer and distributor of data
communication and computer peripheral equipment.
WILLIAM F. RHATIGAN will serve as President of the Company's Telemarketing
Group and will become a director upon consummation of the Offering. Mr.
Rhatigan was Chairman and Chief Executive Officer of NBG Services, Inc. from
1991 until the consummation of the Offering.
MARK J. DENINO has served as a director of TeleSpectrum Worldwide since May
1996. Mr. DeNino has been a managing director of Technology Leaders Management,
Inc., the general partner of Technology Leaders II L.P., which is a venture
capital firm and significant shareholder of CRW Financial, since 1994. For more
than three years prior to that, Mr. DeNino was President of Crossroads Capital,
Inc., an investment banking firm.
54
<PAGE>
RICHARD W. VIRTUE has served as Chief Executive Officer of SOMAR, Inc. since
1982, and will relinquish that post upon consummation of the Offering at which
time he will become a director of the Company. Mr. Virtue has entered into a
consulting agreement under which he will render consulting services to the
Company following the Offering. See "Certain Relationships and Related Party
Transactions--Consulting Agreement with Person Named to Become a Director."
KEVIN W. WALSH will become a director of the Company upon consummation of the
Offering. Mr. Walsh has been a partner of the law firm Adelman Lavine Gold and
Levin, a professional corporation, since 1988.
Upon consummation of the Acquisitions, the Company will form separate divisions
which will operate the respective Operating Businesses. The following
individuals will hold the positions indicated with such divisions. See "Certain
Relationships and Related Party Transactions--The Acquisitons."
GREGORY M. ALCORN will become Chief Executive Officer of the Company's SOMAR
division upon consummation of the Offering. Mr. Alcorn served as President of
SOMAR, Inc. from 1982 until the consummation of the Offering.
PATRICK M. BALDASARE will serve as President of the Company's Market Research
division upon consummation of the Offering. Mr. Baldasare was President of The
Response Center, Inc. from 1987 until the consummation of the Offering.
MICHAEL J. GALLANT will serve as President of the Company's NBG division upon
consummation of the Offering. Mr. Gallant was President of NBG Services, Inc.
from 1991 until the consummation of the Offering.
EDWARD M. IDZIK will serve as President of the Company's Harris division upon
consummation of the Offering. Mr. Idzik was President of HDM and HFI from 1979
until the consummation of the Offering.
MORTON M. REICH will serve as President of the Company's Reich division upon
consummation of the Offering. Mr. Reich was President of The Reich Group, Inc.
from 1978 until the consummation of the Offering.
KAREN E. SCHWEITZER will serve as President of the Company's TeleSpectrum
division upon consummation of the Offering. Ms. Schweitzer co-founded
TeleSpectrum, Inc. and was its President from 1984 until the consummation of
the Offering.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's Board of Directors has established two committees: an Audit
Committee and a Compensation Committee.
The responsibilities of the Audit Committee include recommending to the Board
of Directors the independent public accountants to be selected to conduct the
annual audit of the books and records of the Company, reviewing the proposed
scope of such audit and approving the audit fees to be paid, accounting and
financial controls of the Company with the independent public accountants and
the Company's financial and accounting staff and reviewing and approving
transactions between the Company and its directors, officers and affiliates.
Mr. DeNino is the sole member of the Audit Committee. Following consummation of
the Offering, Mr. Walsh will be appointed to the Audit Committee.
The Compensation Committee provides a general review of the Company's
compensation plans to ensure that they meet corporate objectives. The
responsibilities of the Compensation Committee also include administering the
1996 Stock Incentive Plan, including selecting the officers and salaried
employees to whom awards will be granted. Mr. DeNino is the sole member of the
Compensation Committee. Following consummation of the Offering, Mr. Walsh will
be appointed to the Compensation Committee.
55
<PAGE>
DIRECTOR COMPENSATION
Directors who are not currently receiving compensation as officers, employees
or consultants of the Company are entitled to receive an annual retainer fee of
$7,500, plus $500 and reimbursement of expenses for each meeting of the Board
of Directors and each committee meeting that they attend in person. In
addition, directors receive certain formula grants of non-qualified stock
options under the 1996 Stock Incentive Plan. See "--1996 Stock Incentive Plan."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee following the consummation of the
Offering are to be Mr. DeNino and Mr. Walsh, who will be elected to the
Company's Board of Directors upon consummation of the Offering.
EXECUTIVE COMPENSATION
TeleSpectrum Worldwide was incorporated in April 1996. Effective upon
consummation of the Acquisitions and for the balance of 1996, the Company
anticipates that it will, pursuant to employment agreements, pay compensation
based on the following annual salaries to its Chief Executive Officer and to
the four other individuals named below who are to be executive officers of the
Company and who the Company believes will be its four other most highly
compensated executive officers in 1996 (together, the "Named Executive
Officers").
<TABLE>
-------------------------------------------
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION AWARDS
------------ ------------
SECURITIES
UNDERLYING
SALARY($) BONUS($) OPTIONS
NAME AND PRINCIPAL POSITION --------- -------- ------------
<C> <S> <C> <C>
J. Brian O'Neill 130,000 -- (1) 500,000(2)
Chairman of the Board and Chief Executive Officer
Michael C. Boyd 275,000 225,000(3) 300,000(2)(4)
President and Chief Operating Officer
William F. Rhatigan 250,000 150,000(5) --
President of the Company's Telemarketing Group
Morton M. Reich 300,000 200,000(6) --
President of the Company's Reich division
Edward M. Idzik 275,000 225,000(5) --
President of the Company's Harris division
</TABLE>
- --------
(1) Mr. O'Neill will be entitled to an annual bonus based upon the operating
performance of the Company. The terms and amount of the annual bonus, which
shall not exceed $400,000, will be determined by the Compensation Committee of
the Company's Board of Directors after the additional independent, unaffiliated
director to be elected to the Company's Board of Directors is appointed to the
Compensation Committee.
(2) Options are to be granted under the 1996 Stock Incentive Plan as of the
date of this Prospectus at an exercise price equal to the initial public
offering price. One-fourth of the options will vest immediately; the balance of
the options will vest ratably over three years commencing on the first
anniversary of the date of grant.
(3) Consists of a performance bonus to be awarded based in part upon the
individual's performance and in part upon the operating performance of the
Company.
(4) Does not include options to purchase 300,000 additional shares that the
Company is to grant ratably over the course of the next four years pursuant to
Mr. Boyd's employment agreement.
(5) Consists of a guaranteed bonus.
(6) Consists of a performance bonus to be awarded based in part upon the
individual's performance and in part upon the operating performance of the
Company's Reich division.
56
<PAGE>
1996 STOCK INCENTIVE PLAN
The Company has adopted the 1996 Stock Incentive Plan, effective as of May 17,
1996. The 1996 Stock Incentive Plan provides for grants of stock options
("Options"), restricted stock, stock appreciation rights and performance units
(collectively, "Grants") to selected officers (including officers who are also
directors) and other employees of the Company, independent contractors and
consultants who perform services to the Company and its subsidiaries (the
"Participants"). In addition, the 1996 Stock Incentive Plan provides for grants
of formula stock options to non-employee directors. By encouraging stock
ownership, the Company seeks to motivate such individuals and to encourage such
individuals to devote their best efforts to the business and financial success
of the Company.
General. Subject to adjustment in certain circumstances as discussed below, the
1996 Stock Incentive Plan authorizes up to 2,300,000 shares of Common Stock for
issuance pursuant to the terms of the 1996 Stock Incentive Plan. If and to the
extent Options or Grants granted under the 1996 Stock Incentive Plan expire or
are terminated for any reason without being exercised, the shares of Common
Stock subject to such Option or Grant again will be available for purposes of
the 1996 Stock Incentive Plan.
Administration of the 1996 Stock Incentive Plan. The 1996 Stock Incentive Plan
is administered and interpreted by the Compensation Committee (the "Committee")
of the Board of Directors consisting of not less than two persons appointed by
the Board of Directors from among its members, each of whom must be a
"disinterested person" as defined by Rule 16b-3 under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and an "outside director" as
defined by Section 162(m) of the Code. Except with the formula stock option
grants to non-employee directors, the Committee has the sole authority to (i)
determine the individuals to whom awards shall be made under the 1996 Stock
Incentive Plan, (ii) determine the type, size and terms of the awards to be
made to each such individual, (iii) determine the time when the grants will be
made and the duration of any applicable exercise or restriction period,
including the criteria for vesting and the acceleration of vesting and (iv)
deal with any other matters arising under the Plan. See "--Committees of the
Board of Directors."
Awards. Awards under the 1996 Stock Incentive Plan may consist of (i) options
intended to qualify as incentive stock options ("ISOs") within the meaning of
Section 422 of the Code, (ii) so-called "nonqualified stock options" that are
not intended to so qualify ("NQSOs"), (iii) restricted stock, (iv) stock
appreciation rights ("SARs") and (v) performance units.
Eligibility for Participation. Awards may be made to any employee (including
officers and directors), independent contractor and consultant of the Company
or its subsidiaries. Non-employee directors of the Company are entitled only to
formula awards of NQSOs. During any calendar year, no participant may receive
awards for more than 500,000 shares of Common Stock issued or available for
issuance under the 1996 Stock Incentive Plan. As of June 30, 1996, no options
were outstanding under the 1996 Stock Incentive Plan.
Options. The exercise price of any ISO granted under the 1996 Stock Incentive
Plan will not be less than the fair market value of the underlying shares of
Common Stock on the date of grant. The exercise price of an ISO granted to an
employee who owns more than 10% of the Common Stock may not be less than 110%
of the fair market value of the underlying shares of Common Stock on the date
of grant. The exercise price of an NQSO may be greater than, equal to or less
than the fair market value of the underlying shares of Common Stock on the date
of grant. The Committee will determine the term of each Option; provided,
however, that the exercise period may not exceed ten years from the date of
grant, and the exercise period of an ISO granted to an employee who owns more
than 10% of the Common Stock may not exceed five years from the date of grant.
The participant may pay the exercise price (i) in cash, (ii) with the approval
of the Committee, by delivering shares of Common Stock owned by the participant
and having a fair market value on the date of exercise equal to the exercise
price or (iii) by a combination of the foregoing. The participant may instruct
the Company to deliver the shares of Common Stock due upon the exercise to a
designated broker instead of to the participant.
Formula Option Grants to Non-Employee Directors. Non-employee directors are
entitled to receive NQSOs pursuant to the formula grants under the 1996 Stock
Incentive Plan. According to the formula grants, each non-employee director who
is a member of the Board of Directors as of the effective date of the 1996
Stock Incentive
57
<PAGE>
Plan will receive a grant of an NQSO to purchase 2,500 shares of Common Stock
at a price equal to the initial public offering price in this Offering.
Thereafter, on each date on which the Company holds its annual meeting of
stockholders, each non-employee director in office immediately before and after
the annual election of directors will receive a grant of an NQSO to purchase
2,500 shares of Common Stock at an exercise price equal to the closing price
per share on The Nasdaq National Market on the date of grant. Each non-employee
director who first becomes a member of the Board of Directors after the
effective date of the 1996 Stock Incentive Plan will receive a grant of an NQSO
to purchase 2,500 shares of Common Stock on the date he or she becomes a member
of the Board of Directors, at an exercise price equal to the closing price of
the Common Stock on The Nasdaq National Market on the date of grant. The term
of each such option shall be ten years and each such option shall be fully and
immediately exercisable upon the date of grant.
Restricted Stock. The Committee may issue shares of restricted Common Stock to
a participant pursuant to the 1996 Stock Incentive Plan. Shares may be issued
for consideration or for no consideration, as the Committee determines. The
number of shares of Common Stock granted to each participant shall be
determined by the Committee, subject to the maximum limit described above.
Grants of restricted stock will be made subject to such performance
requirements, vesting provisions, transfer restrictions or other restrictions
and conditions as the Committee may determine in its sole discretion.
Stock Appreciation Rights. The Committee may grant SARs alone or in tandem with
any stock option pursuant to the 1996 Stock Incentive Plan. The exercise price
of an SAR will be either (i) the exercise price of the related stock option or
(ii) the fair market value of a share of Common Stock on the date of grant of
the SAR. When the participant exercises an SAR, the participant will receive
the amount by which the fair market value of the Common Stock on the date of
exercise exceeds the exercise price of the SAR. The participant may elect to
have such appreciation paid in cash or in shares of Common Stock, subject to
Committee approval. To the extent a participant exercises a tandem SAR, the
related option shall terminate. Similarly, upon exercise of a stock option, the
related SAR, if any, shall terminate.
Performance Units. The Committee may grant performance unit awards payable in
cash or shares of Common Stock at the end of a specified performance period.
Payment will be contingent upon achieving performance goals by the end of the
performance period. The measure of a performance unit may, in the Committee's
discretion, be equal to the fair market value of a share of Common Stock. The
performance goals will be comprised of specified annual levels of one or more
performance criteria as the Committee may deem appropriate such as earnings per
share of Common Stock of the Company, net earnings, operating earnings, unit
volume, net sales, market share, balance sheet measurements, cash return on
assets, stockholder return, or return on capital. The Committee will determine
the length of an award period, the maximum payment value of an award, and the
minimum performance goals required before payment will be made.
Amendment and Termination of the 1996 Stock Incentive Plan. The Board of
Directors may amend or terminate the 1996 Stock Incentive Plan at any time;
provided, however, that, the Board of Directors may not amend the 1996 Stock
Incentive Plan to (i) increase (except for increases due to the adjustments
discussed below) the aggregate number of shares of Common Stock for which
Options and/or Grants may be granted hereunder, (ii) decrease the minimum
exercise price specified by the 1996 Stock Incentive Plan in respect of ISOs,
(iii) change the class of employees eligible to receive ISOs under the 1996
Stock Incentive Plan, (iv) increase the individual limit of shares of Common
Stock for which Options and/or Grants may be granted to any single individual
under the 1996 Stock Incentive Plan, or (v) make any amendment that requires
stockholder approval pursuant to Rule 16b-3 of the Exchange Act or Section
162(m) of the Code without stockholder approval. The 1996 Stock Incentive Plan
will terminate on the day immediately preceding the tenth anniversary of its
effective date, unless terminated earlier by the Board of Directors or extended
by the Board of Directors with approval of the stockholders.
Adjustment Provisions. Subject to the change of control provisions below, in
the event of certain transactions identified in the 1996 Stock Incentive Plan,
the Board of Directors may appropriately adjust: (i) the number of shares of
Common Stock (and the option price per share) subject to the unexercised
portion of any outstanding options or SARs, (ii) the number of sharers of
Common Stock to be acquired pursuant to an award which has not
58
<PAGE>
vested, and (iii) the number of shares of Common Stock for which awards may be
made under the 1996 Stock Incentive Plan, and such adjustments shall be
effective and binding for all purposes of the 1996 Stock Incentive Plan.
Change of Control of the Company. In the event of a change of control, all
Options and Grants shall be fully vested. Each participant will be provided
with advance written notice by the Company prior to the change of control (to
the extent possible) and will have the right, within 90 days after such notice,
to exercise the options and SARs in full. Any Options or SARs not timely
exercised will terminate unless exchanged or substituted with the Company (or
its successor). Within 12 months following a change of control, a percentage of
the performance unit payments, if any, for the full performance period in which
the participant so terminates equal to the percentage of the performance period
during which the participant was in the employ or service of the Company (or
its successor) and all amounts for the prior performance period if not then
distributed will be distributed to such participant in a lump sum.
A change of control is defined as (i) a tender offer, merger or other
transaction as a result of which any person or group becomes the owner of more
than 50% of the Common Stock or the combined voting power of the Company's then
outstanding securities, (ii) a liquidation or a sale of substantially all the
Company's assets, (iii) the individuals constituting the Board of Directors or
individuals nominated or elected by them cease to constitute a majority of the
Board of Directors, or (iv) the Company's merger or consolidation with any
other corporation (other than a wholly owned subsidiary) if the Company is not
the surviving corporation (or survives only as a subsidiary of another
corporation).
Section 162(m). Under Section 162(m) of the Code, the Company may be precluded
from claiming a federal income tax deduction for total remuneration in excess
of $1,000,000 paid to the chief executive officer or to any of the other four
most highly compensated officers in any one year. Total remuneration would
include amounts received upon the exercise of stock options granted under the
1996 Stock Incentive Plan and the value of shares received when the shares of
restricted stock became transferable (or such other time when income is
recognized). An exception does exist, however, for "performance-based
compensation," including amounts received upon the exercise of stock options
pursuant to a plan approved by stockholders that meets certain requirements.
The 1996 Stock Incentive Plan has been approved by stockholders and is intended
to make grants of Options thereunder meet the requirements of "performance-
based compensation." Awards of restricted stock generally will not qualify as
"performance-based compensation."
59
<PAGE>
New Plan Benefits. Upon the Effective Date, it is contemplated that the Company
will grant certain Options under the 1996 Stock Incentive Plan at an exercise
price equal to the initial public offering price per share. With regard to
options granted to executive officers, one-fourth of the options vest
immediately and the remaining options vest ratably over the next three years on
successive anniversaries of the date of grant. Options granted to non-employee
directors vest immediately in their entirety. All other options will vest one-
third each on the first, second and third anniversaries of the date of grant.
All options expire on the tenth anniversary of the date of grant. The following
table sets forth certain information with respect to such contemplated Option
grants.
<TABLE>
<CAPTION>
DOLLAR VALUE(1) NUMBER OF UNITS(2)
NAME ND POSITIONA ---------------- ------------------
<S> <C> <C>
J. Brian O'Neill Not determinable 500,000
Chairman of the Board and Chief
Executive Officer
Michael C. Boyd Not determinable 300,000(3)
President and Chief Operating
Officer
William F. Rhatigan Not determinable --
President of the Company's
Telemarketing Group
Morton M. Reich Not determinable --
President of the Company's Reich
division
Edward M. Idzik Not determinable --
President of the Company's Harris
division
All current executive officers as a Not determinable 900,000(3)(4)
group
All current directors who are not Not determinable 2,500(5)
executive officers as a group
All employees, including all current
officers who are not executive
officers, as a group Not determinable 383,600
</TABLE>
- --------
(1)The dollar values of the awards under the 1996 Stock Incentive Plan are not
determinable at this time, since the options are expected to be granted at an
exercise price equal to the initial public offering price of the Common Stock.
(2)The number of units represents the number of shares of Common Stock
underlying the options expected to be granted.
(3)Does not include options to purchase 300,000 additional shares that the
Company is to grant ratably over the course of the next four years pursuant to
Mr. Boyd's employment agreement.
(4)Does not include options to purchase 100,000 additional shares that the
Company is to grant ratably over the course of the next four years pursuant to
an executive officer's employment agreement.
(5)Does not include options to purchase 2,500 shares to be granted to Mr. Walsh
upon his election to the Board of Directors.
EMPLOYMENT AGREEMENTS
Effective as of the consummation of the Offering, the Company will enter into
employment agreements with the Named Executive Officers and certain of the
Company's other executive officers. Mr. O'Neill's agreement provides that he
will be employed by the Company through May 20, 2000 at an annual salary of
$130,000, plus an annual bonus. The terms and amount of the annual bonus, which
shall not exceed $400,000, will be determined by the Compensation Committee of
the Company's Board of Directors after Mr. Walsh, the additional independent,
unaffiliated director to be elected to the Company's Board of Directors is
appointed to the Compensation Committee. In addition, Mr. O'Neill's employment
agreement provides that he shall be granted options to purchase 500,000 shares
of Common Stock. The options are to be granted pursuant to the Company's 1996
Stock Incentive Plan. See "Management--1996 Stock Incentive Plan." If Mr.
O'Neill is terminated without cause, or if Mr. O'Neill terminates his
employment for "good reason" (as defined in this employment agreement), he is
entitled to receive $330,000 per year for the remainder of the term of his
agreement. Mr. Boyd's agreement provides that he will be employed by the
Company through April 21, 2000 at an annual salary of $275,000, plus an annual
performance bonus of up to $281,250 based in part upon his performance and in
part upon the operating performance of the Company and stock options, of which
options to purchase 300,000 shares of Common Stock are to be granted upon the
Effective Date and options to purchase 75,000 shares of Common Stock are to be
granted annually thereafter during the term of his employment agreement. The
options are to be granted pursuant to the Company's
60
<PAGE>
1996 Stock Incentive Plan. See "Management--1996 Stock Incentive Plan."
Mr. Boyd's salary and bonus will be increased to match the salary and
guaranteed bonus of any employee of the Company subsequently hired at a salary
and guaranteed bonus which exceeds $500,000 in the aggregate. If Mr. Boyd is
terminated without cause, or if Mr. Boyd terminates his employment for "good
reason" (as defined in his employment agreement), he is entitled to receive
$387,500 payable over a one-year period. Mr. Schwenk's agreement provides that
he will be employed by the Company through May 5, 2000 at an annual salary of
$200,000, plus an annual performance bonus of up to $187,500 based in part upon
his performance and in part upon the operating performance of the Company and
stock options, of which options to purchase 100,000 shares of Common Stock are
to be granted upon the Effective Date and options to purchase 25,000 shares of
Common Stock are to be granted annually thereafter during the term of his
employment agreement. The options are to be granted pursuant to the Company's
1996 Stock Incentive Plan. See "Management--1996 Stock Incentive Plan." If Mr.
Schwenk is terminated without cause, or if Mr. Schwenk terminates his
employment for "good reason" (as defined in this employment agreement), he is
entitled to receive $275,000 payable over a one-year period. Mr. Rhatigan's
agreement provides that he will be employed by the Company for a four-year term
at an annual salary of $250,000, plus an annual guaranteed bonus of $150,000.
If Mr. Rhatigan is terminated without cause, he will continue to receive his
salary and bonus for the remainder of the term of the agreement. Mr. Alcorn's
agreement provides that he will be employed by the Company for a four-year term
at an annual salary of $195,000, plus an annual performance bonus of up to
$195,000 based upon the operating performance of the Company's SOMAR division.
If Mr. Alcorn is terminated without cause, he will continue to receive his
salary for the remainder of the term of the agreement. Mr. Baldasare's
agreement provides that he will be employed through December 31, 1999 at an
annual salary of $195,000, which shall increase to $220,000 after December 21,
1997, plus an annual bonus, which bonus shall be a portion of a pool, the
amount of which shall be determined by the operating performance of the
Company's Market Research division. If Mr. Baldasare is terminated without
cause, he will continue to receive his salary for the remainder of the term of
the agreement and his bonus for the year of termination. Mr. Gallant's
agreement provides that he will be employed by the Company for a four-year term
at an annual salary of $250,000, plus an annual guaranteed bonus of $150,000.
If Mr. Gallant is terminated without cause, he will continue to receive his
salary and bonus for the remainder of the term of the agreement. Mr. Idzik's
agreement provides that he will be employed by the Company for a four-year term
at an annual salary of $275,000, plus an annual guaranteed bonus of $225,000.
If Mr. Idzik is terminated without cause, he will continue to receive his
salary and bonus for the remainder of the term of the agreement. Mr. Reich's
agreement provides that he will be employed by the Company through December 31,
1999 at an annual salary of $300,000 plus an annual performance bonus of up to
$200,000 based in part upon his performance and in part upon the operating
performance of the Company's Reich division. If Mr. Reich is terminated without
cause, he will continue to receive his salary for the remainder of the term of
the agreement. Ms. Schweitzer's agreement provides that she will be employed by
the Company for a four-year term at an annual salary of $160,000 plus an annual
performance bonus of at least $150,000 based in part upon her performance, and
in part upon the operating performance of the Company's TeleSpectrum division.
If Ms. Schweitzer is terminated without cause, she will continue to receive her
salary for the remainder of the term at the agreement. Each of the agreements
contains confidentiality and non-competition provisions. The non-competition
provisions apply throughout the term of employment and for a period of two
years thereafter, with the exception of Messrs. O'Neill, Boyd and Schwenk whose
agreements provide for non-competition throughout the terms of their respective
employment and for a period of one year thereafter.
61
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The following table contains information concerning the aggregate cash paid and
stock and warrants issued in connection with the Acquisitions (excluding cash
and securities that may be paid or issued in connection with earn-out
arrangements). Also excludes CRW Lender Warrants and CRW Management Warrants.
See "--CRW Transactions."
<TABLE>
--------------------------------------------------------------
<CAPTION>
VALUE OF VALUE OF
SHARES OF SHARES
CASH COMMON STOCK SHARES UNDERLYING
(IN SHARES OF (IN UNDERLYING WARRANTS
MILLIONS) COMMON STOCK MILLIONS) WARRANTS (IN MILLIONS)
OPERATING BUSINESS --------- ------------ ------------ ---------- -------------
<S> <C> <C> <C> <C> <C>
SOMAR $25.0 2,207,340 $21.5 210,000 $0.7
NBG 14.1 1,120,225 12.7 112,500 0.4
Harris 12.2 202,192 2.0 60,900 0.2
Reich 20.0 441,468 4.3 105,000 0.4
TeleSpectrum 8.0(1) 176,587 1.7 44,100 0.2
The Response Center 11.6 256,051 2.5 60,900 0.2
----- --------- ----- ------- ----
Total $90.9 4,403,863 $44.7 593,400 $2.1
</TABLE>
- --------
(1)Does not include the cancellation of a $0.5 million promissory note from the
Seller of the Operating Business held by the Company.
THE ACQUISITIONS
Simultaneously with and as a condition of the consummation of the sale of the
shares of Common Stock offered hereby, TeleSpectrum Worldwide will acquire the
Operating Businesses in the Acquisitions, upon the following material terms:
SOMAR
TeleSpectrum Worldwide will acquire substantially all of the assets (and assume
substantially all of the liabilities) of SOMAR for $25.0 million in cash,
2,207,340 shares of Common Stock (valued at $21.5 million), contingent
payments, the grant of warrants (valued at $0.7 million) and the payment of
certain of SOMAR's expenses. The contingent payment for 1996, if any, is equal
to 50% of the amount by which the earnings before interest and taxes ("EBIT")
of the Company's SOMAR division for 1996 exceed $4.3 million and is payable in
cash. SOMAR's 1995 EBIT was $1.7 million. The contingent payment for 1997, if
any, is equal to the amount by which 1997 EBIT of the Company's SOMAR division
exceeds $17.3 million, multiplied by five, less the bonus payment discussed
below, not to exceed $45.0 million. The 1997 payment is payable in Common Stock
registrable upon demand by SOMAR. The number of shares to be issued in
satisfaction of the contingent payment will be calculated by reference to the
trading price of the Company's Common Stock at the time of the determination of
1997 EBIT. In addition, the Company shall make a bonus payment to the Company's
SOMAR division, in an amount equal to 50% of the amount by which the 1997 EBIT
exceeds $17.3 million, not to exceed $5.0 million. The bonus payment is payable
in cash to the SOMAR division for the purpose of granting bonuses to employees
of the SOMAR division, at the discretion of Mr. Alcorn. SOMAR shall reimburse
the Company the amount, if any, by which the stockholders' equity set forth on
the SOMAR balance sheet as of the closing date of the Acquisition is less than
the stockholders' equity set forth on the SOMAR balance sheet as of December
31, 1995, excluding expenses associated with the Acquisition and the Offering
and certain permitted distributions.
The Company will issue warrants exercisable for an aggregate of 210,000 shares
of Common Stock to certain senior management personnel of SOMAR, including
Messrs. Alcorn (31,500 shares) and Virtue (129,500 shares) at an exercise price
per share equal to the initial public offering price. The warrants will be
immediately exercisable and will expire ten years from issuance. On the
Effective Date the Company will grant options under the 1996 Stock Incentive
Plan to purchase an aggregate of 90,000 shares of Common Stock to certain
employees
62
<PAGE>
of SOMAR, not including Messrs. Alcorn and Virtue, at an exercise price per
share equal to the initial public offering price, which options shall be
subject to a three-year vesting period. The Company has granted piggyback
registration rights with respect to those shares issued in payment of a portion
of the purchase price of the Acquisition. SOMAR has the right to include in the
Offering 171,429 shares of Common Stock.
The Company will cause the Operating Business of SOMAR to be held and operated
as a separate division of the Company through December 31, 1997. The Company
will not allocate any Company expenses to SOMAR through December 31, 1997,
other than expenses directly incurred by SOMAR. The Company has committed to
make available to the Company's SOMAR division up to $14.0 million for the
purpose of meeting SOMAR's capital expenditure requirements. At or prior to the
Effective Date, CRW Financial, a significant stockholder of the Company, will
nominate and vote its shares in favor of the election of Mr. Virtue to the
Company's Board of Directors.
The Company will reimburse SOMAR for the fees and expenses incurred in
connection with the audit of its financial statements for the years ended
December 31, 1993 and 1994; one-half of the fee paid by SOMAR to The Robinson-
Humphrey Company, Inc., not to exceed $400,000; one-half of all accounting
fees, excluding those fees described above, incurred by SOMAR in connection
with the Acquisition and the Offering; and one-half of the legal fees incurred
by SOMAR in connection with the Acquisition and the Offering.
Upon consummation of the Offering, Mr. Virtue will repay to the Seller of the
SOMAR Operating Business an advance that, as of June 30, 1996, was in the
amount of $0.9 million. At or prior to the consummation of the Offering, all
amounts owing to the Company from certain entities which are under common
control and ownership with SOMAR, Inc. (the "SOMAR Affiliates"), or owing to
the SOMAR Affiliates from the Company, will be fully satisfied. All agreements,
understandings and arrangements with such SOMAR Affiliates will be amended so
that all continuing obligations of the Company's SOMAR division thereunder are
no greater than they would be under agreements with unaffiliated third parties.
NBG
TeleSpectrum Worldwide will acquire substantially all of the assets (and assume
substantially all of the liabilities) of NBG for $14.1 million in cash,
1,120,225 shares of Common Stock (valued at $12.7 million), a contingent
payment, the grant of warrants (valued at $0.4 million), and the payment of
certain of NBG's expenses. The contingent payment is equal to the amount by
which the product of NBG's 1996 EBIT and 7.25 exceeds $25.4 million. NBG's 1995
EBIT was $2.1 million. The Company has agreed to operate NBG as a separate
business through 1996. The Company will not allocate any Company expenses to
NBG through 1996, other than expenses directly incurred by NBG. The amount of
the contingent payment is payable in the form of a convertible promissory note
to be issued at closing of the Acquisition of NBG, which note is payable in
three equal installments of principal, together with accrued interest thereon,
ending January 2, 1999. Interest on the unpaid principal balance of the note
accrues at 7.25% per annum. The outstanding principal balance, or a portion
thereof, is convertible into shares of the Common Stock after the thirtieth day
following the first anniversary of the closing of the Acquisition of NBG, at a
conversion price equal to the average of the closing sale prices of the Common
Stock on the five trading days prior to December 31, 1996. NBG shall reimburse
the Company the amount, if any, by which the shareholders' equity set forth on
the NBG balance sheet as of the closing date of the Acquisition is less than
the shareholders' equity set forth on the NBG balance sheet as of December 31,
1995, excluding certain permitted distributions.
The Company will issue warrants exercisable for an aggregate of 56,250 shares
of Common Stock to each of Messrs. Rhatigan and Gallant, at an exercise price
per share equal to the initial public offering price. The warrants will be
immediately exercisable and will expire ten years from the date of issuance. On
the Effective Date, the Company will grant options under the 1996 Stock
Incentive Plan to purchase an aggregate of 75,000 shares of the Common Stock to
certain employees of NBG, not including Messrs. Rhatigan and Gallant, at an
exercise price per share equal to the initial public offering price, which
options shall be subject to a three-year vesting period. NBG has piggyback
registration rights with respect to those shares of Common Stock issued in
payment of a portion of the purchase price of the Acquisition and those shares
of Common Stock to be issued
63
<PAGE>
pursuant to the convertible note, if any. NBG has the right to include in the
Offering 334,000 shares of Common Stock, all of which it has determined to
include in the Offering.
At or prior to the Effective Date, CRW Financial, a significant stockholder of
the Company, shall nominate and vote its shares in favor of the election of Mr.
Rhatigan to the Company's Board of Directors. The Company shall pay the
expenses incurred by NBG's independent public accounting firm and up to
$100,000 of the legal fees incurred by NBG in connection with the Acquisition
and the Offering.
Harris
TeleSpectrum Worldwide will acquire substantially all of the assets (and assume
substantially all of the liabilities) of Harris for $12.2 million in cash,
202,192 shares of Common Stock (valued at $2.0 million), the grant of warrants
(valued at $0.2 million) and the payment of certain of Harris's expenses.
Harris has piggyback registration rights with respect to those shares of Common
Stock issued in payment of a portion of the purchase price of the Acquisition.
The Company will issue warrants exercisable for an aggregate of 60,900 shares
of Common Stock to certain executives of Harris, including warrants exercisable
for 54,810 shares to Mr. Idzik, at an exercise price per share equal to the
initial public offering price. The warrants will be immediately exercisable and
will expire ten years from the date of issuance. On the Effective Date, the
Company will grant options under the 1996 Stock Incentive Plan to purchase an
aggregate of 26,100 shares of the Common Stock to certain employees of Harris,
not including Mr. Idzik, at an exercise price per share equal to the initial
public offering price, which options shall be subject to a three-year vesting
period. Harris shall reimburse the Company the amount, if any, by which the
shareholders' equity set forth on the Harris balance sheet as of the closing
date of the Acquisitions is less than the shareholders' equity set forth on the
Harris balance sheet as of December 31, 1995, excluding certain permitted
distributions. The Company will pay the expenses incurred by Harris's
independent accounting firm and up to $100,000 of the legal fees incurred by
Harris in connection with the Acquisition and the Offering.
Reich
TeleSpectrum Worldwide will acquire substantially all of the assets (and assume
substantially all of the liabilities) of Reich for $20.0 million in cash,
441,468 shares of Common Stock (valued at $4.3 million), a contingent payment,
the grant of warrants (valued at $0.4 million), and the payment of certain of
Reich's expenses. The contingent payment is based upon the amount, if any, by
which Reich's 1996 EBIT multiplied by 7.25 exceeds $25.0 million. Reich's 1995
EBIT was $1.9 million. The Company has agreed to operate Reich as a separate
business through 1996. The Company will not allocate any Company expense to
Reich through 1996, other than expenses directly incurred by Reich. The
contingent payment is payable in the form of a convertible promissory note to
be issued at closing of the Acquisition, which note is payable in three equal
installments of principal, together with accrued interest thereon, ending
January 2, 1999. Interest on the unpaid principal balance of the note accrues
at 7.25% per annum. The outstanding principal balance, or a portion thereof, is
convertible into shares of the Common Stock after the thirtieth day following
the first anniversary of the closing of the Acquisition of Reich, at a
conversion price equal to the average of the closing sale prices of the Common
Stock on the five trading days prior to December 31, 1996. The Company will
issue warrants exercisable for an aggregate of 105,000 shares of Common Stock
to Morton M. Reich, at an exercise price per share equal to the initial public
offering price. The warrants will be immediately exercisable and will expire
ten years from the date of issuance. On the Effective Date, the Company will
grant options under the 1996 Stock Incentive Plan to purchase an aggregate of
45,000 shares of the Common Stock to certain employees of Reich, not including
Mr. Reich, at an exercise price per share equal to the initial public offering
price, which options shall be subject to a three-year vesting period. Reich has
piggyback registration rights with respect to those shares of Common Stock
issued in payment of a portion of the purchase price of the Acquisition and
those shares of Common Stock to be issued pursuant to the convertible note, if
any. Reich shall reimburse the Company the amount, if any, by which the
shareholders' equity set forth on the Reich balance sheet as of the closing
date is less than the shareholders' equity set forth in the Reich balance sheet
as of December 31, 1995, excluding expenses associated with the Acquisition and
the Offering. In addition, prior to the closing of the Acquisition, Reich may
(i) make distributions in an amount necessary to enable Mr. Reich to pay all
federal, state and local taxes for all periods prior to such
64
<PAGE>
closing and (ii) distribute on the day immediately prior to such closing an
amount equal to the aggregate net income of Reich for federal income tax
purposes for 1995; provided, however, that if Reich does not have sufficient
cash to make such distributions, the Company will assume an obligation to pay
such amount prior to March 1, 1997. The Company will pay the expenses incurred
by Reich's independent accounting firm and up to $100,000 of the legal fees
incurred by Reich in connection with the Acquisition and the Offering.
TeleSpectrum
TeleSpectrum Worldwide will acquire substantially all of the assets (and assume
substantially all of the liabilities) of TeleSpectrum for $8.0 million in cash,
176,587 shares of Common Stock (valued at $1.7 million), the grant of warrants
(valued at $0.2 million), the payment of certain of TeleSpectrum's expenses and
the cancellation of the outstanding principal amount of a promissory note held
by TeleSpectrum Worldwide, in the original principal amount of $500,000, which
represented an advance of purchase price from CRW Financial to TeleSpectrum on
behalf of TeleSpectrum Worldwide. The Company will issue warrants exercisable
for an aggregate of 44,100 shares to two executives of TeleSpectrum, including
warrants to Ms. Schweitzer exercisable for 22,050 shares at an exercise price
per share equal to the initial public offering price. The warrants will be
immediately exercisable and will expire ten years from the date of issuance. On
the Effective Date, the Company will grant options under the 1996 Stock
Incentive Plan to purchase an aggregate of 18,900 shares of Common Stock to
certain employees of TeleSpectrum, not including Ms. Schweitzer, at an exercise
price per share equal to the initial public offering price, which options shall
be subject to a three-year vesting period. TeleSpectrum has piggyback
registration rights with respect to those shares of Common Stock issued in
payment of a portion of the purchase price of the Acquisition. TeleSpectrum
shall reimburse the Company the amount, if any, by which the shareholders'
equity set forth on the TeleSpectrum balance sheet as of the closing date of
the Acquisition is less than the shareholders' equity set forth on the
TeleSpectrum balance sheet as of December 31, 1995. The Company will pay the
expenses incurred by TeleSpectrum's independent accounting firm and up to
$100,000 of the legal fees incurred by TeleSpectrum in connection with the
Acquisition and the Offering.
The Response Center
TeleSpectrum Worldwide will acquire substantially all of the assets (and assume
substantially all of the liabilities) of The Response Center for $11.6 million
in cash, 256,051 shares of Common Stock (valued at $2.5 million), the grant of
warrants (valued at $0.2 million) and the payment of certain of The Response
Center's expenses. The Company will issue warrants exercisable for an aggregate
of 60,900 shares of Common Stock to certain executives of The Response Center,
including warrants to Mr. Baldasare exercisable for 55,474 shares, at an
exercise price per share equal to the initial public offering price. The
warrants will be immediately exercisable and will expire ten years from the
date of issuance. On the Effective Date, the Company will grant options under
the 1996 Stock Incentive Plan to purchase an aggregate of 26,100 shares of
Common Stock to certain employees of The Response Center, including 7,560 to
Mr. Baldasare, which options vest immediately and are exercisable at an
exercise price per share equal to the initial public offering price. The
Response Center has piggyback registration rights with respect to those shares
of Common Stock issued at closing in payment of a portion of the purchase price
of the Acquisition. TeleSpectrum Worldwide will pay the expenses incurred by
The Response Center's independent public accounting firm and up to $100,000 of
legal fees incurred in connection with the Acquisition and the Offering. The
Response Center shall reimburse the Company the amount, if any, by which the
stockholders' equity set forth on The Response Center balance sheet as of the
closing date is less than the sum of the stockholders' equity set forth on The
Response Center balance sheet as of September 30, 1995 and The Response
Center's net income for income tax purposes for the period from October 1, 1995
through March 31, 1996, minus the sum of $455,000 and certain permitted
distributions.
CONSULTING AGREEMENT WITH PERSON NAMED TO BECOME DIRECTOR
Effective as of the consummation of the Offering, the Company will enter into a
consulting agreement with Richard W. Virtue, who has been named to become a
director of the Company. Mr. Virtue's agreement provides that he will perform
consulting services for the Company for $150,000 per year. The agreement has a
three-year term and contains confidentiality and non-competition provisions.
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<PAGE>
HEADQUARTERS LEASE
TeleSpectrum Worldwide subleases an aggregate of approximately 3,000 square
feet of space in King of Prussia, Pennsylvania from CRW Financial. The space
houses TeleSpectrum Worldwide's headquarters facility, and comprises 14.2% of
the aggregate space previously occupied by CRW Financial at this location. CRW
Financial, in turn, leases this space from CRW Building Limited Partnership, a
partnership controlled by J. Brian O'Neill, who is Chairman and Chief Executive
Officer of both TeleSpectrum Worldwide and CRW Financial. The sublease
commenced on May 9, 1996, and expires on September 30, 2004. Under the
sublease, TeleSpectrum Worldwide performs and pays 14.2% of all obligations of
CRW Financial under its lease with CRW Building Limited Partnership; monthly
base rent payments under the sublease are approximately $4,100. TeleSpectrum
Worldwide believes that the sublease reflects the prevailing commercial market
rate for the space that it occupies. Upon consummation of the Offering, the
Company anticipates that the sublease will be amended to include the space that
is currently occupied by the TeleSpectrum call center facility. The additional
space will consist of approximately 8,000 square feet; monthly base rent
payments under the sublease attributable to the TeleSpectrum call center
facility will be approximately $11,000.
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<PAGE>
CRW TRANSACTIONS
Initial Capitalization
CRW Financial, the sole stockholder of TeleSpectrum Worldwide, has made a
capital contribution to TeleSpectrum Worldwide of $1.6 million in cash and $0.5
million in the form of a promissory note from TeleSpectrum, Inc. to CRW
Financial. The capital contribution represents the proceeds of borrowings by
CRW Financial under subordinated notes (the "CRW Notes") issued to eight
individuals and one partnership (the "Lenders") on May 22, 1996. Amounts
outstanding under the CRW Notes bear interest at 12% per annum. Principal and
interest on the CRW Notes are due and payable in full immediately upon
repayment in full of all amounts owing from CRW Financial to Mellon Bank N.A.
(the "Mellon Repayment"), or in quarterly installments of 12.5% of the
principal amount plus accrued but unpaid interest beginning January 1, 1997 if
the Mellon Repayment has not been effected on or before any such quarterly
repayment date. As part of the consideration for the CRW Notes, CRW Financial
issued to the Lenders warrants (the "CRW Lender Warrants") to purchase a total
of 1,433,454 shares of Common Stock of TeleSpectrum Worldwide that are
currently owned by CRW Financial. The CRW Lender Warrants are exercisable at
any time during a 10-year period at a price of $1.50 per share (the "CRW
Warrant Price"). In connection with the CRW Initial Capitalization,
TeleSpectrum Worldwide has granted the Lenders the right to have the
TeleSpectrum Worldwide shares of Common Stock owned by CRW Financial and
underlying the CRW Lender Warrants registered under the Securities Act along
with the registration of any other TeleSpectrum Worldwide shares of Common
Stock and also the right to certain demand registrations subject to the
Lenders' agreement not to sell during the 180 days after consummation of the
Offering any shares of Common Stock acquired through exercise of the CRW Lender
Warrants. The Lenders, their respective relationships with CRW Financial and
TeleSpectrum Worldwide and their respective loan and share amounts are as
follows:
<TABLE>
--------------------------------
<CAPTION>
SHARES OWNED BY
CRW FINANCIAL AND
UNDERLYING CRW
CRW NOTE LENDER WARRANTS
LENDER -------- ---------------
<S> <C> <C>
Technology Leaders II L.P. $362,250 247,270
Stockholder of CRW Financial
TL Ventures Third Corp. 287,750 196,423
Stockholder of CRW Financial
J. Brian O'Neill 650,000 443,693
Chairman of the Board and Chief Executive
Officer of CRW Financial and of the Company
Michael C. Boyd 200,000 136,514
President and Chief Operating Officer of the Com-
pany
Richard C. Schwenk, Jr. 200,000 136,514
Senior Vice President and Chief Financial Officer
of the Company
Bernard Morgan 100,000 68,250
Director of CRW Financial
Robert N. Verratti 100,000 68,250
Director of CRW Financial
Arthur R. Spector 100,000 68,250
Consultant to CRW Financial
Jonathan P. Robinson 50,000 34,145
Chief Financial Officer of CRW Financial and
Director of Acquisitions of the Company
Kevin E. Mullin 50,000 34,145
Director of Acquisitions of CRW Financial
---------- ---------
$2,100,000 1,433,454
========== =========
</TABLE>
67
<PAGE>
In consideration of the grant by Mellon Bank, N.A., CRW Financial's primary
lender, of a waiver of a restrictive covenant in the agreement governing CRW
Financial's loan facility, which waiver permitted CRW Financial to issue the
CRW Notes and thereby to effect the initial capitalization of TeleSpectrum
Worldwide, CRW Financial granted to Mellon Bank, N.A. a warrant to purchase
75,445 shares of Common Stock of TeleSpectrum Worldwide currently owned by CRW
Financial. This warrant is exercisable at any time during a 10-year period at
the CRW Warrant Price.
CRW Management Warrants
CRW Financial granted warrants (the "CRW Management Warrants") on May 17, 1996
to four individuals related to CRW Financial (the "CRW Managers") who are
performing services on behalf of CRW Financial in connection with the
Acquisitions and the Offering. The CRW Management Warrants entitle the holders
to purchase a total of 839,108 shares of Common Stock of TeleSpectrum Worldwide
that are currently owned by CRW Financial. The CRW Management Warrants vest
immediately and are exercisable at any time after vesting during a 10-year
period at the CRW Warrant Price. TeleSpectrum Worldwide has granted the CRW
Managers the right to have the shares of Common Stock underlying the CRW
Management Warrants registered under the Securities Act along with the
registration of any other shares of Common Stock and also the right to certain
demand registrations, subject to the CRW Managers' agreement not to sell during
the 180 days after consummation of the Offering any shares of Common Stock
acquired through exercise of the CRW Management Warrants. The CRW Managers
(whose respective relationships with CRW Financial and TeleSpectrum Worldwide
are described above in connection with the CRW Notes) and their respective
share amounts underlying the CRW Management Warrants are as follows: J. Brian
O'Neill--610,160 shares; Arthur R. Spector--76,316 shares; Jonathan P.
Robinson--76,316 shares; and Kevin E. Mullin--76,316 shares.
See Pro Forma Combined Financial Statements for purchase accounting for the CRW
Lender Warrants and the CRW Management Warrants.
CRW Market Research
On or prior to the Effective Date, CRW Financial will terminate the operations
of the market research business it has conducted since January 1996 ("CRWMR")
and will make the employees of CRWMR available to be hired by the Company or
the Company's Market Research division on or after the closing of the
Acquisitions. Neither the Company nor the Company's Market Research division
will have any obligation to hire any CRWMR employees. CRW Financial will retain
the accounts receivable and all accounts payable and other obligations
associated with the CRWMR business.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
Prior to the Acquisitions and the Offering, all of the Common Stock was held by
CRW Financial. The following table sets forth certain information regarding the
beneficial ownership of the Common Stock as of June 30, 1996, assuming
completion of the Acquisitions, and as adjusted to reflect the sale of the
Common Stock being offered hereby, by: (i) each person (or group of affiliated
persons) known by the Company to be the beneficial owner of more than five
percent of the outstanding Common Stock; (ii) each executive officer of the
Company; (iii) each director of the Company and each person named to become a
director; (iv) all of the Company's directors, persons named to become
directors and executive officers as a group; and (v) the Selling Stockholder.
Each stockholder possesses sole voting and investment power with respect to the
shares listed, unless otherwise noted.
<TABLE>
------------------------------------------------------------------------------
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES TO BE BENEFICIALLY
PRIOR TO THE OFFERING NUMBER OF OWNED AFTER OFFERING
---------------------------------- SHARES ----------------------------------
NUMBER BEING NUMBER
OF SHARES PERCENT OFFERED OF SHARES PERCENT
BENEFICIAL OWNER --------------- ------- --------- --------------- -------
<S> <C> <C> <C> <C> <C>
CRW Financial, Inc. 8,510,137 65.9 -- 8,510,137 36.7
443 South Gulph Road
King of Prussia, PA
19406
J. Brian O'Neill 8,635,137 (1) 66.2 -- 8,635,137 (1) 37.0
443 South Gulph Road
King of Prussia, PA
19406
Entities Affiliated with 8,510,137 (2) 65.9 -- 8,510,137 (2) 36.7
Technology Leaders II
L.P.
435 Devon Park Drive
Wayne, PA 19087
SOMAR, Inc. (3) 2,207,340 17.1 -- 2,207,340 9.5
118 South Main Street
Salisbury, NC 28144
NBG Services, Inc. (4) 1,120,225 8.7 334,000 786,225 3.4
One Broadway, 12th
Floor
Cambridge, MA 02142
Michael C. Boyd 211,514 (5) 1.6 -- 211,514 (5) *
Richard C. Schwenk, Jr. 161,514 (5) 1.2 -- 161,514 (5) *
Mark J. DeNino 8,512,637 (2)(6) 65.9 -- 8,512,637 (2)(6) 36.7
William F. Rhatigan 1,176,475 (7) 9.1 -- 842,475 (7) 3.6
Richard W. Virtue 2,336,840 (8) 17.9 -- 2,336,840 (8) 10.0
Kevin W. Walsh 2,500 (9) * -- 2,500 (9) *
Gregory M. Alcorn 31,500 (10) * -- 31,500 (10) *
Patrick M. Baldasare 319,085 (11) 2.5 -- 319,085 (11) 1.4
Edward M. Idzik 257,002 (12) 2.0 -- 257,002 (12) 1.1
Morton M. Reich 546,468 (13) 4.2 -- 546,468 (13) 2.3
Karen E. Schweitzer 198,637 (14) 1.5 -- 198,637 (14) *
Michael J. Gallant 1,176,475 (7) 9.1 -- 842,475 (7) 3.6
All directors, persons
named to become direc-
tors and executive of-
ficers, as a group (13
persons) 13,662,394 (15) 100.0 334,000 13,328,394 (15) 56.4
</TABLE>
- --------
* Less than one percent.
(1)Includes 8,510,137 shares held by CRW Financial. Mr. O'Neill is Chairman of
the Board and Chief Executive Officer, and a principal stockholder, of CRW
Financial, and may be deemed to have shared voting and investment power over
the shares held by CRW Financial. Mr. O'Neill disclaims beneficial ownership of
all such shares. Of the shares held by CRW Financial, 443,693 shares are
purchasable by Mr. O'Neill from CRW
69
<PAGE>
Financial upon the exercise of CRW Lender Warrants granted to Mr. O'Neill, and
610,160 shares are issuable by CRW Financial to Mr. O'Neill upon the exercise
of CRW Management Warrants granted to Mr. O'Neill. Also includes 125,000 shares
issuable upon the exercise of options contemplated to be granted to Mr. O'Neill
under the 1996 Stock Incentive Plan upon consummation of the Offering at an
exercise price equal to the initial public offering price per share, which
options are immediately exercisable. Does not include 375,000 shares issuable
upon the exercise of stock options contemplated to be granted to Mr. O'Neill
under the 1996 Stock Incentive Plan upon consummation of the Offering at an
exercise price equal to the initial public offering price per share. None of
the excluded warrants or options will be exercisable within 60 days of June 30,
1996.
(2)Consists of 8,510,137 shares held by CRW Financial. Technology Leaders II
L.P. is a limited partnership whose sole general partner is Technology Leaders
II Management L.P. TL Ventures Third Corp. is a wholly owned subsidiary of
Technology Leaders II Offshore, C.V., whose co-general partner is Technology
Leaders II Management L.P. Technology Leaders II L.P. and Technology Leaders II
Offshore, C.V. are together referred to herein as "TL Ventures." Mark J.
DeNino, a director of the Company is a general partner of Technology Leaders II
Management L.P. TL Ventures is a significant stockholder of CRW Financial, and
may be deemed to share with Technology Leaders II L.P., voting and investment
power over the shares held by CRW Financial, of which Mr. DeNino is a director.
TL Ventures and Mr. DeNino disclaim beneficial ownership of all such shares. Of
the shares held by CRW Financial, 443,693 shares are purchasable by TL Ventures
upon the exercise of CRW Lender Warrants granted to TL Ventures, which warrants
are immediately exercisable. Mr. DeNino disclaims beneficial ownership of all
such shares.
(3)SOMAR, Inc. has not held any position or office in or had any material
relationship with the registrant or any of its predecessors or affiliates
within the past three years.
(4)NBG Services, Inc. has not held any position or office in or had any
material relationship with the registrant or any of its predecessors or
affiliates within the past three years.
(5)Consists of 136,514 shares issuable upon the exercise of CRW Lender
Warrants, which warrants are immediately exercisable. Also includes 75,000 and
25,000 shares issuable upon the exercise of stock options contemplated to be
granted to Messrs. Boyd and Schwenk, respectively, under the 1996 Stock
Incentive Plan upon consummation of the Offering at an exercise price equal to
the initial public offering price per share, which options are immediately
exercisable. Does not include 225,000 and 75,000 shares issuable upon the
exercise of stock options contemplated to be granted to Messrs. Boyd and
Schwenk, respectively, under the 1996 Stock Incentive Plan upon consummation of
the Offering at an exercise price equal to the initial public offering price
per share. These options will not be exercisable within 60 days of June 30,
1996.
(6)Includes 2,500 shares issuable upon the exercise of options granted to Mr.
DeNino under the 1996 Stock Incentive Plan in connection with Mr. DeNino's
appointment to the Company's Board of Directors. All such options are
immediately exercisable.
(7)Includes 1,120,225 shares held by NBG Services, Inc. Mr. Rhatigan and Mr.
Gallant together own all of the outstanding capital stock of NBG Services,
Inc., and each may be deemed to share voting and investment power over the
shares held by NBG Services, Inc. Also includes 56,250 shares issuable to each
of Messrs. Rhatigan and Gallant upon exercise of warrants granted to such
persons in connection with the Acquisition of the NBG Operating Business, which
warrants are immediately exercisable.
(8)Includes 2,207,340 shares held by SOMAR, Inc. Mr. Virtue is a principal
stockholder of SOMAR, Inc., and may be deemed to share voting and investment
power over the shares held by SOMAR, Inc. with Christopher F. Virtue, a
principal stockholder of SOMAR. Mr. Virtue disclaims beneficial ownership of
all such shares. Also includes 129,500 shares issuable upon the exercise of
warrants granted to Mr. Virtue in connection with the Acquisition of the SOMAR
Operating Business, which warrants are immediately exercisable.
(9)Includes 2,500 shares issuable upon the exercise of options to be granted to
Mr. Walsh under the 1996 Stock Incentive Plan upon his election to the Board of
Directors of the Company, which options are immediately exercisable.
(10)Consists of 31,500 shares issuable upon the exercise of warrants granted to
Mr. Alcorn in connection with the Acquisition of the SOMAR Operating Business,
which warrants are immediately exercisable.
(11)Includes 256,051 shares held by The Response Center, Inc. and The Tab
House, Inc. Mr. Baldasare is a principal shareholder of both The Response
Center, Inc. and The Tab House, Inc., and may be deemed to have
70
<PAGE>
sole voting and investment power over the shares held by such entities. Also
includes 55,474 shares issuable upon the exercise of warrants granted to Mr.
Baldasare in connection with the Acquisition of The Response Center Operating
Business, which warrants are immediately exercisable, and 7,560 shares issuable
upon the exercise of options granted to Mr. Baldasare in connection with the
Acquisition of The Response Center Operating Business, which options are
immediately exercisable.
(12)Includes 202,192 shares held by HDM and HFI. Mr. Idzik is a principal
shareholder of HDM and HFI, and may be deemed to have sole voting and
investment power over the shares held by HDM and HFI. Also includes 54,810
shares issuable upon the exercise of warrants granted to Mr. Idzik in
connection with the Acquisition of the Harris Operating Business, which
warrants are immediately exercisable.
(13)Includes 441,468 shares held by The Reich Group, Inc. and its affiliates.
Mr. Reich is the sole stockholder of The Reich Group, Inc. and of all such
affiliates, and may be deemed to have sole voting and investment power over the
shares held by such entities. Also includes 105,000 shares issuable upon the
exercise of warrants granted to Mr. Reich in connection with the Acquisition of
the Reich Operating Business, which warrants are immediately exercisable.
(14)Includes 176,587 shares held by TeleSpectrum, Inc. Ms. Schweitzer is
President and a 50% stockholder of TeleSpectrum, Inc. and may be deemed to
share voting and investment power over the shares held by TeleSpectrum, Inc.
with Sherry F. Paterra, a 50% stockholder. Also includes 22,050 shares issuable
upon the exercise of warrants to be granted to Ms. Schweitzer in connection
with the Acquisition of the TeleSpectrum Operating Business, which warrants are
immediately exercisable.
(15)Includes 510,834 shares issuable upon the exercise of immediately
exercisable warrants, and 12,560 shares issuable upon the exercise of
immediately exercisable options issued in connection with the Acquisitions.
Also includes 225,000 shares issuable upon the exercise of options contemplated
to be granted under the 1996 Stock Incentive Plan upon consummation of the
Offering at an exercise price equal to the initial public offering price per
share, which options are immediately exercisable. Does not include 1,198,540
shares issuable upon the exercise of options to be granted upon consummation of
the Offering or 400,000 shares issuable upon the exercise of options to be
granted by the Company ratably over the next four years to two executive
officers pursuant to their employment agreements; none of the excluded options
will be exercisable within 60 days of June 30, 1996. See also Notes (1) through
(14) above.
71
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 200,000,000 shares of
Common Stock, par value $.01 per share, and 5,000,000 shares of preferred
stock, par value $.01 per share (the "Preferred Stock"). The following summary
description of the capital stock of the Company does not purport to be complete
and is subject to the detailed provisions of, and qualified in its entirety by
reference to, the Certificate of Incorporation and Bylaws, copies of which have
been filed as exhibits to the registration statement of which this Prospectus
forms a part, and to the applicable provisions of the General Corporation Law
of the State of Delaware (the "DGCL").
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Subject to the
rights of any holders of Preferred Stock, holders of Common Stock are entitled
to receive ratably such dividends as may be declared by the Board of Directors
out of funds legally available. See "Dividend Policy." In the event of a
liquidation, dissolution or winding up of the Company, holders of the Common
Stock are entitled to share ratably in the distribution of all assets remaining
after payment of liabilities, subject to the rights of any holders of Preferred
Stock. The holders of Common Stock have no preemptive rights to subscribe for
additional shares of the Company and no right to convert their Common Stock
into any other securities. In addition, there are no redemption or sinking fund
provisions applicable to the Common Stock. All of the outstanding shares of
Common Stock are, and the Common Stock offered hereby will be, fully paid and
nonassessable.
PREFERRED STOCK
The Board of Directors is authorized, without further action by the
stockholders, to issue any or all shares of authorized Preferred Stock as a
class without series or in one or more series and to fix the rights,
preferences, privileges and restrictions thereof, including dividend rights,
conversion rights, voting rights, terms of redemption, liquidation preferences
and the number of shares constituting any series. The issuance of Preferred
Stock could adversely affect the voting power of holders of Common Stock and
could have the effect of delaying, deferring or impeding a change in control of
the Company. As of the date of this Prospectus, the Company has not authorized
the issuance of any Preferred Stock and there are no plans, agreements or
understandings for the issuance of any shares of Preferred Stock.
CERTAIN PROVISIONS OF DELAWARE LAW AND THE COMPANY'S CERTIFICATE OF
INCORPORATION AND BYLAWS
The Company is subject to the provisions of Section 203 of the DGCL. Section
203 prohibits a publicly-held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed
manner. A "business combination" includes a merger, asset sale or other
transaction resulting in a financial benefit to the interested stockholder.
Subject to certain exceptions, an "interested stockholder" is a person who,
together with affiliates and associates, owns, or within three years prior to
the proposed business combination has owned 15% or more of the corporation's
voting stock.
The Company's Certificate of Incorporation provides that liability of directors
of the Company is eliminated to the fullest extent permitted under Section
102(b)(7) of the DGCL. As a result, no director of the Company will be liable
to the Company or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability: (i) for any breach of the director's
duty of loyalty to the Company or its stockholders; (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) for any wilful or negligent payment of an unlawful
dividend, stock purchase or redemption; or (iv) for any transaction from which
the director derived an improper personal benefit.
72
<PAGE>
The Bylaws of the Company provide that stockholders must follow an advance
notification procedure for certain stockholder nominations of candidates for
the Board of Directors and for certain other stockholder business to be
conducted at an annual meeting. These provisions could, under certain
circumstances, operate to delay, defer or prevent a change in control of the
Company.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C.
73
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering and the Acquisitions, the Company will have
23,200,000 shares of Common Stock outstanding, based upon the number of shares
outstanding as of June 30, 1996. The 10,620,000 shares sold in this Offering
will be freely tradeable without restriction or further registration under the
Securities Act, unless acquired by an "affiliate" of the Company as that term
is defined in Rule 144 promulgated under the Securities Act ("Rule 144"), which
shares will be subject to resale limitations of Rule 144 described below. As of
the consummation of this Offering, holders of 6,342,425 shares of Common Stock
will have piggyback rights to require the Company in certain circumstances to
register such shares for sale under the Securities Act.
In general, under Rule 144 as currently in effect, a stockholder who has
beneficially owned for at least two years shares privately acquired directly or
indirectly from the Company or from an affiliate of the Company, and persons
who are affiliates of the Company who have acquired the shares in registered
transactions, will be entitled to sell within any three-month period a number
of shares that does not exceed the greater of: (i) one percent of the
outstanding shares of Common Stock (approximately 232,000 shares immediately
after completion of the offering); or (ii) the average weekly trading volume in
the Common Stock during the four calendar weeks preceding such sale. Sales
under Rule 144 are also subject to certain requirements relating to the manner
and notice of sale and the availability of current public information about the
Company.
The Company, each of its directors and officers, the holders of all of the
shares of Common Stock and options or warrants to purchase shares of Common
Stock that are or will be outstanding prior to the consummation of the
Acquisitions, certain related persons and the holders of all of the CRW Lender
Warrants and CRW Management Warrants have agreed with the Underwriters not to
offer, sell or otherwise dispose of any shares of Common Stock or securities
convertible into or exercisable or exchangeable for such shares for a period of
180 days after the date of this Prospectus without the prior written consent of
J.P. Morgan Securities Inc. The holders of the shares of Common Stock and
warrants issued or to be issued in the Acquisitions and certain related persons
have agreed with the Underwriters not to offer, sell or otherwise dispose of
any shares of Common Stock or securities convertible into or exercisable or
exchangeable for such shares for a period of 360 days after the date of this
Prospectus without the prior written consent of J.P. Morgan Securities Inc.
In connection with the Acquisitions, the Company has granted certain of the
Sellers the right to include up to 4,069,863 shares of Common Stock in certain
registrations of Common Stock under the Securities Act effected following
consummation of the Offering. In addition, certain of the Sellers have the
right to demand or piggyback registration of all or a portion of the shares of
Common Stock that may be issued to them in payment of the earn-out component of
the purchase price for their Operating Businesses. In connection with the
shares issuable upon exercise of the CRW Lender Warrants and the CRW Management
Warrants, the Company has agreed to include the 2,272,562 shares of Common
Stock issuable upon exercise thereof in any registration of shares of Common
Stock to be sold by the Company.
Prior to this Offering, there has been no market for the Common Stock. No
predictions can be made with respect to the effect, if any, that public sales
of shares of the Common Stock or the availability of shares for sale will have
on the market price of the Common Stock after the completion of the Offering.
Sales of substantial amounts of Common Stock in the public market following the
Offering, or the perception that such sales may occur, could adversely affect
the market price of the Common Stock or the ability of the Company to raise
capital through sales of its equity securities. See "Risk Factors--No Prior
Public Market; Possible Volatility of Stock Price."
74
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date of this Prospectus (the "Underwriting Agreement"), the
Underwriters named below, for whom J.P. Morgan Securities Inc., Dillon, Read &
Co. Inc., Legg Mason Wood Walker, Incorporated and The Robinson-Humphrey
Company, Inc. are acting as representatives (the "Representatives"), have
severally agreed to purchase, and the Company has agreed to sell to them, the
respective numbers of shares of Common Stock set forth opposite their names
below. Under the terms and conditions of the Underwriting Agreement, the
Underwriters are obligated to take and pay for all such shares of Common Stock,
if any are taken. Under certain circumstances, the commitments of nondefaulting
Underwriters may be increased as set forth in the Underwriting Agreement.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ----------
<S> <C>
J.P. Morgan Securities Inc...................................... 1,702,354
Dillon, Read & Co. Inc.......................................... 1,702,352
Legg Mason Wood Walker, Incorporated............................ 1,702,352
The Robinson-Humphrey Company, Inc.............................. 1,702,352
Dain Bosworth Incorporated...................................... 355,580
Alex. Brown & Sons Incorporated................................. 355,580
Furman Selz LLC................................................. 355,580
Merrill Lynch, Pierce, Fenner & Smith Incorporated.............. 355,580
PaineWebber Incorporated........................................ 355,580
Robertson, Stephens & Company LLC............................... 355,580
Smith Barney Inc................................................ 355,580
Advest Inc...................................................... 188,790
First Albany Corporation........................................ 188,790
GS/2/ Securities, Inc. ......................................... 188,790
Janney Montgomery Scott Inc..................................... 188,790
Josephthal Lyon & Ross Incorporated............................. 188,790
Pennsylvania Merchant Group Ltd................................. 188,790
Tucker Anthony Incorporated..................................... 188,790
----------
Total......................................................... 10,620,000
==========
</TABLE>
The Underwriters propose initially to offer the Common Stock directly to the
public at the price set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession not in excess of $.60 per
share. The Underwriters may allow, and such dealers may reallow, a concession
not in excess of $.10 per share to other dealers. After the initial public
offering of the Common Stock, the public offering price and such concession may
be changed.
The Company has granted to the Underwriters an option, expiring at the close of
business on the 30th day after the date of this Prospectus, to purchase up to
1,593,000 additional shares of Common Stock at the initial public offering
price, less the underwriting discount. The Underwriters may exercise such
option solely for the purpose of covering over-allotments, if any. To the
extent the Underwriters exercise the option, each Underwriter will have a firm
commitment, subject to certain conditions, to purchase approximately the same
percentage of such additional shares as the number set forth next to such
Underwriter's name in the preceding table bears to the total number of shares
of Common Stock offered hereby.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act.
The Company, each of its directors and officers, the holders of all of the
shares of Common Stock and options or warrants to purchase shares of Common
Stock that are or will be outstanding prior to the consummation of the
75
<PAGE>
Acquisitions, certain related persons and all of the holders of the CRW Lender
Warrants and CRW Management Warrants have agreed with the Underwriters not to
offer, sell or otherwise dispose of any shares of Common Stock or securities
convertible into or exercisable or exchangeable for such shares for a period of
180 days after the date of this Prospectus without the prior written consent of
J.P. Morgan Securities Inc. The holders of the shares of Common Stock and
warrants issued or to be issued in the Acquisitions and certain related persons
have agreed with the Underwriters not to offer, sell or otherwise dispose of
any shares of Common Stock or securities convertible into or exercisable or
exchangeable for such shares for a period of 360 days after the date of this
Prospectus without the prior written consent of J.P. Morgan Securities Inc.
The Company's Common Stock has been approved for quotation and trading on The
Nasdaq National Market under the trading symbol "TLSP."
The Underwriters have advised the Company that they do not expect that sales to
accounts over which they exercise discretionary authority will exceed 5% of the
shares offered hereby.
At the request of the Company, the Underwriters have reserved up to 531,000
shares of Common Stock offered hereby for sale at the initial public offering
price to certain employees of the Company and other persons. The number of
shares available for sale to the general public will be reduced to the extent
that such persons purchase such reserved shares. Any reserved shares not so
purchased will be offered by the Underwriters to the general public on the same
basis as the other shares of Common Stock offered hereby.
Prior to this Offering, there has been no public market for the Common Stock.
The initial public offering price for the shares of Common Stock offered hereby
was determined by agreement among the Company and the Underwriters. Among the
factors considered in making such determination were the history of and the
prospects for the industry in which the Company competes, an assessment of the
Company's management, the present operations of the Company, the historical
results of operations of the Company and the trend of its revenues and
earnings, the prospects for future earnings of the Company, the general
conditions of the securities markets at the time of the Offering and the prices
of similar securities of generally comparable companies.
There can be no assurance that an active trading market will develop for the
Common Stock or that the Common Stock will trade in the public market
subsequent to the Offering at or above the initial public offering price.
From time to time in the ordinary course of their respective businesses, the
Representatives and their respective affiliates have provided and may in the
future provide investment banking and other financial services to the Company
and its affiliates. The Company will pay Legg Mason Wood Walker, Incorporated a
fee of $1.4 million for investment banking services rendered in connection with
the structuring and negotiation of the Acquisitions. The Company has also
agreed to pay one-half of the $800,000 fee due from the Seller of the SOMAR
Operating Business to The Robinson-Humphrey Company, Inc. for financial
advisory services, including advice regarding the Acquisition of SOMAR by
TeleSpectrum Worldwide. See "Certain Relationships and Related Party
Transactions--The Acquisitions--SOMAR."
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed upon
for the Company by Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania.
Certain legal matters relating to the shares of Common Stock offered hereby
will be passed upon for the Underwriters by Pepper, Hamilton & Scheetz,
Philadelphia, Pennsylvania.
EXPERTS
The financial statements of TeleSpectrum Worldwide as of June 30, 1996 and for
the period from inception (April 26, 1996) to June 30, 1996 included in this
Prospectus have been audited by Arthur Andersen LLP,
76
<PAGE>
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
The financial statements of SOMAR, Harris and Reich as of December 31, 1994 and
1995 and for each of the three years in the period ended December 31, 1995
included in this Prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
The financial statements of NBG as of December 30, 1994 and December 29, 1995
and for each of the three fiscal years in the period ended December 29, 1995
included in this Prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
The financial statements of The Response Center as of September 30, 1994 and
1995 and for each of the two years in the period ended September 30, 1995
included in this Prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
The financial statements of TeleSpectrum as of and for the year ended December
31, 1995 included in this Prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act and the rules and regulations promulgated
thereunder, covering the Common Stock offered hereby. This Prospectus omits
certain information contained in the Registration Statement, and reference is
made to the Registration Statement, and the exhibits and schedules thereto for
further information with respect to the Company and the Common Stock offered
hereby. Statements contained in this Prospectus as to the contents of any
contract, agreement or other document filed as an exhibit to the Registration
Statement are not necessarily complete, and in each instance, reference is made
to the exhibit for a more complete description of the matter involved, each
such statement being qualified in its entirety by such reference. The
Registration Statement may be inspected and copied at the public reference
facilities maintained by the Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the regional offices of the Commission
maintained at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and
Seven World Trade Center, Suite 1300, New York, New York 10048. Copies of such
materials may be obtained from the Public Reference Section of the Commission,
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. In addition, registration statements and certain other
filings made with the Commission through its Electronic Data Gathering,
Analysis and Retrieval ("EDGAR") system are publicly available through the
Commission's site on the Internet's World Wide Web, located at
http://www.sec.gov. The Registration Statement, including all exhibits thereto
and amendments thereof, has been filed with the Commission through EDGAR.
The Company intends to furnish its stockholders with unaudited quarterly
reports and annual reports containing financial statements audited by
independent public accountants.
77
<PAGE>
INDEX TO FINANCIAL STATEMENTS
TELESPECTRUM WORLDWIDE INC.
<TABLE>
<S> <C>
PRO FORMA COMBINED FINANCIAL STATEMENTS:
Basis of Presentation............................................... F-3
Pro Forma Combined Balance Sheet as of June 30, 1996................ F-4
Pro Forma Combined Statement of Income for the Year Ended
December 31, 1995................................................ F-5
Pro Forma Combined Statement of Income for the Six Months Ended June
30, 1995......................................................... F-6
Pro Forma Combined Statement of Income for the Six Months Ended June
30, 1996......................................................... F-7
Notes to Pro Forma Combined Financial Statements.................... F-8
HISTORICAL FINANCIAL STATEMENTS(/1/):
TELESPECTRUM WORLDWIDE INC. (TELESPECTRUM WORLDWIDE)
Report of Independent Public Accountants........................... F-12
Balance Sheet as of June 30, 1996.................................. F-13
Statement of Operations for the Period from Inception (April 26,
1996) to June 30, 1996............................................. F-13
Statement of Stockholder's Equity (Deficit)........................ F-14
Notes To Financial Statements...................................... F-15
SOMAR, INC. (SOMAR)
Report of Independent Public Accountants........................... F-18
Balance Sheets as of December 31, 1994 and 1995, and June 30,
1996............................................................ F-19
Statements of Income for the Years Ended December 31, 1993,
1994 and 1995, and Six Months Ended June 30, 1995 and 1996...... F-20
Statements of Stockholders' Equity for the Years Ended December 31,
1993, 1994 and 1995, and Six Months Ended June 30, 1996......... F-21
Statements of Cash Flows for the Years Ended December 31, 1993,
1994 and 1995, and Six Months Ended June 30, 1995 and 1996...... F-22
Notes to Financial Statements...................................... F-23
NBG SERVICES, INC. (NBG)
Report of Independent Public Accountants........................... F-30
Balance Sheets as of December 30, 1994, December 29, 1995,
and June 28, 1996............................................... F-31
Statements of Income for the Years Ended December 31, 1993,
December 30, 1994 and December 29, 1995, and Twenty Six Weeks
Ended June 30, 1995 and June 28, 1996........................... F-32
Statements of Shareholders' Equity for the Years Ended December 31,
1993, December 30, 1994 and December 29, 1995, and Twenty Six
Weeks Ended June 28, 1996....................................... F-33
Statements of Cash Flows for the Years Ended December 31, 1993,
December 30, 1994 and December 30, 1995, and Twenty Six Weeks
Ended June 30, 1995 and June 28, 1996........................... F-34
Notes to Financial Statements...................................... F-35
HARRIS DIRECT MARKETING, INC. AND HARRIS FULFILLMENT, INC. (HARRIS)
Report of Independent Public Accountants........................... F-39
Combined Balance Sheets as of December 31, 1994 and 1995, and
June 30, 1996................................................... F-40
Combined Statements of Income for the Years Ended December 31,
1993, 1994 and 1995, and Six Months Ended June 30, 1995 and
June 30, 1996................................................... F-41
Combined Statements of Shareholders' Equity for the Years Ended De-
cember 31, 1993, 1994 and 1995, and Six Months Ended June 30,
1996............................................................ F-42
Combined Statements of Cash Flows for the Years Ended December 31,
1993, 1994 and 1995, and Six Months Ended June 30, 1995 and June
30, 1996........................................................ F-43
Notes to Combined Financial Statements............................. F-44
</TABLE>
(1) The audited financial statements included in this Prospectus have been
included in accordance with Securities and Exchange Commission Staff
Accounting Bulletin No. 80.
F-1
<PAGE>
<TABLE>
<S> <C>
THE REICH GROUP COMPANIES (REICH)
Report of Independent Public Accountants............................ F-49
Combined Balance Sheets as of December 31, 1994 and 1995 and June
30, 1996........................................................... F-50
Combined Statements of Income for the Years Ended December 31, 1993,
1994 and 1995, and Six Months Ended June 30, 1995 and 1996......... F-51
Combined Statements of Shareholder's Equity for the Years Ended De-
cember 31, 1993, 1994 and 1995, and Six Months Ended June 30, 1996. F-52
Combined Statements of Cash Flows for the Years Ended December 31,
1993, 1994 and 1995 and Six Months Ended June 30, 1995 and 1996.... F-53
Notes To Combined Financial Statements................................ F-54
THE RESPONSE CENTER INC. AND THE TAB HOUSE, INC. (THE RESPONSE
CENTER)
Report of Independent Public Accountants............................ F-60
Combined Balance Sheets as of September 30, 1994 and 1995, March 31,
1996 and June 30, 1996............................................. F-61
Combined Statements of Income for the Years Ended September 30, 1994
and 1995 and Six Months Ended March 31, 1995 and 1996 and Nine
Months Ended June 30, 1996......................................... F-62
Combined Statements of Shareholders' Equity for the Years Ended Sep-
tember 30, 1994 and 1995, Six Months Ended March 31, 1996 and
Three Months Ended June 30, 1996................................... F-63
Combined Statements of Cash Flows for the Years Ended September 30,
1994 and 1995 and Six Months Ended March 31, 1995 and 1996 and
Nine Months Ended June 30, 1995 and 1996........................... F-64
Notes To Combined Financial Statements............................. F-65
TELESPECTRUM, INC. AND TELESPECTRUM TRAINING SERVICES, INC.
(TELESPECTRUM)
Report of Independent Public Accountants........................... F-69
Combined Balance Sheets as of December 31, 1995 and June 30, 1996.. F-70
Combined Statements of Income for the Year Ended December 31, 1995,
and Six Months Ended June 30, 1995 and 1996........................ F-71
Combined Statements of Stockholders' Equity for the Year Ended Decem-
ber 31, 1995, and Six Months Ended June 30, 1996................... F-72
Combined Statements of Cash Flows for the Year Ended December 31,
1995, and Six Months Ended June 30, 1995 and 1996.................. F-73
Notes To Combined Financial Statements.............................. F-74
</TABLE>
F-2
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND OPERATING BUSINESSES
PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
(UNAUDITED)
The following unaudited pro forma combined financial statements give effect
to the acquisitions by TeleSpectrum Worldwide Inc. ("TeleSpectrum Worldwide")
of substantially all of the net assets of (i) SOMAR, (ii) NBG, (iii) Harris,
(iv) Reich, (v) The Response Center and (vi) TeleSpectrum (together the
"Operating Businesses"). TeleSpectrum Worldwide and the Operating Businesses
are hereafter referred to as the "Company." These acquisitions (the
"Acquisitions") will occur simultaneously with the closing of TeleSpectrum
Worldwide's initial public offering (the Offering) and will be accounted for
using the purchase method. The unaudited pro forma combined financial
statements also give effect to the issuance of Common Stock, which will be
issued by TeleSpectrum Worldwide to the sellers of the Operating Businesses
(the "Sellers") upon the effectiveness of the Offering. These statements are
based on the historical financial statements of TeleSpectrum Worldwide and the
Operating Businesses included elsewhere in this Prospectus and the estimates
and assumptions set forth below and in the notes to the unaudited pro forma
combined financial statements.
The unaudited pro forma combined balance sheet gives effect to these
transactions (the "Acquisitions and Offering") as if they had occurred on June
30, 1996. The unaudited pro forma combined statements of income give effect to
these transactions as if they had occurred on January 1, 1995.
The pro forma adjustments are based upon preliminary estimates, currently
available information and certain assumptions that management deems
appropriate. In management's opinion, the preliminary estimates regarding
allocation of the purchase price of the Operating Businesses are not expected
to materially differ from the final adjustments. These adjustments will be
finalized after the Closing of the Acquisitions. The unaudited pro forma
combined financial data presented herein are not necessarily indicative of the
results TeleSpectrum Worldwide would have obtained had such events occurred at
the beginning of the period, as assumed, or of the future results of
TeleSpectrum Worldwide. The unaudited pro forma combined financial statements
should be read in conjunction with the other financial statements and notes
thereto included elsewhere in this Prospectus.
F-3
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND OPERATING BUSINESSES
PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
OPERATING BUSINESSES--HISTORICAL
---------------------------------------------------- PRO FORMA
THE ACQUISITIONS PRO FORMA
DOLLARS IN TELESPECTRUM RESPONSE AND OFFERING TELESPECTRUM
THOUSANDS WORLDWIDE SOMAR NBG HARRIS REICH CENTER TELESPECTRUM ADJUSTMENTS WORLDWIDE
- ---------- ------------ ------- ------ ------ ------ -------- ------------ ------------ ------------
(NOTE 4)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash
equivalents....... $ -- $ 4 $1,959 $ 877 $ 371 $ 744 $ 605 $ 27,824(a)(b)(c)(d)(e) $ 32,384
Marketable
securities........ -- -- 170 -- -- 313 -- -- 483
Accounts
receivable........ -- 7,183 1,286 3,760 3,511 1,396 3,409 -- 20,545
Amounts due from
affiliates........ 500 1,237 -- -- 135 -- -- (1,700)(b)(e) 172
Due from
TeleSpectrum
Worldwide Inc..... -- 74 42 -- -- 44 51 (211)(b) --
Prepaid expenses
and other......... -- 523 205 576 129 109 283 -- 1,825
------- ------- ------ ------ ------ ------ ------ -------- --------
Total current
assets.......... 500 9,021 3,662 5,213 4,146 2,606 4,348 25,913 55,409
------- ------- ------ ------ ------ ------ ------ -------- --------
PROPERTY AND
EQUIPMENT, NET..... 22 6,266 1,893 4,135 2,193 240 1,085 -- 15,834
GOODWILL........... -- -- -- -- -- -- -- 146,505(b)(c) 146,505
OTHER ASSETS....... 21,924 -- 108 53 21 88 157 (21,924)(a)(b) 427
------- ------- ------ ------ ------ ------ ------ -------- --------
Total assets.... $22,446 $15,287 $5,663 $9,401 $6,360 $2,934 $5,590 $150,494 $218,175
======= ======= ====== ====== ====== ====== ====== ======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT
LIABILITIES:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Line of credit.... $ -- $ 4,438 $ -- $ -- $ -- $ -- $2,289 $ (6,727)(c) $ --
Current
maturities of
long-term debt.... -- 2,857 434 309 246 -- 594 (4,440)(c) --
Accounts
payable........... 11 2,449 350 267 548 217 534 -- 4,376
Accrued
liabilities....... 1,784 578 467 442 527 287 501 (1,763)(a)(b) 2,823
Customer
advances.......... -- -- -- 753 -- 300 -- -- 1,053
Due to
affiliates........ 211 439 -- -- 70 -- -- (336)(b) 384
Other current
liabilities....... -- 389 -- -- 101 -- 464 -- 954
------- ------- ------ ------ ------ ------ ------ -------- --------
Total current
liabilities..... 2,006 11,150 1,251 1,771 1,492 804 4,382 (13,266) 9,590
------- ------- ------ ------ ------ ------ ------ -------- --------
LONG-TERM DEBT..... -- 3,219 760 1,390 414 -- 3 (5,786)(c) --
OTHER NONCURRENT
LIABILITIES........ -- -- -- 170 91 -- 14 -- 275
STOCKHOLDERS'
EQUITY:
Preferred Stock,
$.01 par value,
5,000,000 shares
authorized........ -- -- -- -- -- -- -- -- --
Common stock,
$.01 par value,
200,000,000
shares
authorized,
23,200,000 shares
issued and
outstanding (pro
forma)............ 85 12 -- 1 2 51 6 75(a)(b)(d) 232
Additional paid-
in capital........ 20,774 789 -- 45 450 1 217 186,221(a)(b)(d) 208,497
Net unrealized
gain on
marketable
securities........ -- -- -- -- -- 100 -- (100)(d) --
Retained earnings
(deficit)......... (419) 117 3,652 6,149 4,150 1,978 968 (17,014)(c) (419)
Treasury stock,
at cost........... -- -- -- (125) (239) -- -- 364(c) --
------- ------- ------ ------ ------ ------ ------ -------- --------
Total
stockholders'
equity.......... 20,440 918 3,652 6,070 4,363 2,130 1,191 169,546 208,310
======= ======= ====== ====== ====== ====== ====== ======== ========
Total
liabilities and
stockholders'
equity.......... $22,446 $15,287 $5,663 $9,401 $6,360 $2,934 $5,590 $150,494 $218,175
======= ======= ====== ====== ====== ====== ====== ======== ========
</TABLE>
- -----
See accompanying notes to pro forma combined financial statements.
F-4
<PAGE>
TELESPECTRUM WORLDWIDE INC.* AND OPERATING BUSINESSES
PRO FORMA COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
OPERATING BUSINESSES--HISTORICAL
--------------------------------------------------------- PRO FORMA
THE ACQUISITIONS PRO FORMA
DOLLARS AND SHARES IN RESPONSE AND OFFERING TELESPECTRUM
THOUSANDS SOMAR NBG HARRIS REICH CENTER TELESPECTRUM ADJUSTMENTS WORLDWIDE
- --------------------- ------- ------- ------- ------- -------- ------------ ------------ ------------
(NOTE 5)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES................ $31,900 $12,829 $12,690 $12,253 $6,428 $11,854 $ -- $87,954
OPERATING EXPENSES:
Cost of services....... 25,048 8,572 6,402 7,836 3,401 8,338 -- 59,597
Selling, general and
administrative........ 5,162 2,115 2,986 2,534 2,662 3,072 (1,006)(g) 17,525
Goodwill
amortization.......... -- -- -- -- -- -- 5,860 (f) 5,860
------- ------- ------- ------- ------ ------- ------- -------
Total operating
expenses............ 30,210 10,687 9,388 10,370 6,063 11,410 4,854 82,982
------- ------- ------- ------- ------ ------- ------- -------
Operating income..... 1,690 2,142 3,302 1,883 365 444 (4,854) 4,972
INTEREST INCOME......... 45 19 70 14 10 -- -- 158
INTEREST EXPENSE........ (756) (55) (214) (57) -- (184) 1,172 (h) (94)
------- ------- ------- ------- ------ ------- ------- -------
Income before taxes.... 979 2,106 3,158 1,840 375 260 (3,682) 5,036
INCOME TAXES............ -- -- -- -- -- 18 (2,425)(i) (2,407)
------- ------- ------- ------- ------ ------- ------- -------
NET INCOME.............. $ 979 $ 2,106 $ 3,158 $ 1,840 $ 375 $ 278 $(6,107) $ 2,629
======= ======= ======= ======= ====== ======= ======= =======
PRO FORMA NET INCOME PER
SHARE.................. $ 0.12 (l)
=======
SHARES USED IN COMPUTING
PRO FORMA NET INCOME
PER SHARE.............. 21,200 (l)
=======
</TABLE>
- --------
* TeleSpectrum Worldwide was incorporated on April 26, 1996; accordingly there
were no historical results prior to that date (See Note 1).
See accompanying notes to pro forma combined financial statements.
F-5
<PAGE>
TELESPECTRUM WORLDWIDE INC.* AND OPERATING BUSINESSES
PRO FORMA COMBINED STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
OPERATING BUSINESSES--HISTORICAL
------------------------------------------------------ PRO FORMA
THE ACQUISITIONS PRO FORMA
DOLLARS AND SHARES IN RESPONSE AND OFFERING TELESPECTRUM
THOUSANDS SOMAR NBG HARRIS REICH CENTER TELESPECTRUM ADJUSTMENTS WORLDWIDE
- --------------------- ------- ------ ------ ------ -------- ------------ ------------ ------------
(NOTE 5)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES................ $14,795 $5,599 $7,525 $5,521 $3,556 $5,592 $ -- $42,588
OPERATING EXPENSES:
Cost of services....... 11,221 3,556 3,543 3,417 1,772 3,828 -- 27,337
Selling, general and
administrative........ 2,620 1,046 1,431 665 1,617 1,652 (374)(g) 8,657
Goodwill
amortization.......... -- -- -- -- -- -- 2,930 (f) 2,930
------- ------ ------ ------ ------ ------ -------- -------
Total operating
expenses............ 13,841 4,602 4,974 4,082 3,389 5,480 2,556 38,924
------- ------ ------ ------ ------ ------ -------- -------
Operating income
(loss).............. 954 997 2,551 1,439 167 112 (2,556) 3,664
INTEREST INCOME......... -- -- 20 8 -- -- -- 28
INTEREST EXPENSE........ (299) (30) (117) (35) -- (85) 532 (h) (34)
------- ------ ------ ------ ------ ------ -------- -------
Income before taxes.... 655 967 2,454 1,412 167 27 (2,024) 3,658
INCOME TAXES............ -- -- -- -- -- -- (1,749)(i) (1,749)
------- ------ ------ ------ ------ ------ -------- -------
NET INCOME (LOSS)....... $ 655 $ 967 $2,454 $1,412 $ 167 $ 27 $ (3,773) $ 1,909
======= ====== ====== ====== ====== ====== ======== =======
PRO FORMA NET INCOME PER
SHARE.................. $ 0.09(l)
=======
SHARES USED IN COMPUTING
PRO FORMA NET INCOME
PER SHARE.............. 21,200(l)
=======
</TABLE>
- --------
* TeleSpectrum Worldwide was incorporated on April 26, 1996; accordingly there
were no historical results prior to that date (See Note 1).
See accompanying notes to pro forma combined financial statements.
F-6
<PAGE>
TELESPECTRUM WORLDWIDE INC.* AND OPERATING BUSINESSES
PRO FORMA COMBINED STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
OPERATING BUSINESSES--HISTORICAL
------------------------------------------------------- PRO FORMA
THE ACQUISITIONS PRO FORMA
DOLLARS AND SHARES IN TELESPECTRUM RESPONSE AND OFFERING TELESPECTRUM
THOUSANDS WORLDWIDE SOMAR NBG HARRIS REICH CENTER TELESPECTRUM ADJUSTMENTS WORLDWIDE
- --------------------- ------------ ------- ------ ------ ------- -------- ------------ ------------- ------------
(NOTE 5)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES................ $ -- $20,803 $8,924 $5,367 $11,347 $3,231 $8,034 $ -- $57,706
OPERATING EXPENSES:
Cost of services....... -- 16,888 5,995 2,762 6,692 1,690 5,290 -- 39,317
Selling, general and
administrative........ 419 3,092 1,389 1,521 1,199 1,296 2,121 (81)(g) 10,956
Goodwill
amortization.......... -- -- -- -- -- -- -- 2,930 (f) 2,930
----- ------- ------ ------ ------- ------ ------ ------- -------
Total operating
expenses............ 419 19,980 7,384 4,283 7,891 2,986 7,411 2,849 53,203
----- ------- ------ ------ ------- ------ ------ ------- -------
Operating income
(loss).............. (419) 823 1,540 1,084 3,456 245 623 (2,849) 4,503
INTEREST INCOME......... -- 10 32 46 15 -- -- -- 103
INTEREST EXPENSE........ -- (454) (54) (79) (46) -- (119) 703 (h) (49)
----- ------- ------ ------ ------- ------ ------ ------- -------
Income (loss) before
taxes................. (419) 379 1,518 1,051 3,425 245 504 (2,146) 4,557
INCOME TAXES............ -- -- -- -- -- -- -- (2,060)(i) (2,060)
----- ------- ------ ------ ------- ------ ------ ------- -------
NET INCOME (LOSS)....... (419) $ 379 $1,518 $1,051 $ 3,425 $ 245 $ 504 $(4,206) $ 2,497
===== ======= ====== ====== ======= ====== ====== ======= =======
PRO FORMA NET INCOME PER
SHARE.................. $ 0.12(l)
=======
SHARES USED IN COMPUTING
PRO FORMA NET INCOME
PER SHARE.............. 21,200(l)
=======
</TABLE>
- --------
* TeleSpectrum Worldwide was incorporated on April 26, 1996; accordingly,
there were no historical results prior to that date (See Note 1).
See accompanying notes to pro forma combined financial statements.
F-7
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND OPERATING BUSINESSES
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. TELESPECTRUM WORLDWIDE BACKGROUND:
TeleSpectrum Worldwide was incorporated as a wholly-owned subsidiary of CRW
Financial, Inc. ("CRW") on April 26, 1996. Accordingly, there are no historical
financial statements available for TeleSpectrum Worldwide prior to April 26,
1996. On May 22, 1996, CRW contributed $2.1 million of capital to TeleSpectrum
Worldwide. The $2.1 million CRW capital contribution consisted of $1.6 million
of cash and a $0.5 million promissory note from TeleSpectrum. The note
represented an April 1996 advance of the purchase price from CRW on behalf of
TeleSpectrum Worldwide (See Note 3).
TeleSpectrum Worldwide was formed to create a national provider of integrated
teleservices solutions. TeleSpectrum Worldwide has conducted no operations to
date and will acquire the Operating Businesses simultaneously with the
consummation of the Offering. See "Risk Factors," "Certain Relationships and
Related Party Transactions" and page F-3 for additional information.
2. HISTORICAL FINANCIAL STATEMENTS:
The historical financial statements represent the financial position and
results of operations for TeleSpectrum Worldwide and the Sellers and were
derived from the respective financial statements where indicated. All Operating
Businesses have December 31 year ends, except for the Response Center and NBG.
The Response Center's year end is September 30 and NBG operates on a fifty-two,
fifty-three week fiscal year ending on the last Friday of the calendar year.
However, for purposes of the Pro Forma Combined Financial Statements, the
balance sheet and statements of income information for The Response Center and
NBG are as of June 30, 1996 and the year ended December 31, 1995 and the six
months ended June 30, 1995 and 1996. The audited historical financial
statements included elsewhere in this Prospectus have been included in
accordance with Securities and Exchange Commission Staff Accounting Bulletin
No. 80. Included in the TeleSpectrum Worldwide June 30, 1996 balance sheet is
$21,924,000 of other assets which consists of $20,271,000 and $1,653,000 of
deferred acquisition costs and deferred public offering costs, respectively.
See TeleSpectrum Worldwide historical financial statements.
3. ACQUISITION OF OPERATING BUSINESSES:
Concurrent with the closing of the Offering, TeleSpectrum Worldwide will
acquire substantially all of the net assets of the Operating Businesses. The
Acquisitions will be accounted for using the purchase method of accounting with
TeleSpectrum Worldwide treated as the acquirer. The total estimated purchase
price is $160.8 million, which consists of: (i) $90.9 million of cash to be
paid to the Sellers upon the consummation of the Offering; (ii) forgiveness of
the $0.5 million promissory note from TeleSpectrum; (iii) the $44.7 million
estimated fair value of 4,403,863 shares of Common Stock to be issued to the
Sellers; (iv) the $2.1 million estimated fair value of warrants to purchase
593,400 shares of Common Stock at the initial public offering price of $15.00
per share to be issued in connection with the Acquisitions; (v) the $18.7
million deemed value for accounting purposes of the CRW Lender Warrants and CRW
Management Warrants as discussed in this Prospectus to purchase 2,272,562
shares of Common Stock currently owned by CRW Financial at $1.50 per share; and
(vi) estimated transaction costs of $3.9 million. The estimated purchase price
for the Acquisitions is subject to certain purchase price adjustments at
closing and earn-out arrangements. See "Certain Relationships and Related Party
Transactions."
The 4,403,863 shares of the Company's Common Stock to be issued to the
Sellers are valued as follows:
<TABLE>
<CAPTION>
SHARES VALUE PER SHARE TOTAL VALUE
--------- --------------- -----------
<S> <C> <C>
334,000 $15.00 $ 5,010,000
4,069,863 9.75 39,681,164
--------- -----------
4,403,863 $44,691,164
========= ===========
</TABLE>
F-8
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND OPERATING BUSINESSES
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
The 334,000 shares, were valued at the assumed initial public offering price
since the shares will be issued to the Sellers and sold in of the Offering. The
remaining 4,069,863 shares to be issued to the Sellers were valued at a 35%
discount to the initial public offering price, or $9.75 per share. This
discount was based upon an appraisal and upon the fact that holders of these
shares have agreed to not offer, sell or otherwise dispose of any of these
shares for a period of 360 days after the Offering without the prior written
consent of J.P. Morgan Securities Inc. These shares are not subject to demand
registration rights, and as a result may not be freely tradeable for up to
three years after the consummation of the Acquisitions.
The estimated total purchase price of $160.8 million of the Acquisitions has
been allocated to the assets acquired and liabilities assumed. Based upon
management's preliminary analysis, it is anticipated that the historical
carrying value of the Operating Businesses' assets and liabilities will
approximate fair value. The amount allocated to goodwill is $146.5 million. The
Operating Businesses have no long-term client contracts and client
relationships can be cancelled by the client upon relatively short notice.
Though the Operating Businesses have sophisticated computer systems, the
computer systems are not proprietary. No additional portion of the price was
allocated to these items. Further, management has not identified any other
tangible or identifiable intangible assets of the Operating Businesses to which
a portion of the purchase price could reasonably be allocated.
In addition to the purchase price discussed above, the SOMAR, NBG and Reich
acquisitions have certain earn-out provisions based upon 1996 and/or 1997
operating results. The earn-out provisions will be recorded in accordance with
the Emerging Issues Task Force 95-8 "Accounting for Contingent Consideration
Paid to the Shareholders of an Acquired Company." If these earn-out provisions
are achieved there will be additional purchase price allocated to goodwill.
There are no pro forma adjustments required for the earn-out provisions in the
pro forma combined financial statements relating to the earn-out provisions. In
addition, TeleSpectrum Worldwide has agreed to implement a bonus plan for the
employees of SOMAR. Such bonus payments could be significant.
4. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS:
(a) To reflect the sale of 10,286,000 shares of Common Stock at an assumed
initial public offering price of $15.00 per share, net of expenses and
underwriting discount, for net proceeds of $140.9 million.
(b) To reflect: (i) the use of $90.9 million of the net proceeds of the
Offering to pay the cash portion of the purchase price of the Operating
Businesses payable at closing; (ii) forgiveness of the $0.5 million
promissory note from TeleSpectrum; (iii) the issuance of 4,403,863 shares
of Common Stock to the Sellers; (iv) the issuance of warrants to purchase
593,400 shares of Common Stock at the Offering price; and (v) estimated
transaction costs of $3.9 million.
(c) To reflect the use of a portion of the net proceeds of the Offering to
reduce debt originally incurred by the Operating Businesses payable at
closing.
(d) To reflect the purchase price adjustments associated with the acquisition
of the Operating Businesses (approximately $4.0 million), including
estimated closing adjustments based primarily on minimum required
shareholders' equity balance at closing. The estimated closing purchase
price adjustments relate primarily to additional estimated payments to the
Sellers to reflect the increase in the Operating Businesses' shareholders'
equity through the closing of the Acquisitions. See "Certain Relationships
and Related Party Transactions--The Acquisitions."
(e) To reflect the repayment of the SOMAR amount due from affiliates of $1.2
million.
F-9
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND OPERATING BUSINESSES
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
A summary of the unaudited proforma combined balance sheet adjustments (a),
(b), (c), (d) and (e) is as follows:
<TABLE>
<CAPTION>
DEBIT (CREDIT)
----------------------------------------------------------------
BALANCE SHEET ACCOUNTS UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
- ---------------------- ----------------------------------------------------------------
(A) (B) (C) (D) (E) TOTAL
--------- -------- -------- -------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash.................... $ 141,080 $(93,503) $(16,953) $ (4,000) $ 1,200 $ 27,824
Amounts due from
affiliates............. (500) (1,200) (1,700)
Due from TeleSpectrum
Worldwide Inc. ........ (211) (211)
Goodwill................ 160,829 (14,324) 146,505
Other assets............ (1,653) (20,271) (21,924)
Line of credit.......... 6,727 6,727
Current maturities of
long-term debt......... 4,440 4,440
Accrued liabilities..... 1,463 300 1,763
Due to affiliates....... 336 336
Long-term debt.......... 5,786 5,786
Common stock............ (103) (44) 72 (75)
Additional paid-in
capital................ (140,787) (46,936) 1,502 (186,221)
Net unrealized gain on
available securities... 100 100
Retained earnings....... 17,014 17,014
Treasury stock, at
cost................... (364) (364)
--------- -------- -------- -------- ------- ---------
$ -- $ -- $ -- $ -- $ -- $ --
========= ======== ======== ======== ======= =========
</TABLE>
5. UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME ADJUSTMENTS:
(f) To reflect the amortization expense for the goodwill recorded in
connection with the acquisition of the Operating Businesses. The goodwill
is being amortized on a straight-line basis over an estimated life of 25
years.
(g) To reflect officers' compensation expense of the Operating Businesses and
TeleSpectrum Worldwide (see below) based upon employment agreements
entered into upon the closing of the Acquisitions.
(h) To reflect the elimination of interest expense resulting from the
reduction of debt from the net proceeds of the Offering (see
Adjustment(c)).
(i) To calculate the provision for income taxes on the combined pro forma
income before taxes at effective tax rates of 47.8% and 45.2% in 1995 and
1996, respectively.
(j) The weighted average shares outstanding used to calculate pro forma
earnings per share is based upon the estimated average number of shares of
Common Stock and common stock equivalents outstanding during the period
calculated as follows:
<TABLE>
<S> <C>
Shares issued in the formation of TeleSpectrum Worldwide....... 8,510,137
Shares issued to the Sellers of the Operating Businesses....... 4,403,863
Shares issued in the Offering.................................. 10,286,000
Less: Shares issued in the Offering whose proceeds will be used
for working capital and capital expenditures ................. (2,000,000)
----------
21,200,000
==========
</TABLE>
Outstanding options and warrants have been excluded since all such options
and warrants are exercisable at the Offering price.
TeleSpectrum Worldwide has entered into employment agreements with its Chief
Executive Officer, Chief Operating Officer and a Chief Financial Officer which
provide for total minimum annual compensation of $605,000. This amount was
reflected in pro forma adjustment 5(g).
In addition, TeleSpectrum Worldwide is in the process of hiring other
corporate staff. Also, certain corporate expenses will be incurred in 1996 and
thereafter related to operating as a public company and in managing the
Operating Businesses, which heretofore have operated as autonomous businesses.
These additional expenses (which will be significant) have not been reflected
in the accompanying pro forma statements of income. The effect of the
additional expenses and related benefits is not currently estimable as the
Acquisitions have not been consummated and the expected synergies of combining
the Operating Businesses are not specifically quantifiable at this time. See
"Executive Compensation" and "Employment Agreements" under "Management."
F-10
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND OPERATING BUSINESSES
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
6. PRO FORMA COMBINED STATEMENTS OF INCOME SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies have been reflected in the
Company's pro forma combined income statements.
Revenue Recognition and Concentration of Credit Risk
The Company recognizes revenues as services are performed for its clients.
The Company's ten largest clients in 1995 represented approximately 56.4% of
the Company's pro forma revenues, with the largest client accounting for 11.9%.
Loss of one or more of these clients could have a material adverse effect on
the Company's business, results of operations and financial condition.
Depreciation
Depreciation is recorded on a straight line basis as follows:
<TABLE>
<CAPTION>
TYPE USEFUL LIVES
---- ------------
<S> <C>
Building and Building Improvements.............................. 10-40
Telemarketing Equipment......................................... 5-7
Machinery and Equipment......................................... 5-10
Furniture and Office Equipment.................................. 3-10
Leasehold Improvements.......................................... 5-10
</TABLE>
Training Costs
The Company maintains on-going training programs for its employees. The cost
of this training is charged to expense when incurred.
F-11
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To TeleSpectrum Worldwide Inc.:
We have audited the accompanying balance sheet and statement of
stockholder's equity of TeleSpectrum Worldwide Inc. (a Delaware Corporation)
as of June 30, 1996 and statement of operations for the period from inception
(April 26, 1996) to June 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of TeleSpectrum Worldwide
Inc. as of June 30, 1996, and the results of its operations for the period
from inception (April 26, 1996) to June 30, 1996, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Philadelphia, Pa.
July 15, 1996
F-12
<PAGE>
TELESPECTRUM WORLDWIDE INC.
BALANCE SHEET
JUNE 30, 1996
(IN THOUSANDS--EXCEPT PAR VALUE AND SHARE AMOUNTS)
<TABLE>
<S> <C>
ASSETS
DUE FROM OPERATING BUSINESS........................................... $ 500
PROPERTY AND EQUIPMENT................................................ 22
DEFERRED ACQUISITION COSTS............................................ 20,271
DEFERRED PUBLIC OFFERING COSTS........................................ 1,653
-------
Total assets...................................................... $22,446
=======
LIABILITIES AND STOCKHOLDER'S EQUITY
ACCOUNTS PAYABLE...................................................... $ 11
DUE TO OPERATING BUSINESS............................................. 211
ACCRUED EXPENSES...................................................... 1,784
STOCKHOLDER'S EQUITY:
Preferred stock, $.01 par value, 5,000,000 shares authorized, none
issued............................................................. --
Common stock, $.01 par value, 200,000,000 shares authorized,
8,510,137 shares issued and outstanding............................ 85
Additional paid in capital.......................................... 20,774
Accumulated deficit................................................. (419)
-------
Total liabilities and stockholder's equity........................ $22,446
=======
</TABLE>
TELESPECTRUM WORLDWIDE INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM APRIL 26, 1996 (INCEPTION) TO JUNE 30, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
REVENUES............................................................ $ --
OPERATING EXPENSES:
Cost of services.................................................. --
Selling, general and administrative .............................. 419
---------
Total operating expenses........................................ 419
=========
Operating loss.................................................. (419)
INTEREST INCOME..................................................... --
INTEREST EXPENSE.................................................... --
---------
NET LOSS............................................................ $ (419)
=========
NET LOSS PER SHARE.................................................. $ 0.05
=========
SHARES USED IN COMPUTING NET LOSS PER SHARE......................... 8,510,137
=========
</TABLE>
The accompanying notes are an integral part of these statements.
F-13
<PAGE>
TELESPECTRUM WORLDWIDE INC.
STATEMENT OF STOCKHOLDER'S EQUITY
(IN THOUSANDS--EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PREFERRED COMMON
STOCK STOCK
------------- ----------------
ADDITIONAL TOTAL
PAID-IN STOCKHOLDER'S
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------ --------- ------ ---------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Incorporated on April
26, 1996............... -- $-- 8,510,137 $85 $ (75) $ -- $ 10
Capital Contribution
(Note 1)............... -- -- -- -- 2,100 -- 2,100
Issuance of Equity Owned
by Parent (Note 6)..... -- -- -- -- 18,749 -- 18,749
Net loss................ -- -- -- -- -- (419) (419)
--- ---- --------- --- ------- ----- -------
Balance, June 30, 1996.. -- $-- 8,510,137 $85 $20,774 $(419) $20,440
=== ==== ========= === ======= ===== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-14
<PAGE>
TELESPECTRUM WORLDWIDE INC.
NOTES TO FINANCIAL STATEMENTS
1. BACKGROUND:
TeleSpectrum Worldwide Inc. (TeleSpectrum Worldwide) was incorporated in
Delaware on April 26, 1996, as a wholly owned subsidiary of CRW Financial, Inc.
(CRW). TeleSpectrum Worldwide was formed to create a national provider of
integrated teleservices solutions (see Note 2). On May 22, 1996, TeleSpectrum
Worldwide received a $2.1 million capital contribution from CRW (see Note 6).
On May 21, 1996, TeleSpectrum Worldwide effected a 8.510137 for 1 split of its
Common Stock. All share and per share amounts included in the financial
statements reflect this split.
TeleSpectrum Worldwide has conducted no operations to date and has entered
into agreements to acquire substantially all of the net assets of the
businesses discussed in Note 2. These businesses have been operating
independently and TeleSpectrum Worldwide may not be able to successfully
integrate these businesses and their operations, employees and management.
Given the nature of TeleSpectrum Worldwide, it is and will be subject to many
risks, including but not limited to (i) an absence of combined operating
history, (ii) the potential inability to manage growth, (iii) risks generally
associated with acquisitions, (iv) possible fluctuations in quarterly results,
(v) reliance on major clients and key industries, (vi) possible decline in
effectiveness of telemarketing and (vii) reliance on key personnel.
2. ACQUISITIONS AND PUBLIC OFFERING:
In May 1996, CRW assigned to TeleSpectrum Worldwide its rights to acquire
substantially all of the net assets of SOMAR, Inc. (SOMAR), NBG Services, Inc.
(NBG), Harris Direct Marketing, Inc. and Harris Fulfillment, Inc. (Harris), The
Reich Group Companies (Reich), The Response Center, Inc. and The Tab House,
Inc. (The Response Center) and TeleSpectrum, Inc. and TeleSpectrum Training
Services, Inc. (TeleSpectrum); together, the Operating Businesses. These
acquisitions will occur contemporaneously with the closing of TeleSpectrum
Worldwide's initial public offering (the Offering) and will be accounted for
using the purchase method. The estimated total purchase price of the Operating
Businesses is $160.8 million, which consists of: (i) $90.9 million in cash to
be paid to the sellers of the Operating Businesses (the Sellers) upon the
consummation of the Offering; (ii) forgiveness of the $0.5 million promissory
note from TeleSpectrum (see Note 3); (iii) the $44.7 million estimated fair
value of 4,403,863 shares of Common Stock to be issued to the Sellers; (iv) the
$2.1 million estimated fair value of warrants to purchase 593,400 shares of
Common Stock at the initial public offering price of $15.00 per share to be
issued in connection with the acquisitions of the Operating Businesses
(Acquisitions); (v) the $18.7 million deemed value for accounting purposes of
the CRW Lender Warrants and CRW Management Warrants (see Note 6) to purchase
2,272,562 shares of Common Stock (currently owned by CRW) at $1.50 per share;
and (vi) estimated transaction costs of $3.9 million. The estimated purchase
price for the Acquisitions is subject to certain purchase price adjustments at
Closing, as defined and earn-out arrangements.
The 4,403,863 shares of the Company's Common Stock to be issued to the
Sellers are valued as follows:
<TABLE>
<CAPTION>
VALUE
SHARES PER SHARE TOTAL VALUE
------ --------- -----------
<S> <C> <C>
334,000 $15.00 $ 5,010,000
4,069,863 9.75 39,681,164
--------- -----------
4,403,863 $44,691,164
========= ===========
</TABLE>
The 334,000 shares were valued at the initial public offering price since the
shares will be issued to the Sellers and sold in the Offering. The remaining
4,069,863 shares were valued at a 35% discount to the assumed initial public
offering price, or $9.75 per share. This discount was based upon an appraisal
and upon the fact that holders of these shares have agreed to not offer, sell
or otherwise dispose of any of these shares for a period of 360 days after the
Offering without the prior written consent of J.P. Morgan Securities Inc. These
shares are not subject to demand registration rights, and as a result may not
be freely tradeable for up to three years after the consummation of the
Acquisitions.
F-15
<PAGE>
In addition to the total per share price discussed above, the SOMAR, NBG and
Reich acquisitions have earnout provisions based upon 1996 and/or 1997
operating results. If these earnout provisions are achieved, there will be
additional purchase price. In addition, TeleSpectrum Worldwide has agreed to
implement a bonus plan for the employees of SOMAR. Such bonus payments could be
significant. Also, Telespectrum Worldwide will be committed to provide up to
$14.0 million in funding for future SOMAR capital expenditures.
3. TRANSACTIONS WITH OPERATING BUSINESS
Upon signing the asset purchase agreement with TeleSpectrum in April 1996,
CRW (See Note 6) advanced TeleSpectrum $500,000 in the form of a promissory
note due in one year with interest at 9%. Upon the closing of the acquisition,
a portion of the purchase price will be paid by cancellation of the promissory
note (see Note 2).
In connection with the acquisitions, TeleSpectrum Worldwide has agreed to
reimburse certain acquisition costs incurred by the Operating Businesses. As of
June 30, 1996, the amount payable to the Operating Businesses was $211,000.
4. OPTIONS AND WARRANTS:
The 1996 Equity Compensation Plan
On May 17, 1996 TeleSpectrum Worldwide adopted The 1996 Equity Compensation
Plan (the Plan). The Plan reserves up to 2,300,000 shares of Common Stock for
issuance in connection with the exercise and/or grant of incentive and
nonqualified stock options, restricted stock, stock appreciation rights and
performance units to selected officers (including officers who are also
directors) and other TeleSpectrum Worldwide employees, independent contractors
and consultants. In addition, the Plan provides for grants of formula stock
options to employee directors.
In May 1996, TeleSpectrum Worldwide agreed to grant to the Chief Executive
Officer, Chief Operating Officer and Chief Financial Officer and other
management options to purchase 1,000,000 shares of Common Stock at the Offering
price per share. In addition, TeleSpectrum Worldwide granted 155,000 options to
a director and an outside consultant at the Offering price per share. Of the
options granted to the executives, options to purchase 225,000 shares of Common
Stock will vest upon consummation of the Offering. All of the remaining options
will vest over three years and are exercisable over ten years. In addition,
400,000 shares are issuable upon the exercise of options that TeleSpectrum
Worldwide is to grant, pursuant to employment agreements with two of its
executive officers, ratably over the course of the next four years.
Upon the effective date of the Offering, TeleSpectrum Worldwide has agreed to
grant to employees of the Operating Businesses options to purchase 281,100
shares of Common Stock at the offering price per share. Of these options, 7,560
are vested and exercisable immediately and the remainder of the options will
vest over three years and are exercisable over ten years.
Warrants
Effective upon the consummation of the Offering, TeleSpectrum Worldwide will
issue warrants to purchase 593,400 shares of Common Stock in connection with
the acquisitions of the Operating Businesses at the Offering per share price.
These warrants are exercisable for ten years.
5. EMPLOYMENT AGREEMENTS:
TeleSpectrum Worldwide has entered into employment agreements with its Chief
Executive Officer, Chief Operating Officer and Chief Financial Officer which
provide for minimum annual compensation of $605,000 plus bonuses. In addition,
in connection with the Closing of the Acquisitions, TeleSpectrum Worldwide will
enter into employment agreements with several management members of the
Operating Businesses, which agreements provide for minimum annual compensation
of $3.4 million plus bonuses.
F-16
<PAGE>
6. CRW TRANSACTIONS:
As discussed in Note 1, CRW made a capital contribution to TeleSpectrum
Worldwide on May 22, 1996 of $1.6 million in cash and $0.5 million in the form
of a promissory note from TeleSpectrum, Inc. to CRW. The capital contribution
represents the proceeds of borrowings by CRW under subordinated notes issued to
the following individuals and partnership: J. Brian O'Neill, TeleSpectrum
Worldwide's Chairman of the Board and Chief Executive Officer and Chairman and
Chief Executive Officer of CRW, TL Ventures (a significant CRW stockholder),
Michael Boyd, TeleSpectrum Worldwide's Chief Operating Officer and President,
Richard C. Schwenk, Jr., TeleSpectrum Worldwide's Senior Vice President and
Chief Financial Officer, Jonathan P. Robinson, CRW's Chief Financial Officer
and TeleSpectrum Worldwide's Director of Acquisitions, Kevin Mullin, CRW's
Director of Acquisitions, Arthur Spector, a consultant to CRW, Bernard Morgan
and Robert Veratti (CRW directors) and Technology Leaders L.P., a stockholder
of CRW. As additional consideration, the lenders to CRW received warrants from
CRW to purchase 1,433,454 shares of TeleSpectrum Worldwide Common Stock owned
by CRW at $1.50 per share (CRW Lender Warrants). In addition, CRW issued to its
bank, warrants to purchase 75,000 shares of TeleSpectrum Worldwide Common Stock
owned by CRW at $1.50 share. These warrants were issued as consideration for
CRW bank's issuing a waiver under its loan facility with CRW, permitting the
May 22, 1996 capital contribution to TeleSpectrum Worldwide.
CRW also agreed to issue warrants to purchase 839,108 shares of TeleSpectrum
Worldwide Common Stock owned by CRW at $1.50 per share to Messrs. O'Neill,
Robinson, Mullin and Spector (CRW Management Warrants). The warrants were
granted by CRW to these individuals for services provided to CRW.
The deemed value for accounting purposes of the CRW Lender Warrants and the
CRW Management Warrants is based upon the difference between $9.75 (35%
discount to the initial public offering price) and the $1.50 warrant exercise
price. The deemed value for accounting purposes of $18.7 million is treated as
additional purchase price consideration of the acquisitions of the Operating
Businesses and has been reflected as "Deferred Acquisition Costs" in the
accompanying June 30, 1996 balance sheet.
TeleSpectrum Worldwide subleases an aggregate of 3,000 square feet in King of
Prussia (suburban Philadelphia), Pennsylvania from CRW. The sublease commenced
on May 9, 1996 and requires monthly base rent payments through September 30,
2004 of approximately $4,100. TeleSpectrum Worldwide believes the lease to be
at the prevailing commercial market rate.
7. REVOLVING CREDIT COMMITMENT:
The Company has obtained a commitment for a bank credit facility with a
borrowing limit of $50.0 million. Interest on borrowings under the credit
facility will accrue at an annual rate equal to LIBOR plus a percentage that
will range from 0.75% to 1.50% based on the Company's debt to earnings before
interest, taxes, depreciation and amortization ratio. The closing of the credit
facility is subject to the (i) consummation of the Offering, with gross
proceeds to the Company of at least $144.0 million, resulting in cash remaining
on the balance sheet of the Company (following consummation of the Acquisitions
and the repayment of indebtedness assumed in the Acquisitions) of no less than
$22.0 million; and (ii) customary conditions.
8. ACCRUED EXPENSES:
Accrued expenses principally consists of professional fees related to the
Acquisitions and the Offering.
9. SIGNIFICANT ACCOUNTING POLICIES:
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
New Accounting Pronouncement
The Financial Accounting Standards Board has issued SFAS No. 123, "Accounting
for Stock-Based Compensation." The Company is required to adopt this standard
for the year ending December 31, 1996. The Company has elected to adopt the
disclosure requirement of this pronouncement. This pronouncement will have no
impact on the Company's reported financial position or results of operations.
F-17
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To SOMAR, Inc.:
We have audited the accompanying balance sheets of SOMAR, Inc. (a North
Carolina corporation) as of December 31, 1994 and 1995, and the related
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SOMAR, Inc. as of December 31,
1994 and 1995, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Charlotte, North Carolina,
April 29, 1996
F-18
<PAGE>
SOMAR, INC.
BALANCE SHEETS
(IN THOUSANDS--EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31
--------------- JUNE 30,
1994 1995 1996
------ ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash............................................ $ 2 $ 25 $ 4
Accounts receivable, net of reserves of $40 for
1994, 1995 and 1996............................ 2,822 4,825 7,183
Amounts due from--
TeleSpectrum Worldwide Inc. ................... -- -- 74
Stockholders................................... 529 881 925
Affiliates..................................... 1 210 312
Prepaid expenses and other...................... 307 451 523
------ ------- -------
Total current assets.......................... 3,661 6,392 9,021
PROPERTY AND EQUIPMENT, net....................... 1,865 4,400 6,266
------ ------- -------
Total assets.................................. $5,526 $10,792 $15,287
====== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit.................................. $1,429 $ 1,182 $ 4,438
Note payable--Bank.............................. -- 1,000 --
Current portion of long term debt............... 82 2,182 1,798
Current portion of capital lease obligations.... 501 852 1,059
Accounts payable................................ 1,345 1,959 2,449
Accrued compensation............................ 340 523 578
Other accrued expenses.......................... 101 122 389
Amounts due to an affiliate..................... 105 562 439
------ ------- -------
Total current liabilities..................... 3,903 8,382 11,150
------ ------- -------
LONG-TERM DEBT.................................... 300 767 1,074
------ ------- -------
CAPITAL LEASE OBLIGATIONS......................... 845 872 2,145
------ ------- -------
COMMITMENTS AND CONTINGENCIES (Notes 5 and 6)
STOCKHOLDERS' EQUITY:
Common stock, $1 par value; 100,000 shares
authorized; 11,765 shares issued and
outstanding.................................... 12 12 12
Additional paid-in capital...................... 772 789 789
Retained earnings (deficit)..................... (306) (30) 117
------ ------- -------
Total stockholders' equity.................... 478 771 918
------ ------- -------
Total liabilities and stockholders' equity.... $5,526 $10,792 $15,287
====== ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-19
<PAGE>
SOMAR, INC.
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
FOR THE YEAR ENDED SIX MONTHS ENDED
DECEMBER 31 JUNE 30
------------------------- ------------------
1993 1994 1995 1995 1996
------- ------- ------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES........................ $10,703 $20,785 $31,900 $ 14,795 $ 20,803
------- ------- ------- -------- --------
OPERATING EXPENSES..............
Cost of services.............. 7,731 15,623 25,048 11,221 16,888
Selling, general and
administrative expenses...... 2,787 4,115 5,162 2,620 3,092
------- ------- ------- -------- --------
Total operating expenses.... 10,518 19,738 30,210 13,841 19,980
------- ------- ------- -------- --------
Operating income............ 185 1,047 1,690 954 823
INTEREST INCOME................. 17 12 45 -- 10
INTEREST EXPENSE................ (106) (432) (756) (299) (454)
------- ------- ------- -------- --------
NET INCOME...................... $ 96 $ 627 $ 979 $ 655 $ 379
======= ======= ======= ======== ========
PRO FORMA DATA (UNAUDITED)
Historical net income......... $ 96 $ 627 $ 979 $ 655 $ 379
Pro forma provision for income
taxes........................ 49 261 414 269 141
------- ------- ------- -------- --------
Pro forma net income.......... $ 47 $ 366 $ 565 $ 386 $ 238
======= ======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-20
<PAGE>
SOMAR, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL RETAINED TOTAL
COMMON PAID-IN STOCKHOLDER EARNINGS STOCKHOLDERS'
STOCK CAPITAL LOAN (DEFICIT) EQUITY (DEFICIT)
------ ---------- ----------- --------- ----------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1,
1993................... $12 $474 $(612) $(361) $(487)
Net income............. -- -- -- 96 96
--- ---- ----- ----- -----
BALANCE, DECEMBER 31,
1993................... 12 474 (612) (265) (391)
Net income............. -- -- -- 627 627
Distributions.......... -- -- -- (668) (668)
Repayments of stock-
holder loan........... -- -- 612 -- 612
Stock options.......... -- 298 -- -- 298
--- ---- ----- ----- -----
BALANCE, DECEMBER 31,
1994................... 12 772 -- (306) 478
Net income............. -- -- -- 979 979
Distributions.......... -- -- -- (703) (703)
Stock options.......... -- 17 -- -- 17
--- ---- ----- ----- -----
BALANCE, DECEMBER 31,
1995................... 12 789 -- (30) 771
Net income (unau-
dited)................ -- -- -- 379 379
Distributions (unau-
dited)................ -- -- -- (232) (232)
--- ---- ----- ----- -----
BALANCE, June 30, 1996
(unaudited)............ $12 $789 $ -- $ 117 $ 918
=== ==== ===== ===== =====
</TABLE>
The accompanying notes are an integral part of these statements.
F-21
<PAGE>
SOMAR, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
FOR THE YEAR ENDED SIX MONTHS
DECEMBER 31 ENDED JUNE 30
----------------------- ----------------
1993 1994 1995 1995 1996
----- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income ........................ $ 96 $ 627 $ 979 $ 655 $ 379
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities--
Depreciation and amortization.... 145 288 775 283 593
Stock option compensation ex-
pense........................... -- 298 17 17 --
Changes in operating assets and
liabilities--
Accounts receivable............ 144 (1,987) (2,003) (1,620) (2,432)
Prepaid expenses and other..... (89) (123) (144) (136) (72)
Accounts payable............... (165) 559 614 935 490
Accrued expenses............... 123 395 203 8 322
----- ------- ------- ------- -------
Net cash provided by (used
in) operating activities.... 254 57 441 142 (720)
----- ------- ------- ------- -------
INVESTING ACTIVITIES:
Purchases of property and equip-
ment.............................. (19) (174) (2,309) (765) (511)
Advances to stockholder............ (426) (103) (352) (422) (44)
Advances to affiliates............. -- (2) (209) -- (102)
Repayments of advances to affili-
ates.............................. 1 13 -- 1 --
Repayment of stockholder loan...... -- 612 -- -- --
----- ------- ------- ------- -------
Net cash (used in) provided
by investing activities..... (444) 346 (2,870) (1,186) (657)
----- ------- ------- ------- -------
FINANCING ACTIVITIES:
Borrowings on long-term debt....... 24 25 2,824 1,032 806
Repayments on long-term debt....... (86) (31) (257) (220) (883)
Borrowings (repayments) on note
payable--Bank..................... -- -- 1,000 -- (1,000)
Borrowings (repayments) from affil-
iates............................. 506 (491) 458 99 (123)
Distributions paid to sharehold-
ers............................... -- (669) (703) -- (232)
Payments on capital lease obliga-
tions............................. (302) (297) (623) (502) (468)
Net (repayments) borrowings on line
of credit agreement............... 63 1,046 (247) 671 3,256
----- ------- ------- ------- -------
Net cash provided by (used
in) financing activities.... 205 (417) 2,452 1,080 1,356
----- ------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH...... 15 (14) 23 36 (21)
CASH, BEGINNING OF PERIOD............ 1 16 2 2 25
----- ------- ------- ------- -------
CASH, END OF PERIOD.................. $ 16 $ 2 $ 25 $ 38 $ 4
===== ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-22
<PAGE>
SOMAR, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE
SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
INDUSTRY INFORMATION
SOMAR, Inc. (the "Company") is a provider of outsourced telephone-based
sales, marketing and customer management services, to clients principally in
the insurance industry and also to clients in the financial services,
telecommunications and consumer products industries.
REVENUE RECOGNITION AND CONCENTRATION OF CREDIT RISK
The Company recognizes revenues on programs as services are performed for its
clients, generally based upon hours incurred.
The nature of the industry is such that the Company is dependent on several
large clients for a significant portion of its annual revenues. For the years
ended December 31, 1993, 1994, 1995, and for the six months ended June 30,
1996, the Company had three, four, three and three clients, respectively, that
each accounted for more than 10% of the Company's revenues. For the period
ended December 31, 1993, the three clients accounted for 36%, 25% and 11% of
the Company's revenues, respectively. For the period ended December 31, 1994,
the four clients accounted for 20%, 17%, 16% and 13% of the Company's revenues,
respectively. For the period ended December 31, 1995, the three clients
accounted for 33%, 16% and 15% of the Company's revenues. For the six months
ended June 30, 1996, the three clients accounted for 22%, 20%, and 13% of the
Company's revenues, respectively. The loss of one or more of these major
clients could have a materially adverse effect on the Company's business.
Concentration of credit risk is limited to trade accounts receivable and is
subject to the financial conditions of certain major clients described above.
Two of these clients are engaged in transactions with each other and represent
a single credit risk to the Company. The Company does not require collateral to
secure clients' receivables. The Company performs periodic reviews of its
clients' financial condition to reduce collection risk on trade accounts
receivable.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method for financial reporting purposes and accelerated
methods for income tax reporting purposes over the estimated useful lives of
the respective assets. Assets recorded under capital leases are amortized using
the straight-line method over the estimated useful lives of the leased assets.
Upon sale or retirement, the related cost and accumulated depreciation are
removed from the accounts, and any gain or loss is recognized in the statement
of income.
Major improvements are capitalized and charged to expense through
depreciation. Repairs and maintenance are charged to expense as incurred.
Certain general and administrative expenses associated with the opening of new
call centers are expensed prior to the opening of the call center.
As of January 1, 1993, the Company prospectively revised the remaining lives
of certain furniture and equipment to better reflect the periods during which
such assets are expected to remain in service. Furniture and equipment lives
that previously averaged three years were increased to an average of six years.
This change increased income for the year ended December 31, 1993, by $101,000.
F-23
<PAGE>
SOMAR, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE
SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
STATEMENT OF CASH FLOWS
For the years ended December 31, 1993, 1994, 1995 and the six months ended
June 30, 1996, the Company paid interest of $114,000, $366,000, $750,000 and
$450,000, respectively.
INCOME TAXES
The Company has elected to be taxed as an S Corporation under the provisions
of the Internal Revenue Code and North Carolina General Statutes. As a result,
the Company is not subject to federal income taxes, and the taxable income of
the Company is included in the individual tax returns of the Company's
stockholders. Accordingly, no provision for federal or state income taxes has
been recorded in the accompanying financial statements.
The Company reports certain income and expense items for income tax purposes
on a basis different from that reflected in the accompanying financial
statements. The principal differences relate to the timing of the recognition
of accrued expenses that are not deductible for federal income tax purposes
until paid and the use of accelerated methods of depreciation for income tax
purposes. At December 31, 1995, the financial reporting basis of the Company's
net assets exceeds the tax basis of the net assets by approximately $580,000.
In the event that the S Corporation is terminated, deferred income taxes
applicable to these differences would be reflected in the accompanying
financial statements.
Given the pending sale of the business (see Note 8), for informational
purposes, the accompanying statements of income include an unaudited pro forma
adjustment for income taxes which would have been recorded if the Company had
not been an S Corporation, based on the tax laws in effect during the
respective periods. The differences between the federal statutory income tax
rate and the pro forma income tax rate primarily relate to state and local
income taxes and expenses not deductible for tax purposes.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, accounts receivable, accounts payable and accrued liabilities are
reflected in the financial statements at fair value due to the short-term
nature of those instruments. The carrying amounts of the line of credit, note
payable and long-term debt approximate fair value on the balance sheet dates.
PREPAID AGENT LICENSE FEES
The Company capitalizes the cost of licensing its agents and amortizes
license fees over a 12-month period. Prepaid agent license fees amounted to
$59,000 and $172,000 at December 31, 1994 and 1995, respectively.
ACCOUNTING OF STOCK-BASED COMPENSATION
The Company currently utilizes Accounting Principles Board Opinion No. 25 in
its accounting for stock options. In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation." The accounting method as
provided in the pronouncement is not required to be adopted; however, it is
encouraged. The Company does not anticipate adopting the accounting provisions
of the statement but will include in the footnotes to the financial statements
the disclosures required by SFAS No. 123 in fiscal 1996.
TRAINING COSTS
The Company maintains ongoing training programs for its employees. The cost
of this training is charged to expense when incurred. As of December 31, 1995,
the Company recorded a $407,000 receivable from a State Economic Development
Agency for certain educational and training costs that are to be reimbursed.
F-24
<PAGE>
SOMAR, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE
SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
PERVASIVENESS OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
INTERIM FINANCIAL STATEMENTS
The financial statements as of June 30, 1996 and for the six months ended
June 30, 1995 and 1996 are unaudited and, in the opinion of management of the
Company, include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the results for those interim
periods. The results of operations for the six months ended June 30, 1996 are
not necessarily indicative of the results to be expected for the full year.
2. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
DECEMBER 31
USEFUL --------------- JUNE 30
LIVES 1994 1995 1996
--------- ------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Furniture and fixtures................... 5-7 years $ 874 $ 2,265 $3,074
Telemarketing equipment.................. 5 years 1,694 3,263 4,010
Building................................. 40 years -- -- 900
Leasehold improvements................... 5-6 years 9 359 362
------ ------- ------
2,577 5,887 8,346
Less--Accumulated depreciation and
amortization............................ (712) (1,487) (2,080)
------ ------- ------
$1,865 $ 4,400 $6,266
====== ======= ======
</TABLE>
The gross cost of equipment under capital lease obligations included above
amounted to $1,547,000, $2,547,000 and $4,485,000 at December 31, 1994, 1995
and June 30, 1996, respectively.
Depreciation and amortization expense for the years ended December 31, 1993,
1994, 1995, and for the six months ended June 30, 1996 was $145,000, $288,000,
$775,000 and $593,000, respectively.
3. LINE OF CREDIT AND NOTE PAYABLE--BANK:
At December 31, 1994 and 1995, the Company had a line of credit with Fremont
Financial Corporation ("Fremont"). The Company has entered into an agreement
with NationsBank of Georgia ("NationsBank") for a revolving line of credit with
a maximum borrowing limit of $6,500,000. Interest on the NationsBank line of
credit is payable monthly and accrues on borrowings under the revolving line of
credit at the bank's prime rate (8 1/2%) plus 1%.
The Company's borrowing base under the NationsBank revolver is limited to 85%
of eligible receivables as defined by the agreement. The line is secured by
trade accounts receivable, equipment and other assets of the Company. At July
12, 1996, the Company's availability under the NationsBank revolver was
approximately $780,000.
The agreement terminates on January 1, 1997, and contains certain restrictive
covenants that, among other things, require the maintenance of certain
financial ratios, limitations on capital expenditures and bonuses, and
restrictions on future indebtedness. As of March 31, 1996, the Company was in
violation of certain loan covenants for which it has obtained a waiver letter
from the bank. This waiver letter modified the loan covenants related to
certain required financial ratios. As of June 30, 1996, the Company is in
compliance with these revised loan covenants.
F-25
<PAGE>
SOMAR, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE
SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
At December 31, 1995, the Company was transitioning its line of credit
arrangement from Fremont to NationsBank. In connection with the transition, the
Company borrowed $1,000,000 from NationsBank on a short-term basis at an
interest rate equal to the bank's prime rate (8.5%) plus 1%. This note was
repaid on January 3, 1996, with the proceeds from the new revolving line of
credit arrangement.
4. LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31
------------- JUNE 30
1994 1995 1996
----- ------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Note payable to MCI Telecommunications Corporation,
unsecured, payable in monthly installments of
$128,300 through July 1996, and remaining payment
of $118,700 due in August 1996, interest at 9.75%
(on June 15, 1996, this note was refinanced; the
refinanced note is payable in monthly installments
of $128,300 through March 1997 and $43,400 in
April 1997, at an interest rate of 9.75%)......... $ -- $ 981 $ 1,149
Notes payable to a bank, secured by related
equipment, payable on July 1, 1996, interest
payable monthly at the bank's prime rate plus 150
basis points (10% at December 31, 1995),
guaranteed by the Company's two principal
stockholders and two affiliated companies (on July
5, 1996, these notes were refinanced by the West
Virginia Economic Development Authority; the
refinanced notes are secured by assets of the
Company and are payable in monthly installments of
$21,250 including interest, through July 1999, at
an interest rate of 4%)........................... -- 720 720
Installment note payable to a bank, secured by
related equipment, payable in monthly installments
of $11,900 including interest, through August
1998, at the bank's prime interest rate plus 150
basis points (10% at December 31, 1995),
guaranteed by the Company's two principal
stockholders and two affiliated companies......... -- 331 274
Note payable to Network Sampling Services, balance
due July 1, 1997, including interest at 10%,
guaranteed by one of the Company's principal
stockholders...................................... 382 300 300
Installment note payable to a bank, secured by
related equipment, payable in monthly installments
of $11,957 including interest, through April 1998,
at the bank's prime interest rate plus 150 basis
points (10% at December 31, 1995), guaranteed by
the Company's two principal stockholders and two
affiliated companies.............................. -- 288 230
Installment note payable to a bank, secured by
related equipment, payable in monthly installments
of $21,774 including interest, through October
1996, at the bank's prime rate plus 150 basis
points (10% at December 31, 1995), guaranteed by
the Company's two principal stockholders and two
affiliated companies.............................. -- 226 114
Installment note payable to a finance company,
unsecured, payable in monthly installments of
$3,800 including interest, through August 1998 at
an interest rate of 9%............................ -- 103 85
----- ------ -------
382 2,949 2,872
Less--Current portion............................ (82) (2,182) (1,798)
----- ------ -------
$ 300 $ 767 $ 1,074
===== ====== =======
</TABLE>
F-26
<PAGE>
SOMAR, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE
SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
Minimum principal repayments of long-term debt as of December 31, 1995, are
as follows (in thousands):
<TABLE>
<S> <C>
1996.................................................................. $2,182
1997.................................................................. 602
1998.................................................................. 165
------
$2,949
======
</TABLE>
The notes payable to a bank contain certain restrictive covenants. As of June
30, 1996, the Company was in violation of one of the loan covenants for which
it has obtained a waiver from the bank.
5. COMMITMENTS AND CONTINGENCIES:
The Company is party to various claims and other matters arising in the
normal course of business. In the opinion of management, the outcome of these
matters will not have a material adverse effect on the Company's financial
position or results of operations.
LEASES
The Company leases administrative offices, telephone call centers and
equipment under noncancelable operating leases. In addition, the Company has
capital leases covering certain operating equipment. Future minimum lease
payments at December 31, 1995, are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- -------
<S> <C> <C>
1996...................................................... $ 673 $ 989
1997...................................................... 549 647
1998...................................................... 449 280
1999...................................................... 221 16
2000...................................................... 179 --
Thereafter................................................ 503 --
------ -----
Total................................................. $2,574 1,932
======
Less--Amount representing interest...................... (208)
-----
Present value of future minimum lease payments............ 1,724
Less--Current portion................................... (852)
-----
$ 872
=====
</TABLE>
Rent expense under operating leases was approximately $631,000, $599,000,
$673,000 and $389,000 for the years ended December 31, 1993, 1994, 1995, and
for the six months ended June 30, 1996, (including amounts paid to related
parties), respectively (see Note 7).
The Company financed purchases of approximately $59,000, $1,488,000,
$1,000,000 and $1,948,000 through capital leases in 1993, 1994, 1995, and for
the six months ended June 30, 1996, respectively.
EMPLOYEE BENEFIT PLAN
The Company sponsors a defined contribution 401(k) profit-sharing plan for
eligible employees. Company contributions to the plan, which are based on a
company match percentage, amounted to $8,000, $21,000,
F-27
<PAGE>
SOMAR, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE
SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
$30,000 and $23,000 for the years ended December 31, 1993, 1994, 1995, and for
the six months ended June 30, 1996, respectively.
6. STOCK OPTIONS:
In December 1991, the Company's two principal stockholders granted stock
options to three key employees for the purchase of up to 2,588 shares of their
common stock at an exercise price of $10 per share. The options vested
immediately and were exercisable through December 31, 1994. The deemed value of
the options for accounting purposes at the date of grant was less than the $10
exercise price. Accordingly, no compensation expense was recorded at the date
of these grants.
In December 1994, the principal stockholders extended all option exercise
dates from December 31, 1994 to March 31, 1996. All remaining option terms,
including the $10 per share exercise price, remained unchanged. The deemed
value of the options for accounting purposes at the extension date was $125 per
share. Accordingly, $298,000 of compensation expense was recorded at the date
of extension.
In May 1995, the Company's two principal stockholders granted stock options
to another key employee for the purchase of up to 117 shares of their common
stock at an exercise price of $10 per share through March 31, 1996. The deemed
value of the options for accounting purposes at the date of grant was $156 per
share. Accordingly, $17,000 of compensation expense was recorded at the date of
grant.
At December 31, 1994 and 1995, no options had been exercised and 2,588 and
2,705 options were outstanding, respectively.
In March 1996, all options were exercised and 2,705 shares were issued by the
Company's principal shareholders to the option holders.
7. RELATED-PARTY TRANSACTIONS:
Southern Investments (a partnership), The Development Group, Inc. ("DGI"),
Southern Alloy of America, Inc., SOMAR Telecommunications, Inc. ("STI") and
Engineered Machine Technologies, Inc. ("EMTI") are affiliated with the Company
through common ownership.
The Company leases residential real estate, automobiles, computer equipment
and furniture and equipment from Southern Investments on a month-to-month
basis. Rent expense related to these operating leases totaled approximately
$495,000, $363,000, $278,000 and $144,000 for the years ended December 31,
1993, 1994, 1995 and for the six months ended June 30, 1996, respectively.
F-28
<PAGE>
SOMAR, INC.
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE
SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
Following is a schedule of amounts due from a stockholders and affiliates (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1994 1995 1996
------------- --------
<S> <C> <C> <C>
Stockholders......................................... $529 $ 881 $ 925
Southern Investments................................. -- 102 115
DGI.................................................. -- 42 23
EMTI................................................. 1 5 9
STI.................................................. -- 61 165
----- ------- ------
$530 $1,091 $1,237
===== ======= ======
</TABLE>
Following is a schedule of amounts due to an affiliate (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1994 1995 1996
------ ------ --------
<S> <C> <C> <C>
Southern Alloy of America, Inc....................... $105 $562 $439
====== ====== ====
</TABLE>
Included in interest expense and interest income in the accompanying
financial statements is interest income (expense) from (to) related parties
(including allocated interest expense) as follows (in thousands):
<TABLE>
<CAPTION>
FROM (TO)
--------------------------
DECEMBER 31,
---------------- JUNE 30,
1993 1994 1995 1996
---- ---- ---- --------
<S> <C> <C> <C> <C>
Southern Alloy of America, Inc................... $(18) $(99) $(94) $(49)
Southern Investments............................. (14) 12 -- 6
---- ---- ---- ----
$(32) $(87) $(94) $(43)
==== ==== ==== ====
</TABLE>
In 1993, 1994, 1995 and for the six months ended June 30, 1996, the Company
was allocated interest expense from Southern Alloy of America, Inc., amounting
to approximately $18,000, $99,000, $94,000 and $49,000, respectively.
The Company's senior management are employees of DGI. DGI charges the Company
for services provided by these individuals. These expenses amounted to
approximately $879,000, $1,132,000, $1,136,000 and $675,000 in 1993, 1994, 1995
and for the six months ended June 30, 1996, respectively.
The Company has guaranteed a line of credit agreement for Southern Alloy of
America, Inc. The outstanding balance under this agreement amounted to
$1,424,000 at December 31, 1995 and $1,667,000 at June 30, 1996. The guarantee
related to this line of credit agreement is not being assumed in connection
with the sale of the business discussed in Note 8 below.
8. SALE OF BUSINESS:
In April 1996, the Company entered into an Asset Purchase Agreement with
TeleSpectrum Worldwide, a wholly owned subsidiary of CRW Financial, Inc.
("CRW"), whereby CRW agreed to purchase substantially all of the Company's net
assets.
F-29
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To NBG Services, Inc.:
We have audited the accompanying balance sheets of NBG Services, Inc. (a
Massachusetts corporation--see Note 1) as of December 30, 1994 and December 29,
1995, and the related statements of income, shareholders' equity and cash flows
for each of the three fiscal years in the period ended December 29, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of NBG Services, Inc. as of
December 30, 1994 and December 29, 1995, and the results of its operations and
its cash flows for each of the three fiscal years in the period ended December
29, 1995, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Philadelphia, Pa.,
May 8, 1996
F-30
<PAGE>
NBG SERVICES, INC.
BALANCE SHEETS
(IN THOUSANDS--EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 29, JUNE 28,
1994 1995 1996
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............. $ -- $ 700 $1,959
Short-term investments................. 14 210 170
Accounts receivable, net of reserves of
$37 in 1994 and $90 in 1995 and 1996.. 527 1,757 1,286
Due from TeleSpectrum Worldwide, Inc... -- -- 42
Prepaid expenses and other............. 31 129 205
------ ------ ------
Total current assets................. 572 2,796 3,662
PROPERTY AND EQUIPMENT, net.............. 817 1,336 1,893
OTHER ASSETS............................. 94 102 108
------ ------ ------
Total assets......................... $1,483 $4,234 $5,663
====== ====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of capital lease
obligations........................... $ 273 $ 277 $ 434
Bank overdraft......................... 82 -- --
Demand note............................ -- 500 --
Accounts payable....................... 196 212 350
Accrued expenses....................... 259 537 467
------ ------ ------
Total current liabilities............ 810 1,526 1,251
------ ------ ------
CAPITAL LEASE OBLIGATIONS................ 277 454 760
------ ------ ------
COMMITMENTS AND CONTINGENCIES (Note 5)
SHAREHOLDERS' EQUITY:
Common stock, no par value, 10,000
shares authorized,
100 shares issued and outstanding..... -- -- --
Retained earnings...................... 396 2,254 3,652
------ ------ ------
Total shareholders' equity........... 396 2,254 3,652
------ ------ ------
Total liabilities and shareholders'
equity.............................. $1,483 $4,234 $5,663
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-31
<PAGE>
NBG SERVICES, INC.
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE TWENTY-
SIX
FOR THE FISCAL YEAR ENDED WEEKS ENDED
-------------------------------------- -----------------
DECEMBER 31, DECEMBER 30, DECEMBER 29, JUNE 30, JUNE 28,
1993 1994 1995 1995 1996
------------ ------------ ------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES................ $4,849 $5,778 $12,829 $5,599 $8,924
------ ------ ------- ------ ------
OPERATING EXPENSES:
Cost of services...... 3,200 4,259 8,572 3,556 5,995
Selling, general and
administrative
expenses............. 1,289 1,443 2,115 1,046 1,389
------ ------ ------- ------ ------
Total operating
expenses........... 4,489 5,702 10,687 4,602 7,384
------ ------ ------- ------ ------
Operating income.... 360 76 2,142 997 1,540
INTEREST INCOME......... 1 17 19 -- 32
INTEREST EXPENSE........ (76) (60) (55) (30) (54)
------ ------ ------- ------ ------
NET INCOME.............. $ 285 $ 33 $ 2,106 $ 967 $1,518
====== ====== ======= ====== ======
PRO FORMA DATA
(UNAUDITED)
Historical net
income............... $ 285 $ 33 $ 2,106 $ 967 $1,518
Pro forma provision
for income taxes..... 125 25 864 396 622
------ ------ ------- ------ ------
Pro forma net income.. $ 160 $ 8 $ 1,242 $ 571 $ 896
====== ====== ======= ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-32
<PAGE>
NBG SERVICES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS--EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
TOTAL
RETAINED SHAREHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------ ------ -------- -------------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1993.................. 100 $ -- $ 78 $ 78
Net income.............................. -- -- 285 285
--- ----- ------ ------
BALANCE, DECEMBER 31, 1993................ 100 -- 363 363
Net income.............................. -- -- 33 33
--- ----- ------ ------
BALANCE, DECEMBER 30, 1994................ 100 -- 396 396
Net income.............................. -- -- 2,106 2,106
Distributions........................... -- -- (248) (248)
--- ----- ------ ------
BALANCE, DECEMBER 29, 1995................ 100 -- 2,254 2,254
Net income (unaudited).................. 1,518 1,518
Distributions (unaudited)............... -- -- (120) (120)
--- ----- ------ ------
BALANCE, JUNE 28, 1996 (unaudited)........ 100 $ -- $3,652 $3,652
=== ===== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-33
<PAGE>
NBG SERVICES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE TWENTY-
FOR THE FISCAL YEAR ENDED SIX WEEKS ENDED
-------------------------------------- -----------------
DECEMBER 31, DECEMBER 30, DECEMBER 29, JUNE 30, JUNE 28,
1993 1994 1995 1995 1996
------------ ------------ ------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income............ $ 285 $ 33 $ 2,106 $ 967 $1,518
Adjustments to
reconcile net income
to net cash provided
by operating
activities--
Depreciation and
amortization....... 128 205 319 132 230
Provision for loss
on accounts
receivable......... -- 37 113 50 15
Changes in operating
assets
and liabilities--
Accounts
receivable....... (176) (182) (1,343) (135) 456
Due from
TeleSpectrum
Worldwide, Inc... -- -- -- -- (42)
Prepaid expenses
and other........ (45) (46) (106) (71) (82)
Accounts payable.. 41 93 16 64 138
Accrued expenses.. 47 75 278 280 (70)
----- ---- ------- ----- ------
Net cash
provided by
operating
activities..... 280 215 1,383 1,287 2,163
----- ---- ------- ----- ------
INVESTING ACTIVITIES:
Purchase of short-term
investments.......... (41) (35) (205) -- --
Proceeds from short-
term investments..... -- 62 9 -- 40
Purchases of property
and equipment........ (37) (69) (398) (143) (92)
----- ---- ------- ----- ------
Net cash used in
investing
activities..... (78) (42) (594) (143) (52)
----- ---- ------- ----- ------
FINANCING ACTIVITIES:
Bank overdraft........ -- 82 (82) (82) --
Repayment of capital
lease obligations.... (207) (264) (259) (134) (232)
Proceeds from demand
note................. -- -- 500 -- --
Repayment of demand
note................. -- -- -- -- (500)
Distributions to
shareholders......... -- -- (248) -- (120)
----- ---- ------- ----- ------
Net cash used in
financing
activities..... (207) (182) (89) (216) (852)
----- ---- ------- ----- ------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS............ (5) (9) 700 928 1,259
CASH AND CASH
EQUIVALENTS, BEGINNING
OF PERIOD.............. 14 9 -- -- 700
----- ---- ------- ----- ------
CASH AND CASH
EQUIVALENTS, END OF
PERIOD................. $ 9 $ -- $ 700 $ 928 $1,959
===== ==== ======= ===== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-34
<PAGE>
NBG SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 28, 1996 AND FOR THE
TWENTY-SIX WEEKS ENDED JUNE 30, 1995 AND JUNE 28, 1996 IS UNAUDITED)
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
INDUSTRY INFORMATION
RG Associates, Inc., d/b/a NBG Services, Inc. was incorporated in June 1991.
In April 1996, RG Associates, Inc., d/b/a NBG Services, Inc., amended its
Articles of Incorporation to change the name of the corporation to NBG
Services, Inc. (the "Company"). The Company provides outbound telemarketing
data processing and fulfillment services in the financial services,
telecommunications and high technology industries.
The Company operates on a fifty-two, fifty-three week fiscal year ending on
the last Friday of the calendar year.
REVENUE RECOGNITION AND CONCENTRATION OF CREDIT RISKS
The Company recognizes revenues as services are performed for its clients.
Cash received in advance of services performed is deferred and recorded as
deferred revenue in the accompanying balance sheets. For the fiscal years ended
December 31, 1993, December 30, 1994 and December 29, 1995, and the twenty-six
weeks ended June 28, 1996 the Company had one, two, two and two clients,
respectively, that each accounted for more than 10% of the Company's revenues.
For the fiscal year ended December 31, 1993, one client accounted for 95% of
the Company's revenues. For the fiscal year ended December 30, 1994, the two
clients accounted for 13% and 77% of the Company's revenues, respectively. For
the fiscal year ended December 29, 1995, the two clients accounted for 40% and
53% of the Company's revenues, respectively. For the twenty-six weeks ended
June 28, 1996, the two clients accounted for 27% and 66% of the Company's
revenue, respectively. The loss of either of these significant clients would
have a material adverse effect on the Company's business.
The concentration of credit risk is limited to trade accounts receivables and
is subject to the financial conditions of the Company's clients. The Company
does not require collateral or other securities to support customer
receivables.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Investments are held at market value, and at December 29, 1995 and June 28,
1996 were classified as short-term. Cash, cash equivalents and investments
consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 29, JUNE 28,
1994 1995 1996
------------ -------------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH:
Money market and demand accounts..... $ -- $700 $1,959
INVESTMENTS:
Common stocks........................ 11 196 160
Mutual funds......................... 3 14 10
----- ---- ------
$ 14 $910 $2,129
===== ==== ======
</TABLE>
The Company adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," (SFAS 115)
effective January 1, 1994. This statement requires the Company to classify its
investment securities as: (1) held to maturity, (2) available for sale or (3)
held for trading purposes. At December 30, 1994, December 29, 1995, and June
28, 1996 all of the Company's short-term investments are classified as
available for sale, therefore any unrealized holding gains or losses should be
F-35
<PAGE>
NBG SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 28, 1996 AND FOR THE
TWENTY-SIX WEEKS ENDED JUNE 30, 1995 AND JUNE 28, 1996 IS UNAUDITED)
presented in a separate component of shareholders' equity. At December 30,
1994, December 29, 1995 and June 28, 1996, there were no significant unrealized
holding gains or losses.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Property and equipment
capitalized under capital leases are recorded at the present value of the
minimum lease payments due over the term of the lease. Depreciation and
amortization are provided using the straight-line method over the estimated
useful lives or the lease term, whichever is shorter.
Expenditures for maintenance, repairs and betterments which do not prolong
the useful life of an asset have been charged to operations as incurred.
Additions and betterments which substantially extend the useful life of the
asset are capitalized. Upon sale or other disposition of assets, the cost and
related accumulated depreciation and amortization are removed from the
respective accounts, and the resulting gain or loss, if any, is included in
income.
STATEMENT OF CASH FLOWS
For the fiscal years ended December 31, 1993, December 30, 1994, December 29,
1995 and the twenty-six weeks ended June 28, 1996, the Company paid interest of
$76,000, $60,000, $55,000 and $54,000, respectively. For the fiscal years ended
December 31, 1993, December 30, 1994, December 29, 1995 and the twenty-six
weeks ended June 28, 1996 the Company financed equipment purchases with capital
leases of $381,000, $302,000, $440,000 and $695,000, respectively.
INCOME TAXES
The Company has elected to be taxed under Subchapter S of the Internal
Revenue Code. As a result, the Company is not subject to federal income taxes,
and the taxable income of the Company is included in the shareholders' tax
returns. Therefore, no provision for federal and state income taxes has been
made for the fiscal years ended December 31, 1993, December 30, 1994 and
December 29, 1995 and the twenty-six weeks ended June 28, 1996.
The Company is on the cash basis of accounting for income tax reporting
purposes and on the accrual basis for financial reporting purposes. Therefore,
the Company reports certain income and expense items for income tax purposes on
a basis different from that reflected in the accompanying financial statements.
At December 29, 1995, the Company's financial reporting basis of the net assets
exceeds the tax basis of the net assets by approximately $1,500,000. In the
event that the S Corporation is terminated, deferred income taxes applicable to
these differences would be reflected in the accompanying financial statements.
Given the pending sale of the business (see Note 7), for informational
purposes, the accompanying statements of income include an unaudited pro forma
adjustment for income taxes which would have been recorded if the Company had
not been an S Corporation, based on the tax laws in effect during the
respective periods. The differences between the federal statutory income tax
rate and the pro forma income tax rate primarily relates to state and local
income taxes and expenses not deductible for tax purposes.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, accounts receivable, accounts payable and accrued liabilities are
reflected in the financial statements at fair value due to the short-term
nature of those instruments. The carrying amount of the demand note and capital
lease obligations approximates fair value at December 29, 1995 and June 28,
1996.
PERVASIVENESS OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
F-36
<PAGE>
NBG SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 28, 1996 AND THE
TWENTY-SIX WEEKS ENDED JUNE 30, 1995 AND JUNE 28, 1996 IS UNAUDITED)
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INTERIM FINANCIAL STATEMENTS
The financial statements as of June 28, 1996 and the twenty six weeks ended
June 30, 1995 and June 28, 1996 are unaudited and, in the opinion of management
of the Company, include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the results for those interim
periods. The results of operations for the twenty six weeks ended June 28, 1996
are not necessarily indicative of the results to be expected for the full year.
2. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
USEFUL DECEMBER 30, DECEMBER 29, JUNE 28,
LIVES 1994 1995 1996
------ ------------ ------------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Telemarketing equipment.......... 5 $1,097 $1,845 $2,495
Furniture and office equipment... 7 155 195 332
Leasehold improvements........... 7 -- 50 50
------ ------ ------
1,252 2,090 2,877
Less--Accumulated depreciation
and amortization................ (435) (754) (984)
------ ------ ------
$ 817 $1,336 $1,893
====== ====== ======
Depreciation expense for the fiscal years ended December 31, 1993, December
30, 1994, December 29, 1995 and the twenty six weeks ended June 28, 1996 was
$128,000, $205,000, $319,000 and $230,000, respectively.
3. ACCRUED EXPENSES:
<CAPTION>
DECEMBER 30, DECEMBER 29, JUNE 28,
1994 1995 1996
------------ ------------ --------
(IN THOUSANDS)
<S> <C> <C> <C>
Accrued compensation............. $ 84 $ 174 $ 293
Accrued profit sharing........... 110 139 --
Accrued telephone................ 50 77 86
Accrued other.................... 15 147 88
------ ------ ------
$ 259 $ 537 $ 467
====== ====== ======
4. DEBT:
<CAPTION>
DECEMBER 30, DECEMBER 29, JUNE 28,
1994 1995 1996
------------ ------------ --------
(IN THOUSANDS)
<S> <C> <C> <C>
Demand note...................... $ -- $ 500 $ --
Capitalized lease obligations
(Note 5)........................ 550 731 1,194
------ ------ ------
550 1,231 1,194
Less-current portion............. (273) (777) (434)
------ ------ ------
$ 277 $ 454 $ 760
====== ====== ======
</TABLE>
On December 29, 1995, the Company borrowed $500,000 from a bank under a
demand note which bears interest at prime rate (8.5% at December 29, 1995). The
note was repaid on March 29, 1996. Interest expense on this note was $15,000
for the twenty-six weeks ended June 28, 1996.
F-37
<PAGE>
NBG SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
(INFORMATION AS OF JUNE 28, 1996 AND FOR THE
TWENTY-SIX WEEKS ENDED JUNE 30, 1995 AND JUNE 28, 1996 IS UNAUDITED)
The Company has a line of credit with a bank which provides for maximum
borrowings of $500,000. The line is collateralized by all of the assets of the
Company and is personally guaranteed by the shareholders. The line of credit
expires on May 31, 1997. At December 29, 1995 and June 28, 1996, there was no
outstanding balance on this line of credit.
5. COMMITMENTS AND CONTINGENCIES:
The Company leases facilities and equipment under capital and noncancelable
operating leases through December, 2002. Interest rates on the capital leases
range from 4% to 18%. Rent expense under operating leases for the fiscal years
ended December 31, 1993, December 30, 1994, December 29, 1995 and the twenty-
six weeks ended June 28, 1996 was $110,000, $213,000, $331,000 and $288,000,
respectively.
Future minimum lease payments under the Company's leases as of December 29,
1995 are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- -------
(IN THOUSANDS)
<S> <C> <C>
1996...................................................... $ 747 $ 328
1997...................................................... 512 277
1998...................................................... 514 154
1999...................................................... 524 57
2000...................................................... 470 --
Thereafter................................................ 462 --
------ -----
Total minimum lease payments.............................. $3,229 816
======
Less--Amount representing interest........................ (85)
-----
Present value of future minimum lease payments............ 731
-----
Less--Current portion of principal payments............... (277)
-----
$ 454
=====
</TABLE>
The Company subleases two of its facilities under noncancelable operating
leases through December 31, 1996. Total minimum lease payments have not been
reduced by the minimum sublease rentals of $90,000 due to the Company under
these two noncancelable subleases.
6. EMPLOYEE BENEFIT PLANS:
The Company sponsors a noncontributory profit sharing plan for employees. The
Company's contributions to the plan are at the discretion of the Board of
Directors. For the fiscal years ended December 31, 1993, December 30, 1994 and
December 29, 1995 the Company's discretionary contributions to the plan were
$75,000, $110,000 and $139,000, respectively. There were no contributions to
the plan for the twenty-six weeks ended June 28, 1996.
On January 1, 1996, the Company adopted a defined contribution 401(k) savings
plan. The plan provides for a matching contribution by the Company based on
employee contributions. Additional Company contributions may be made at the
discretion of management. For the twenty six-weeks ended June 28, 1996, the
Company contributed $9,000 to the plan.
7. SALE OF BUSINESS:
In May 1996, an asset purchase agreement was signed among TeleSpectrum
Worldwide Inc., a wholly-owned subsidiary of CRW Financial, Inc., the Company
and the shareholders of the Company, whereby TeleSpectrum Worldwide agreed to
purchase substantially all of the net assets of the Company.
F-38
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Harris Direct Marketing, Inc. and Harris Fulfillment, Inc.:
We have audited the accompanying combined balance sheets of Harris Direct
Marketing, Inc. and Harris Fulfillment, Inc. (Pennsylvania corporations) as of
December 31, 1994 and 1995, and the related combined statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Companies' management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of Harris Direct
Marketing, Inc. and Harris Fulfillment, Inc. as of December 31, 1994 and 1995,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Philadelphia, Pa.,
April 19, 1996
F-39
<PAGE>
HARRIS DIRECT MARKETING, INC. AND HARRIS FULFILLMENT, INC.
COMBINED BALANCE SHEETS
(IN THOUSANDS--EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31
--------------- JUNE 30
1994 1995 1996
------ ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................... $ 975 $ 2,919 $ 877
Accounts receivable, net of reserves of $25,
$161 and $77 at December 31, 1994, 1995 and
June 30, 1996.................................. 2,872 2,930 3,760
Prepaid expenses and other...................... 592 651 576
------ ------- ------
Total current assets.......................... 4,439 6,500 5,213
PROPERTY AND EQUIPMENT, net....................... 4,270 4,139 4,135
OTHER ASSETS...................................... 64 164 53
------ ------- ------
Total assets.................................. $8,773 $10,803 $9,401
====== ======= ======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt............... $ 349 $ 299 $ 309
Accounts payable................................ 338 362 267
Accrued expenses................................ 616 635 442
Customer advances............................... 876 1,463 753
------ ------- ------
Total current liabilities..................... 2,179 2,759 1,771
------ ------- ------
LONG-TERM DEBT.................................... 1,863 1,530 1,390
------ ------- ------
DEFERRED RENT..................................... 116 120 139
------ ------- ------
OTHER NONCURRENT LIABILITIES...................... 35 19 31
------ ------- ------
COMMITMENTS AND CONTINGENCIES (Note 7)
SHAREHOLDERS' EQUITY:
Common stock (Harris Direct Marketing, Inc.), no
par value, 10,000 shares authorized, 99 shares
issued......................................... 1 1 1
Common stock (Harris Fulfillment, Inc.), $1 par
value, 1,000 shares authorized, 111 1/9 shares
issued and outstanding......................... -- -- --
Additional paid-in capital...................... 45 45 45
Retained earnings............................... 4,659 6,454 6,149
Treasury stock, at cost......................... (125) (125) (125)
------ ------- ------
Total shareholders' equity.................... 4,580 6,375 6,070
------ ------- ------
Total liabilities and shareholders' equity.... $8,773 $10,803 $9,401
====== ======= ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-40
<PAGE>
HARRIS DIRECT MARKETING, INC. AND HARRIS FULFILLMENT, INC.
COMBINED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE SIX MONTHS
DECEMBER 31 ENDED JUNE 30
------------------------ --------------------
1993 1994 1995 1995 1996
------ ------- ------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES....................... $7,018 $10,115 $12,690 $7,525 $5,367
------ ------- ------- --------- ---------
OPERATING EXPENSES:
Cost of services............. 3,834 5,530 6,402 3,543 2,762
Selling, general and
administrative expenses..... 2,473 2,680 2,986 1,431 1,521
------ ------- ------- --------- ---------
Total operating expenses... 6,307 8,210 9,388 4,974 4,283
------ ------- ------- --------- ---------
Operating income........... 711 1,905 3,302 2,551 1,084
INTEREST INCOME................ 21 9 70 20 46
INTEREST EXPENSE............... (163) (195) (214) (117) (79)
------ ------- ------- --------- ---------
NET INCOME..................... $ 569 $ 1,719 $ 3,158 $2,454 $ 1,051
====== ======= ======= ========= =========
PRO FORMA DATA (UNAUDITED)
Historical net income........ $ 569 $ 1,719 $ 3,158 $ 2,454 $ 1,051
Pro forma provision for in-
come taxes.................. 271 784 1,425 1,110 474
------ ------- ------- --------- ---------
Pro forma net income......... $ 298 $ 935 $ 1,733 $ 1,344 $ 577
====== ======= ======= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-41
<PAGE>
HARRIS DIRECT MARKETING, INC. AND HARRIS FULFILLMENT, INC.
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS--EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
HARRIS DIRECT HARRIS
MARKETING, INC. FULFILLMENT, INC.
COMMON STOCK COMMON STOCK ADDITIONAL TOTAL
---------------- --------------------- PAID-IN RETAINED TREASURY SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS STOCK EQUITY
------- ------- -------- -------- ---------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1,
1993................... 99 $ 1 111 1/9 $ -- $ 45 $ 2,544 $(125) $ 2,465
Net income............. -- -- -- -- -- 569 -- 569
Distributions.......... -- -- -- -- -- (27) -- (27)
------- ------- -------- -------- ---- ------- ----- -------
BALANCE, DECEMBER 31,
1993................... 99 1 111 1/9 -- 45 3,086 (125) 3,007
Net income............. -- -- -- -- -- 1,719 -- 1,719
Distributions.......... -- -- -- -- -- (146) -- (146)
------- ------- -------- -------- ---- ------- ----- -------
BALANCE, DECEMBER 31,
1994................... 99 1 111 1/9 -- 45 4,659 (125) 4,580
Net income............. -- -- -- -- -- 3,158 -- 3,158
Distributions.......... -- -- -- -- -- (1,363) -- (1,363)
------- ------- -------- -------- ---- ------- ----- -------
BALANCE, DECEMBER 31,
1995................... 99 1 111 1/9 -- 45 6,454 (125) 6,375
Net income (unau-
dited)................ -- -- -- -- -- 1,051 -- 1,051
Distributions (unau-
dited)................ -- -- -- -- -- (1,356) -- (1,356)
------- ------- -------- -------- ---- ------- ----- -------
BALANCE, JUNE 30, 1996
(unaudited)............ 99 $ 1 111 1/9 $ -- $ 45 $ 6,149 $(125) $ 6,070
======= ======= ======== ======== ==== ======= ===== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-42
<PAGE>
HARRIS DIRECT MARKETING, INC. AND HARRIS FULFILLMENT, INC.
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX
FOR THE YEAR ENDED MONTHS ENDED
DECEMBER 31 JUNE 30
------------------------ --------------
1993 1994 1995 1995 1996
------- ------ ------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income......................... $ 569 $1,719 $ 3,158 $2,454 $1,051
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities--
Depreciation and amortization.... 436 527 591 286 309
Provision for loss on accounts
receivable...................... 31 25 136 42 29
Provision for deferred rent...... 22 94 4 2 18
Changes in operating assets and
liabilities--
Accounts receivable............ (1,265) (628) (195) (658) (858)
Prepaid expenses and other..... (330) (51) (159) (1) 186
Accounts payable............... 305 (152) 24 87 (94)
Accrued expenses............... 44 160 3 (136) (182)
Customer advances.............. 418 189 587 60 (710)
------- ------ ------- ------ ------
Net cash provided by (used
in) operating activities.... 230 1,883 4,149 2,136 (251)
------- ------ ------- ------ ------
INVESTING ACTIVITIES:
Proceeds from the sale of property
and equipment..................... 255 -- -- -- --
Purchases of property and
equipment......................... (684) (903) (460) (325) (305)
------- ------ ------- ------ ------
Net cash used in investing
activities.................. (429) (903) (460) (325) (305)
------- ------ ------- ------ ------
FINANCING ACTIVITIES:
Net borrowings (repayments) on
lines of credit................... -- (250) -- -- --
Repayment of long-term debt........ (398) (360) (382) (174) (146)
Proceeds from long-term debt....... 489 417 -- -- 16
Shareholder distributions.......... (27) (146) (1,363) (1,060) (1,356)
------- ------ ------- ------ ------
Net cash provided by (used
in) financing activities.... 64 (339) (1,745) (1,234) (1,486)
------- ------ ------- ------ ------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS.................... (135) 641 1,944 577 (2,042)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD........................... 469 334 975 975 2,919
------- ------ ------- ------ ------
CASH AND CASH EQUIVALENTS, END OF
PERIOD.............................. $ 334 $ 975 $ 2,919 $1,552 $ 877
======= ====== ======= ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-43
<PAGE>
HARRIS DIRECT MARKETING, INC. AND HARRIS FULFILLMENT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND
1996 IS UNAUDITED)
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
INDUSTRY INFORMATION
Harris Direct Marketing, Inc. and Harris Fulfillment, Inc. (together the
Company) are a regional, vertically-integrated direct mail and fulfillment
organization which provides its services primarily to companies in the
pharmaceutical, financial services and insurance industries.
The financial statements reflect the combined financial position, results of
operations and cash flows of Harris Direct Marketing, Inc. and Harris
Fulfillment, Inc. The Companies are engaged in related operations, and are
owned by the same shareholders who have identical ownership in each entity. The
financial statements reflect the elimination of all significant intercompany
accounts and transactions.
REVENUE RECOGNITION AND CONCENTRATION OF CREDIT RISKS
The Company recognizes revenues on programs as services are performed for its
clients based upon hours incurred. Cash received in advance of services
performed is deferred and recorded as customer advances in the accompanying
balance sheets. For the years ended December 31, 1993, 1994 and 1995 and the
six months ended June 30, 1996, the Company had one customer in the
pharmaceutical industry which accounted for 17.0%, 32.0%, 44.0% and 46.0%,
respectively, of the Company's revenues. The loss of this significant customer
would have a material adverse effect on the Company's business.
The concentration of credit risk is limited to trade accounts receivables and
is subject to the financial conditions of the Company's customers. The Company
does not require collateral or other securities to support customer
receivables.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. At the
balance sheet dates, cash equivalents were composed primarily of investments in
money market funds.
The Company maintains cash accounts which, at times, may exceed federally
insured limits. The Company has not experienced any losses from maintaining
cash accounts in excess of federally insured limits and believes that they are
not exposed to any significant risks on their cash accounts.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization
are provided using the straight-line method over the estimated useful lives.
Expenditures for maintenance, repairs and improvements that do not prolong
the useful life of an asset have been charged to operations as incurred.
Additions and betterments that substantially extend the useful life of the
asset are capitalized. Upon sale or other disposition of assets, the cost and
related accumulated depreciation and amortization are removed from the
respective accounts, and the resulting gain or loss, if any, is included in
income.
F-44
<PAGE>
HARRIS DIRECT MARKETING, INC. AND HARRIS FULFILLMENT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE
SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
STATEMENT OF CASH FLOWS
For the years ended December 31, 1993, 1994 and 1995 and the six months ended
June 30, 1996, the Company paid interest of $150,000, $197,000, $222,000 and
$70,000, respectively.
INCOME TAXES
The Company has elected to be taxed under Subchapter S of the Internal
Revenue Code. As a result, the Company is not subject to federal income taxes,
and the taxable income of the Company is included in the shareholders' tax
returns. The Company has also elected S Corporation status for state income tax
purposes. Therefore, no provision for federal and state income taxes has been
made for the years ended December 31, 1993, 1994 and 1995 and the six months
ended June 30, 1996.
The Company reports certain income and expense items for income tax purposes
on a basis different from that reflected in the accompanying financial
statements. The principal differences relate to timing of the recognition of
bad debt expense, and the use of accelerated methods of depreciation for income
tax purposes. At December 31, 1995, the Company's financial reporting basis of
the net assets exceeds the tax basis of the net assets by approximately
$300,000. In the event that the S Corporation is terminated, deferred income
taxes applicable to these differences would be reflected in the accompanying
financial statements.
Given the pending sale of the business (see Note 9), for informational
purposes, the accompanying statements of income include an unaudited pro forma
adjustment for income taxes which would have been recorded if the Company had
not been an S Corporation, based on the tax laws in effect during the
respective periods. The differences between the federal statutory income tax
rate and the pro forma income tax rate primarily relates to state and local
income taxes and expenses not deductible for tax purposes.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, accounts receivable, accounts payable and accrued liabilities are
reflected in the financial statements at fair value due to the short-term
nature of those instruments. The carrying amount of long-term debt obligations
approximates fair value at the balance sheet dates.
PERVASIVENESS OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
INTERIM FINANCIAL SERVICES
The financial statements as of June 30, 1996 and for the six months ended
June 30, 1995 and 1996 are unaudited and, in the opinion of management of the
Company, include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the results for those interim
periods. The results of operations for the six months ended June 30, 1996 are
not necessarily indicative of the results to be expected for the full year.
F-45
<PAGE>
HARRIS DIRECT MARKETING, INC. AND HARRIS FULFILLMENT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE
SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
2. PREPAID EXPENSES AND OTHER:
<TABLE>
<CAPTION>
DECEMBER 31
----------- JUNE 30
1994 1995 1996
----- ----- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Prepaid postage......................................... $ 418 $ 498 $433
Other................................................... 174 153 143
----- ----- ----
$ 592 $ 651 $576
===== ===== ====
</TABLE>
3. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
DECEMBER 31
USEFUL ---------------- JUNE 30
LIVES 1994 1995 1996
------ ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Machinery and equipment............... 5-10 $ 3,344 $ 3,543 $ 3,582
Furniture and office equipment........ 5-10 814 969 1,231
Building and building improvements.... 10-30 2,341 2,345 2,349
Leasehold improvements................ 15 41 41 41
Land.................................. 80 80 80
------- ------- -------
6,620 6,978 7,283
Less--Accumulated depreciation and
amortization......................... (2,350) (2,839) (3,148)
------- ------- -------
$ 4,270 $ 4,139 $ 4,135
======= ======= =======
</TABLE>
Depreciation expense for the years ended December 31, 1993, 1994 and 1995,
and the six months ended June 30, 1996 was $436,000, $527,000, $591,000, and
$309,000, respectively.
4. ACCRUED EXPENSES:
<TABLE>
<CAPTION>
DECEMBER 31
----------- JUNE 30
1994 1995 1996
----- ----- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Accrued vacation..................................... $ 217 $ 210 $210
Accrued compensation................................. 139 161 48
Accrued other........................................ 260 264 184
----- ----- ----
$ 616 $ 635 $442
===== ===== ====
</TABLE>
5. LINES OF CREDIT:
The Company had two lines of credit with the same bank that expired in April
1996 and had a combined borrowing limit of $850,000. The lines bear interest at
the bank's prime rate (9.0% at December 31, 1994 and 8.25% at December 31,
1995). The Company had no outstanding balances on the lines of credit at
December 31, 1994 and 1995. The maximum borrowed under the lines was $390,000
and $850,000 in 1994 and 1995, respectively, and the average amount outstanding
was $128,000 and $212,000 in 1994 and 1995, respectively. The weighted average
interest rate during 1994 and 1995 was approximately 6.92% and 9.0%,
respectively.
F-46
<PAGE>
HARRIS DIRECT MARKETING, INC. AND HARRIS FULFILLMENT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE
SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
6. LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31
------------- JUNE 30
1994 1995 1996
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage payable to bank, payable in variable
monthly installments including interest at the
bank's prime rate plus .75% (10.25% at December
31, 1995) through June 2005...................... $1,317 $1,245 $1,202
Note payable to bank, payable in monthly
installments of $17,000 plus interest at 8.25%
through October 1998............................. 791 584 481
Note payable to bank, payable in monthly
installments of $4,000 plus interest at 7%
through December 1996............................ 93 -- --
Note payable to bank, payable in monthly
installments of $2,000 plus interest at prime
plus 1% through March 1995....................... 5 -- --
Other............................................. 6 -- 16
------ ------ ------
2,212 1,829 1,699
Less--Current portion............................. 349 299 309
------ ------ ------
$1,863 $1,530 $1,390
====== ====== ======
</TABLE>
In November 1994, the Company refinanced $509,000 of its outstanding debt
with an $825,000 note with the same bank. The net proceeds were used to finance
additional equipment purchases.
The mortgage and notes payable are with the same bank and are collateralized
by all of the Company's assets. Minimum principal repayments of long-term debt
as of December 31, 1995, are as follows (in thousands):
<TABLE>
<S> <C>
1996.................................................................. $ 299
1997.................................................................. 298
1998.................................................................. 273
1999.................................................................. 112
2000.................................................................. 124
Thereafter............................................................ 723
------
$1,829
======
</TABLE>
F-47
<PAGE>
HARRIS DIRECT MARKETING, INC. AND HARRIS FULFILLMENT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONCLUDED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE
SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES:
The Company leases facilities through August 31, 2002. Rent expense under
operating leases for the years ended December 31, 1993, 1994 and 1995 and the
six months ended June 30, 1996 was $272,000, $568,000, $583,000 and $285,000,
respectively.
Future minimum lease payments under the Company's operating leases as of
December 31, 1995, are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING
LEASES
---------
<S> <C>
1996.............................................................. $ 567
1997.............................................................. 357
1998.............................................................. 388
1999.............................................................. 433
2000.............................................................. 464
Thereafter........................................................ 821
------
Total minimum lease payments...................................... $3,030
======
</TABLE>
The Company is party to various claims and other matters arising in the
normal course of business. In the opinion of management, the outcome of these
matters will not have a material adverse effect on the Company's financial
position or results of operations.
8. PROFIT SHARING PLAN:
The Company has a noncontributory profit sharing plan to provide retirement
benefits to its eligible employees. The amount of the Company's contribution is
determined at the discretion of the Company's Board of Directors. For the years
ended December 31, 1993, 1994 and 1995 and the six months ended June 30, 1996
the Company contributed $62,000, $55,000, $49,000 and $0, respectively, to the
profit sharing plan.
9. SALE OF BUSINESS:
In April 1996, an asset purchase agreement was entered into among CRW
Financial Inc. ("CRW"), the Company and the shareholders of the Company,
whereby TeleSpectrum Worldwide Inc., a wholly-owned subsidiary of CRW agreed to
purchase substantially all of the net assets of the Company.
F-48
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Reich Group Companies:
We have audited the accompanying combined balance sheets of The Reich Group
Companies identified in Note 1 as of December 31, 1994 and 1995, and the
related combined statements of operations, shareholder's equity (deficit) and
cash flows for each of the three years in the period ended December 31, 1995.
These financial statements are the responsibility of the Companies' management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of The Reich Group
Companies as of December 31, 1994 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1995, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Philadelphia, Pa.,
April 24, 1996
F-49
<PAGE>
THE REICH GROUP COMPANIES
COMBINED BALANCE SHEETS
(IN THOUSANDS--EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31
-------------- JUNE 30,
1994 1995 1996
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash............................................. $ 31 $ 220 $ 371
Accounts receivable, net of reserves of $16 in
1994, and $73 in 1995 and $45 in 1996........... 691 2,544 3,511
Due from shareholder............................. 49 132 135
Prepaid expenses and other....................... 87 79 129
------ ------ ------
Total current assets........................... 858 2,975 4,146
EQUIPMENT AND FURNITURE, net....................... 248 1,328 2,193
OTHER ASSETS....................................... 5 15 21
------ ------ ------
Total assets................................... $1,111 $4,318 $6,360
====== ====== ======
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
CURRENT LIABILITIES:
Line of credit................................... $ 70 $ -- $ --
Current portion of long-term debt................ 102 155 246
Current portion of deferred rent................. 68 68 68
Accounts payable................................. 370 930 548
Accrued salaries and wages....................... 128 363 527
Notes payable to shareholder..................... -- 570 70
Other current liabilities........................ 179 68 33
------ ------ ------
Total current liabilities...................... 917 2,154 1,492
------ ------ ------
LONG-TERM DEBT..................................... 273 371 414
------ ------ ------
DEFERRED RENT...................................... 193 125 91
------ ------ ------
COMMITMENTS AND CONTINGENCIES (Note 6)
SHAREHOLDER'S EQUITY (DEFICIT):
Common stock (see Note 8)........................ 2 2 2
Additional paid-in capital....................... 350 450 450
Retained earnings (deficit)...................... (385) 1,455 4,150
Treasury stock, at cost (TRG/Communications, Inc.
150 shares)..................................... (239) (239) (239)
------ ------ ------
Total shareholder's equity (deficit)........... (272) 1,668 4,363
------ ------ ------
Total liabilities and shareholder's equity
(deficit)..................................... $1,111 $4,318 $6,360
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-50
<PAGE>
THE REICH GROUP COMPANIES
COMBINED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX
FOR THE YEAR ENDED MONTHS ENDED
DECEMBER 31 JUNE 30
----------------------- ---------------
1993 1994 1995 1995 1996
------ ------ ------- ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES............................. $4,375 $5,424 $12,253 $5,521 $11,347
------ ------ ------- ------ -------
OPERATING EXPENSES:
Cost of services................... 3,172 4,225 7,836 3,417 6,692
Selling, general and administrative
expenses.......................... 1,111 976 2,534 665 1,199
------ ------ ------- ------ -------
Total operating expenses......... 4,283 5,201 10,370 4,082 7,891
------ ------ ------- ------ -------
Operating income................. 92 223 1,883 1,439 3,456
INTEREST INCOME...................... 16 13 14 8 15
INTEREST EXPENSE..................... (37) (37) (57) (35) (46)
------ ------ ------- ------ -------
NET INCOME........................... $ 71 $ 199 $ 1,840 $1,412 $ 3,425
====== ====== ======= ====== =======
PRO FORMA DATA (UNAUDITED)
Historical net income.............. $ 71 $ 199 $ 1,840 $1,412 $ 3,425
Pro forma provision for income tax-
es................................ 39 97 746 578 1,397
------ ------ ------- ------ -------
Pro forma net income............... $ 32 $ 102 $ 1,094 $ 834 $ 2,028
====== ====== ======= ====== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-51
<PAGE>
THE REICH GROUP COMPANIES
COMBINED STATEMENTS OF SHAREHOLDER'S EQUITY (DEFICIT)
(IN THOUSANDS - EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DIALDIRECT
THE REICH TELE- TRG/ COMMUNI- INSUREDIRECT
GROUP, INC. DIALDIRECT, INC. MARKETING, LTD. CATIONS, INC. AGENCY INC.
------------- ------------------ ------------------ ------------- -------------
COMMON STOCK COMMON STOCK COMMON STOCK COMMON STOCK COMMON STOCK ADDITIONAL RETAINED
------------- ------------------ ------------------ ------------- ------------- PAID-IN EARNINGS TREASURY
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) STOCK
------ ------ -------- -------- ------- -------- ------ ------ ------ ------ ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY
1, 1993.......... 100 $-- 100 $-- 100 $-- 150 $ 2 100 $-- $350 $ (655) $(239)
Net income...... -- -- -- -- -- -- -- -- -- -- -- 71 --
--- ---- --- ---- --- ---- --- --- --- ---- ---- ------ -----
BALANCE, DECEMBER
31, 1993......... 100 -- 100 -- 100 -- 150 2 100 -- 350 (584) (239)
Net income...... -- -- -- -- -- -- -- -- -- -- -- 199 --
--- ---- --- ---- --- ---- --- --- --- ---- ---- ------ -----
BALANCE, DECEMBER
31, 1994......... 100 -- 100 -- 100 -- 150 2 100 -- 350 (385) (239)
Capital contri-
bution to Dial
Direct
Telemarketing,
Ltd. by share-
holder.......... -- -- -- -- -- -- -- -- -- -- 100 -- --
Net income...... -- -- -- -- -- -- -- -- -- -- -- 1,840 --
--- ---- --- ---- --- ---- --- --- --- ---- ---- ------ -----
BALANCE, DECEMBER
31, 1995......... 100 -- 100 -- 100 -- 150 2 100 -- 450 1,455 (239)
--- ---- --- ---- --- ---- --- --- --- ---- ---- ------ -----
Net income (un-
audited)........ -- -- -- -- -- -- -- -- -- -- -- 3,425 --
Distribution to
shareholder (un-
audited)........ -- -- -- -- -- -- -- -- -- -- -- (730) --
--- ---- --- ---- --- ---- --- --- --- ---- ---- ------ -----
BALANCE, JUNE 30,
1996 (unau-
dited)........... 100 $-- 100 $-- 100 $-- 150 $ 2 100 $-- $450 $4,150 (239)
=== ==== === ===== === ===== === === === ==== ==== ====== =====
<CAPTION>
TOTAL
SHAREHOLDER'S
EQUITY
(DEFICIT)
-------------
<S> <C>
BALANCE, JANUARY
1, 1993.......... $ (542)
Net income...... 71
------
BALANCE, DECEMBER
31, 1993......... (471)
Net income...... 199
------
BALANCE, DECEMBER
31, 1994......... (272)
Capital contri-
bution to Dial
Direct
Telemarketing,
Ltd. by share-
holder.......... 100
Net income...... 1,840
------
BALANCE, DECEMBER
31, 1995......... 1,668
------
Net income (un-
audited)........ 3,425
Distribution to
shareholder (un-
audited)........ (730)
------
BALANCE, JUNE 30,
1996 (unau-
dited)........... $4,363
======
</TABLE>
The accompanying notes are an integral part of these statements.
F-52
<PAGE>
THE REICH GROUP COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX
FOR THE YEAR ENDED MONTHS ENDED
DECEMBER 31 JUNE 30
--------------------- --------------
1993 1994 1995 1995 1996
----- ----- ------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income............................ $ 71 $ 199 $ 1,840 $1,412 $3,425
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities--
Depreciation and amortization....... 106 143 220 87 213
Amortization of deferred rent....... (68) (68) (68) (33) (33)
Loss on disposal of property........ 8 1 7 -- --
Changes in operating assets and
liabilities--
Accounts receivable............... (34) (193) (1,853) (959) (967)
Due from shareholder.............. 57 (40) (83) (16) (3)
Prepaid expenses and other
assets........................... 227 (33) (2) (115) (56)
Accounts payable.................. (348) 88 560 543 (382)
Accrued salaries and wages........ (43) 37 235 126 164
Other current liabilities......... 20 85 (111) 46 (35)
----- ----- ------- ------ ------
Net cash provided by (used in)
operating activities........... (4) 219 745 1,091 2,326
----- ----- ------- ------ ------
INVESTING ACTIVITIES:
Purchases of furniture and equipment,
net of capital lease obligations of
$178 in 1993 and $95 in 1995......... (37) (138) (1,212) (595) (829)
----- ----- ------- ------ ------
Net cash used in investing
activities..................... (37) (138) (1,212) (595) (829)
----- ----- ------- ------ ------
FINANCING ACTIVITIES:
Net borrowings (repayments) on line of
credit............................... 60 10 (70) (70) --
Repayment of long-term debt........... (97) (88) (109) (45) (116)
Proceeds from long-term debt.......... 76 -- 165 -- --
Capital contribution to DialDirect
Telemarketing, Ltd. from
shareholder.......................... -- -- 100 -- --
Proceeds from (repayment of) notes
payable to shareholder............... -- -- 570 -- (500)
Distribution to shareholder........... -- -- -- -- (730)
----- ----- ------- ------ ------
Net cash provided by (used in)
financing activities........... 39 (78) 656 (115) (1,346)
----- ----- ------- ------ ------
NET INCREASE (DECREASE) IN CASH......... (2) 3 189 381 151
CASH, BEGINNING OF PERIOD............... 30 28 31 31 220
----- ----- ------- ------ ------
CASH, END OF PERIOD..................... $ 28 $ 31 $ 220 $ 412 $ 371
===== ===== ======= ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-53
<PAGE>
THE REICH GROUP COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND
1996 IS UNAUDITED)
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
INDUSTRY INFORMATION
The Reich Group Companies (the "Company") offers telemarketing services to
clients in the financial services, insurance, telecommunications and publishing
industries. In 1995, the Company derived 93% of its revenue from telemarketing
activities.
The 1993, 1994 and 1995 financial statements reflect the combined financial
position, results of operations and cash flows of The Reich Group, Inc.,
DialDirect, Inc., DialDirect Telemarketing, LTD., TRG/Communications, Inc. and
InsureDirect Agency, Inc. The accompanying financial statements are presented
on a combined basis, as all companies are owned by the same shareholder. The
financial statements reflect the elimination of all significant intercompany
accounts and transactions.
REVENUE RECOGNITION AND CONCENTRATION OF CREDIT RISK
The Company recognizes revenues on programs as services are performed for
customers, generally based upon hours incurred. For the years ended December
31, 1993, 1994, 1995 and for the six months ended June 30, 1996, the Company
had three, two, four and three clients, respectively, that each accounted for
more than 10% of the Company's revenues. For the year ended December 31, 1993,
the three clients accounted for 36%, 21% and 11% of the Company's revenues,
respectively. For the year ended December 31, 1994, the two clients accounted
for 47% and 24% of the Company's revenues, respectively. For the year ended
December 31, 1995, the four clients accounted for 46%, 12%, 15% and 15% of the
Company's revenues, respectively. For the six months ended June 30, 1996 the
three clients accounted for 43%, 10% and 34% of the Company's revenues,
respectively. The loss of one or more of these major clients could have a
materially adverse effect on the Company's business.
The concentration of credit risk is limited to trade accounts receivables and
is subject to the financial and industry conditions of the Company's customers.
The Company does not require collateral or other securities to support customer
receivables.
CASH
The Company maintains cash accounts which, at times, may exceed federally
insured limits. The Company has not experienced losses from maintaining cash
accounts in excess of federally insured limits. The Company believes that it is
not exposed to significant credit risk in relation to their cash accounts.
EQUIPMENT AND FURNITURE
Equipment and furniture are recorded at cost. Equipment and furniture
capitalized under capital leases are recorded at the present value of the
minimum lease payments due over the term of the lease. Depreciation and
amortization are provided using the straight-line method over the estimated
useful lives of five to seven years.
Expenditures for maintenance, repairs and betterments which do not prolong
the useful life of an asset are charged to expense as incurred. Additions and
betterments which extend the useful life of the properties are capitalized.
Upon sale or other disposition of assets, the cost and related accumulated
depreciation and amortization are removed from the respective accounts, and the
resulting gain or loss, if any, is included in income.
F-54
<PAGE>
THE REICH GROUP COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND
1996 IS UNAUDITED)
PROFIT SHARING PLAN
The Company has a noncontributory profit sharing plan covering all eligible
employees. Contributions to the plan are at the sole discretion of the
management. Contributions of $40,000, and $62,000 were made for the years ended
December 31, 1993 and 1994, respectively. No contribution was made for the year
ended December 31, 1995, or for the six months ended June 30, 1996.
STATEMENT OF CASH FLOWS
For the years ended December 31, 1993, 1994 and 1995 and the six months ended
June 30, 1996, the Company paid interest of $37,000, $37,000, $57,000 and
$46,000.
INCOME TAXES
The Company has elected to be taxed under Subchapter S of the Internal
Revenue Code. As a result, the Company is not subject to federal or state
income taxes, and the taxable income of the Company is included in the
shareholder's tax returns. Therefore, no provision for federal and state income
taxes has been made for the years ended December 31, 1993, 1994 and 1995, and
the six months ended June 30, 1996.
The Company is on the cash basis of accounting for income tax reporting
purposes and on the accrual basis for financial reporting purposes. Therefore,
the Company reports certain income and expense items for income tax purposes on
a basis different from that reflected in the accompanying financial statements.
At December 31, 1995, the Company's financial reporting basis of the net assets
exceeds the tax basis of the net assets by approximately $934,000. In the event
that the S Corporation status is terminated, deferred income taxes applicable
to these differences would be reflected in the accompanying financial
statements.
Given the pending sale of the business (see Note 9), for informational
purposes, the accompanying statements of income include an unaudited pro forma
adjustment for income taxes which would have been recorded if the Company had
not been an S Corporation, based on the tax laws in effect during the
respective periods. The differences between the federal statutory income tax
rate and the pro forma income tax rate primarily relates to state and local
taxes and expenses not deductible for tax purposes.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, accounts receivable, accounts payable and accrued liabilities are
reflected in the financial statements at fair value due to the short-term
nature of those instruments. The carrying amount of long-term debt and capital
lease obligations approximates fair value at the balance sheet dates.
PERVASIVENESS OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the recorded amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
INTERIM FINANCIAL STATEMENTS
The financial statements as of June 30, 1996 and for the six months ended
June 30, 1995 and 1996 are unaudited and, in the opinion of management of the
Company, include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the results for those interim
periods. The results of operations for the six months ended June 30, 1996 are
not necessarily indicative of the results to be expected for the full year.
F-55
<PAGE>
THE REICH GROUP COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND
1996 IS UNAUDITED)
2. EQUIPMENT AND FURNITURE:
<TABLE>
<CAPTION>
DECEMBER 31
USEFUL ---------------- JUNE 30
LIVES 1994 1995 1996
------ ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Telemarketing equipment.............. 5 $ 471 $ 1,766 $ 2,477
Furniture and office equipment....... 5-7 777 768 1,034
Leasehold improvements............... 7 60 76 177
------- ------- -------
1,308 2,610 3,688
Less--Accumulated depreciation and
amortization........................ (1,060) (1,282) (1,495)
------- ------- -------
$ 248 $ 1,328 $ 2,193
======= ======= =======
</TABLE>
Depreciation expense for the years ended December 31, 1993, 1994 and 1995 and
the six months ended June 30, 1996 was $106,000, $143,000, $220,000 and
$213,000, respectively.
3. OTHER CURRENT LIABILITIES:
<TABLE>
<CAPTION>
DECEMBER 31
----------- JUNE 30
1994 1995 1996
----- ----- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Accrued profit sharing................................... $ 62 $ -- $--
Advance billings......................................... 82 60 26
Other accrued liabilities................................ 35 8 7
----- ----- ----
$ 179 $ 68 $ 33
===== ===== ====
</TABLE>
4. LINE OF CREDIT:
The Company has a revolving line of credit with a bank which provides for
maximum borrowings of $700,000. Borrowings under the line are limited to 60% of
eligible accounts receivable, as defined. The line is collateralized by the
Company's accounts receivable and general intangibles, a second mortgage on the
personal residences of the Company's shareholder and his wife and other
personal assets of the Company's shareholder and his wife. The line is also
personally guaranteed by the Company's shareholder and his wife. At December
31, 1995 and June 30, 1996, there was no outstanding balance on this line of
credit. Interest on the outstanding balance is payable monthly and accrues on
borrowings under the revolving line of credit at the bank's base rate (10.5% at
December 31, 1995).
The agreement shall continue until all indebtedness to the bank has been
repaid in full and the parties terminate the agreement.
F-56
<PAGE>
THE REICH GROUP COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
5. LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31
------------ JUNE 30
1994 1995 1996
----- ----- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Note payable to bank, interest is payable monthly at
the bank's rate plus 1/2% (11% on December 31,
1995). Principal due in monthly installments of
$4,000 through August 1998. This note is collater-
alized by accounts receivable, equipment and other
assets of the Company and a second mortgage on the
personal residences of the Company's shareholder
and his wife. Payment on the note is also guaran-
teed by the Company's shareholder and his wife..... $ 140 $ 105 $ 86
Note payable to regional industrial development au-
thority, interest accrues at 5%, principal and in-
terest due in monthly installments of $3,000
through August 2000, collateralized by specified
furniture and equipment of the Company............. -- 155 140
Payable to landlord, no stated interest (discounted
at 8.9%), unsecured, due in varying monthly in-
stallments from $3,000 to $4,000 through October
31, 1998........................................... 117 96 79
Capitalized lease obligations (Note 6).............. 118 170 355
----- ----- -----
375 526 660
Less--Current portion............................... (102) (155) (246)
----- ----- -----
$ 273 $ 371 $ 414
===== ===== =====
</TABLE>
Minimum principal repayments of long-term debt as of December 31, 1995,
excluding capitalized lease obligations (see Note 6), are as follows (in
thousands):
<TABLE>
<S> <C>
1996.................................................................... $ 95
1997.................................................................... 111
1998.................................................................... 91
1999.................................................................... 35
2000.................................................................... 24
----
$356
====
</TABLE>
In December 1995, the City of Wheeling, West Virginia issued a commitment to
provide $235,000 of financing at 5% interest for a term of five years.
Additionally, the West Virginia Economic Development Authority issued a
commitment to provide $500,000 of financing at prime less 4% (minimum rate of
5%) interest for a term of five years. Each loan is to be collateralized by the
furniture and equipment in the Company's West Virginia facility.
In 1995, the Company received a grant of $187,000 from the West Virginia
Economic Development Authority as a reimbursement for certain costs in
connection with the establishment of a calling center in West Virginia. The
grant has been recorded as an offset to cost of services in the combined
statement of income.
F-57
<PAGE>
THE REICH GROUP COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
6. COMMITMENTS AND CONTINGENCIES:
The Company leases facilities and equipment under capital and noncancelable
operating leases with terms through 2000. Interest rates on the capital leases
range from 11.0% to 15.5%. At December 31, 1995, the capital leases are
collateralized by telemarketing equipment with a book value of $137,000 (net of
accumulated amortization of $313,000). Rent expense under operating leases for
the years ended December 31, 1993, 1994, 1995, and the six months ended June
30, 1996 was $132,000, $140,000, $195,000, and $103,000, respectively.
Future minimum lease payments under the Company's leases as of December 31,
1995 are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- -------
<S> <C> <C>
1996....................................................... $238 $ 78
1997....................................................... 220 78
1998....................................................... 188 44
1999....................................................... 11 1
2000....................................................... 1 --
---- ----
Total minimum lease payments............................... $658 201
====
Less--Amount representing interest......................... (31)
----
Present value of future minimum lease payments............. 170
Less--Current portion of principal payments................ (60)
----
$110
----
</TABLE>
In February 1996, the Company entered into an additional capital lease for
the acquisition of furniture and equipment for the Company's Delaware facility.
The total amount of the future lease commitment was $250,000 with monthly
payments of $8,000 for 36 months.
In November and December 1995, the Company entered into two leases for new
office space in connection with the expansion of its telemarketing facilities
in Delaware and West Virginia. The lease for the Delaware facility commenced on
January 1, 1996 with a minimum monthly rental payment of $6,000 for a term of
three years. The lease for the West Virginia facility commenced on April 1,
1996 with a minimum monthly rental payment of $10,000 beginning June 15, 1996
for a term of five years.
The Company is party to various claims and other matters arising in the
normal course of business. In the opinion of management, the outcome of these
matters will not have a material adverse effect on the Company's financial
position or results of operations.
7. NOTES PAYABLE TO SHAREHOLDER:
In December 1995, the Company received the proceeds from two demand notes
payable to its shareholder for $500,000 (repaid subsequent to December 31,
1995) and $70,000, respectively. The remaining note of $70,000 accrues interest
at 8%.
F-58
<PAGE>
THE REICH GROUP COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONCLUDED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
8. COMMON STOCK:
The description of the Company's common stock is as follows:
<TABLE>
<CAPTION>
COMMON
STOCK
PAR VALUE
---------
<S> <C>
The Reich Group, Inc.
$1 par value, 1,000 shares authorized, 100 shares issued and
outstanding.................................................... $ 100
DialDirect, Inc.
$1 par value, 1,000 shares authorized, 100 shares issued and
outstanding.................................................... 100
DialDirect Telemarketing, Ltd.
$1 par value, 1,000 shares authorized, 100 shares issued and
outstanding.................................................... 100
TRG/Communications, Inc.
$2,000 stated value, 150 shares outstanding.................... 2,000
InsureDirect Agency, Inc.
$1 par value, 1,000 shares authorized, 100 shares issued and
outstanding.................................................... 100
------
$2,400
======
</TABLE>
9. SALE OF BUSINESS:
In April 1996, an asset purchase agreement was entered into among CRW
Financial Inc. ("CRW"), the Company and the shareholder of the Company whereby
TeleSpectrum Worldwide Inc., a wholly-owned subsidiary of CRW agreed to
purchase substantially all of the net assets of the Company.
F-59
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Response Center, Inc. and The Tab House, Inc.:
We have audited the accompanying combined balance sheets of The Response
Center, Inc. and The Tab House, Inc. (Pennsylvania corporations) as of
September 30, 1994 and 1995, and the related combined statements of operations,
shareholders' equity and cash flows for each of the two fiscal years in the
period ended September 30, 1995. These financial statements are the
responsibility of the Companies' management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of The Response Center,
Inc. and The Tab House, Inc. as of September 30, 1994 and 1995, and the results
of their operations and their cash flows for each of the two fiscal years in
the period ended September 30, 1995, in conformity with generally accepted
accounting principles.
As discussed in Note 2 to the combined financial statements, the Company
changed its method of accounting for marketable securities in fiscal 1995.
Arthur Andersen LLP
Philadelphia, Pa.,
April 26, 1996
F-60
<PAGE>
THE RESPONSE CENTER, INC. AND THE TAB HOUSE, INC.
COMBINED BALANCE SHEETS
(IN THOUSANDS--EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30
------------- MARCH 31, JUNE 30,
1994 1995 1996 1996
------ ------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............ $ 72 $ 282 $ 641 $ 744
Marketable securities................ 248 324 310 313
Accounts receivable, net of reserves
of $32, $28, $28, and $28........... 1,357 1,522 1,087 1,396
Due from TeleSpectrum Worldwide
Inc. ............................... -- -- -- 44
Prepaid expenses and other........... 14 23 41 109
------ ------ ------ ------
Total current assets............... 1,691 2,151 2,079 2,606
PROPERTY AND EQUIPMENT, net............ 164 139 250 240
OTHER ASSETS........................... 8 8 96 88
------ ------ ------ ------
Total assets....................... $1,863 $2,298 $2,425 $2,934
====== ====== ====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable..................... $ 126 $ 119 $ 198 $ 217
Accrued expenses..................... 326 275 241 287
Deferred revenue..................... 128 92 282 300
------ ------ ------ ------
Total current liabilities.......... 580 486 721 804
------ ------ ------ ------
COMMITMENTS AND CONTINGENCIES (Note 5)
SHAREHOLDERS' EQUITY:
Common stock (The Response Center,
Inc.), no par value, 1,000 shares
authorized, 550 shares issued and
outstanding......................... 51 51 51 51
Common stock (The Tab House, Inc.),
$.01 par value, 1,000 shares
authorized, 550 shares issued and
outstanding......................... -- -- -- --
Additional paid-in capital........... 1 1 1 1
Net unrealized gain on marketable
securities available for sale....... -- 121 98 100
Retained earnings.................... 1,231 1,639 1,554 1,978
------ ------ ------ ------
Total shareholders' equity......... 1,283 1,812 1,704 2,130
------ ------ ------ ------
Total liabilities and shareholders'
equity............................ $1,863 $2,298 $2,425 $2,934
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-61
<PAGE>
THE RESPONSE CENTER, INC. AND THE TAB HOUSE, INC.
COMBINED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR FOR THE SIX FOR THE NINE
ENDED MONTHS ENDED MONTHS ENDED
SEPTEMBER 30 MARCH 31 JUNE 30
-------------------- ------------- -------------
1994 1995 1995 1996 1995 1996
--------- --------- ------ ------ ------ ------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
REVENUES..................... $ 6,183 $ 6,719 $3,584 $2,781 $5,199 $4,583
--------- --------- ------ ------ ------ ------
OPERATING EXPENSES:
Cost of services........... 3,426 3,583 1,811 1,534 2,702 2,438
Selling, general and
administrative............ 2,800 2,717 1,551 1,310 2,107 1,731
--------- --------- ------ ------ ------ ------
Total operating
expenses................ 6,226 6,300 3,362 2,844 4,809 4,169
--------- --------- ------ ------ ------ ------
Operating income (loss).. (43) 419 222 (63) 390 414
INTEREST INCOME.............. 8 10 -- -- -- --
INTEREST EXPENSE............. (2) -- -- -- -- --
--------- --------- ------ ------ ------ ------
NET INCOME (LOSS)............ $ (37) $ 429 $ 222 $ (63) $ 390 $ 414
========= ========= ====== ====== ====== ======
PRO FORMA DATA (UNAUDITED)
Historical net income
(loss).................... $ (37) $ 429 $ 222 $ (63) $ 390 $ 414
Pro forma provision
(benefit) for income
taxes..................... (15) 180 91 (25) 160 164
--------- --------- ------ ------ ------ ------
Pro forma net income
(loss).................... $ (22) $ 249 $ 131 $ (38) $ 230 $ 250
========= ========= ====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-62
<PAGE>
THE RESPONSE CENTER, INC. AND THE TAB HOUSE, INC.
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS--EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THE RESPONSE THE
CENTER, INC. TAB HOUSE, INC. UNREALIZED
COMMON STOCK COMMON STOCK ADDITIONAL GAIN ON TOTAL
------------- ------------------ PAID-IN MARKETABLE RETAINED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL SECURITIES EARNINGS EQUITY
------ ------ ------- -------- ---------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 1,
1993................... 550 $ 51 550 $ -- $ 1 $-- $1,301 $ 1,353
Net loss............... -- -- -- -- -- -- (37) (37)
Distributions.......... -- -- -- -- -- -- (33) (33)
--- ---- ------- -------- ---- ---- ------ -------
BALANCE, SEPTEMBER 30,
1994................... 550 51 550 -- 1 -- 1,231 1,283
Net income............. -- -- -- -- -- -- 429 429
Distributions.......... -- -- -- -- -- -- (21) (21)
Net unrealized gain on
marketable
securities............ -- -- -- -- -- 121 -- 121
--- ---- ------- -------- ---- ---- ------ -------
BALANCE, SEPTEMBER 30,
1995................... 550 51 550 -- 1 121 1,639 1,812
Net loss (unaudited)... -- -- -- -- -- -- (63) (63)
Distributions
(unaudited)........... -- -- -- -- -- -- (22) (22)
Net unrealized loss on
marketable securities
(unaudited)........... -- -- -- -- -- (23) -- (23)
--- ---- ------- -------- ---- ---- ------ -------
BALANCE, MARCH 31, 1996
(unaudited)............ 550 51 550 -- 1 98 1,554 1,704
Net income
(unaudited)........... -- -- -- -- -- -- 477 477
Distributions
(unaudited)........... (53) (53)
Net unrealized gain on
marketable securities
(unaudited)........... -- -- -- -- -- 2 -- 2
--- ---- ------- -------- ---- ---- ------ -------
BALANCE, JUNE 30, 1996
(unaudited)............ 550 $ 51 550 $ -- $ 1 $100 $1,978 $ 2,130
=== ==== ======= ======== ==== ==== ====== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-63
<PAGE>
THE RESPONSE CENTER, INC. AND THE TAB HOUSE, INC.
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
FOR THE FISCAL YEAR FOR THE SIX NINE MONTHS
ENDED MONTHS ENDED ENDED JUNE
SEPTEMBER 30 MARCH 31 30
-------------------- ------------- ------------
1994 1995 1995 1996 1995 1996
--------- --------- ----- ------ ----- -----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss).......... $ (37) $ 429 $ 222 $ (63) $ 390 $ 414
Adjustments to reconcile
net income to net cash
provided by operating
activities--
Depreciation and
amortization............ 43 48 28 30 40 47
Gain on sale of
marketable securities... (7) (22) (16) (2) (16) (2)
Changes in operating
assets and
liabilities--
Accounts receivable..... 13 (165) (47) 435 (205) 126
Due from TeleSpectrum
Worldwide............ -- -- -- -- -- (44)
Prepaid expenses and
other.................. 41 (8) (19) (18) (31) 5
Other assets............ (2) -- -- (87) -- (169)
Accounts payable........ (202) (7) 35 78 69 97
Accrued expenses........ 219 (51) (74) (34) (110) 11
Deferred revenue........ 43 (36) 1 190 (56) 208
--------- --------- ----- ------ ----- -----
Net cash provided by
(used in) operating
activities............ 111 188 130 529 81 693
--------- --------- ----- ------ ----- -----
INVESTING ACTIVITIES:
Purchases of marketable
securities.............. (93) -- -- (15) -- (17)
Proceeds on sales of
marketable securities... 73 67 44 9 45 9
Purchases of property and
equipment............... (39) (23) (21) (142) (27) (148)
--------- --------- ----- ------ ----- -----
Net cash provided by
(used in) investing
activities............ (59) 44 23 (148) 18 (156)
--------- --------- ----- ------ ----- -----
FINANCING ACTIVITIES:
Repayment of shareholder
loan.................... (160) -- -- -- -- --
Distributions paid....... (33) (22) (22) (22) (22) (75)
--------- --------- ----- ------ ----- -----
Net cash used in
financing activities.. (193) (22) (22) (22) (22) (75)
--------- --------- ----- ------ ----- -----
NET INCREASE (DECREASE) IN
CASH AND CASH
EQUIVALENTS............... (141) 210 131 359 77 462
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD....... 213 72 72 282 72 282
--------- --------- ----- ------ ----- -----
CASH AND CASH EQUIVALENTS,
END OF PERIOD............. $ 72 $ 282 $ 203 $ 641 $ 149 $ 744
========= ========= ===== ====== ===== =====
</TABLE>
The accompanying notes are an integral part of these statements.
F-64
<PAGE>
THE RESPONSE CENTER, INC. AND THE TAB HOUSE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1996 AND JUNE 30, 1996 AND FOR THE SIX MONTHS
ENDED MARCH 31, 1995 AND 1996 AND THE NINE MONTHS ENDED JUNE 30, 1995 AND 1996
IS UNAUDITED)
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
INDUSTRY INFORMATION
The Response Center, Inc. and the Tab House, Inc. (collectively the
"Company") provide custom market research and analysis, principally to clients
in the telecommunications, financial services, pharmaceutical and healthcare
industries.
The accompanying financial statements reflect the combined financial position
and results of operations of The Response Center, Inc. and The Tab House, Inc.
The accompanying financial statements are presented on a combined basis, as The
Response Center, Inc. and The Tab House, Inc. are owned by the same
shareholders who have identical ownership in each entity. The financial
statements reflect the elimination of all significant intercompany accounts and
transactions.
REVENUE RECOGNITION AND CONCENTRATION OF CREDIT RISK
The Company recognizes revenues as services are performed for customers on a
per project basis. In fiscal 1994, 1995, the six months ended March 31, 1996
and the nine months ended June 30, 1996, the Company had one customer, which
accounted for 36%, 27%, 21% and 26% of revenues, and 24%, 27%, 22% and 30% of
accounts receivable, respectively. The Company expects total revenues for this
customer to decline in fiscal 1996 versus 1995.
The concentration of credit risk is limited to trade accounts receivables and
is subject to the financial conditions of the Company's customers. The Company
does not require collateral or other securities to support customer
receivables.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. At the
balance sheet dates, cash equivalents were composed primarily of investments in
money market funds.
The Company maintains cash accounts which, at times, may exceed federally
insured limits. The Company has not experienced any losses from maintaining
cash accounts in excess of federally insured limits. The Company believes that
they are not exposed to any significant credit risks on their cash accounts.
MARKETABLE SECURITIES
During fiscal 1995, the Company began reporting marketable securities in
accordance with Statement of Financial Accounting Standards No. 115. All
securities have been classified as available-for-sale and reported at quoted
market value with net unrealized gains being reported as a separate component
of shareholders' equity. Prior to 1995, marketable securities were reported at
the lower of cost or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization
are provided using the straight-line method over the estimated useful lives as
follows:
<TABLE>
<S> <C>
Computer and office equipment...... 5 years
Furniture and fixtures............. 7 years
Leasehold improvements............. The lessor of 6 years or the lease term.
</TABLE>
F-65
<PAGE>
THE RESPONSE CENTER, INC. AND THE TAB HOUSE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND JUNE 30, 1996 AND FOR THE SIX MONTHS
ENDED MARCH 31, 1995 AND 1996 AND THE NINE MONTHS ENDED JUNE 30, 1995 AND 1996
IS UNAUDITED)
Expenditures for maintenance, repairs and betterments which do not prolong
the normal useful life of an asset have been charged to operations as incurred.
Additions and improvements which substantially extend the useful lives of the
properties are capitalized. Upon sale or other disposition of assets, the cost
and related accumulated depreciation and amortization are removed from the
respective accounts, and the resulting gain or loss, if any, is included in
income.
INCOME TAXES
The Company has elected to be taxed under Subchapter S of the Internal
Revenue Code. As a result, the Company is not subject to federal income taxes,
and the taxable income of the Company is included in the shareholders' tax
returns. The Company has also elected S Corporation status for state income tax
purposes. Therefore, no provision for federal and state income taxes has been
made in the accompanying financial statements.
The Company is on the cash basis of accounting for income tax purposes and on
the accrual basis for financial reporting purposes. Therefore, the Company
reports certain income and expense items for income tax purposes on a basis
different from that reflected in the accompanying financial statements. At
September 30, 1995, the Company's financial reporting basis of the net assets
exceeds the tax basis of the net assets by approximately $1,000,000. In the
event that the S Corporation is terminated, deferred income taxes applicable to
these differences would be reflected in the accompanying financial statements.
Given the pending sale of the business (see Note 6), for informational
purposes, the accompanying statements of income include an unaudited pro forma
adjustment for income taxes which would have been recorded if the Company had
not been an S Corporation, based on the tax laws in effect during the
respective periods. The differences between the federal statutory income tax
rate and the pro forma income tax rate primarily relates to state and local
income taxes and expenses not deductible for tax purposes.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, accounts receivable, accounts payable and accrued liabilities are
reflected in the financial statements at the fair value due to the short-term
nature of those instruments.
PERVASIVENESS OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
INTERIM FINANCIAL STATEMENTS
The financial statements as of March 31, 1996 and June 30, 1996 and for the
six months ended March 31, 1995 and 1996 and for the nine months ended June 30,
1995 and 1996 are unaudited and, in the opinion of management of the Company,
include all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the results for those interim periods. The
results of operations for the six months ended March 31, 1996 and for the nine
months ended June 30, 1996 are not necessarily indicative of the results to be
expected for the full year.
401(K) PLAN
On October 1, 1991, the Company adopted a 401(k) plan for its employees (the
"Plan"). The Plan allows all participants to contribute a percentage of their
compensation with Company contributions. The Company contributed $10,000 and
$13,000 in fiscal 1994 and 1995, respectively.
F-66
<PAGE>
THE RESPONSE CENTER, INC. AND THE TAB HOUSE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND JUNE 30, 1996 AND FOR THE SIX MONTHS
ENDED MARCH 31, 1995 AND 1996 AND THE NINE MONTHS ENDED JUNE 30, 1995 AND 1996
IS UNAUDITED)
2. MARKETABLE SECURITIES:
The Company adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," (SFAS 115)
effective October 1, 1994. This statement requires the Company to classify its
investment securities as: (1) held-to-maturity, (2) available-for-sale or (3)
trading securities. At September 30, 1995, all of the Company's marketable
securities are classified as available for sale and reported at market value;
therefore, any unrealized holding gains or losses are presented as a separate
component of shareholders' equity. The cumulative effect of adopting SFAS 115
was an increase in shareholders' equity of $121,000.
In accordance with SFAS 115, the Company has not restated the financial
statements for prior years. For the year ended September 30, 1994, marketable
securities are carried at the lower of cost or market. The following is a
summary of available-for-sale securities as of September 30, 1995 (in
thousands):
<TABLE>
<CAPTION>
UNREALIZED UNREALIZED
HOLDING HOLDING MARKET
COST LOSSES GAINS VALUE
---- ---------- ---------- ------
<S> <C> <C> <C> <C>
Common stocks............................. $118 $ (6) $106 $218
Municipal bonds, maturity dates ranging
from 12/99 to 3/05....................... 59 -- 20 79
Mutual Funds.............................. 26 -- 1 27
---- ---- ---- ----
Total Marketable Securities............... $203 $ (6) $127 $324
==== ==== ==== ====
</TABLE>
During the year ended September 30, 1995 the Company sold marketable
securities in the amount of $103,000. Under the specific identification method,
the Company realized gains of $22,000 on these sales.
The following is a summary of available-for-sale securities as of September
30, 1994 (in thousands):
<TABLE>
<CAPTION>
UNREALIZED UNREALIZED
HOLDING HOLDING MARKET
COST LOSSES GAINS VALUE
---- ---------- ---------- ------
<S> <C> <C> <C> <C>
Common stocks............................. $148 $ (9) $ 77 $216
Municipal bonds, maturity dates ranging
from 12/99 to 3/05....................... 59 -- 12 71
Mutual Funds.............................. 41 (2) -- 39
---- ---- ---- ----
Total Marketable Securities............... $248 $(11) $ 89 $326
==== ==== ==== ====
</TABLE>
During the period ended September 30, 1994, the Company sold marketable
securities in the amount of $243,000. Under the specific identification method,
the Company realized gains of $17,000 on these sales.
F-67
<PAGE>
THE RESPONSE CENTER, INC. AND THE TAB HOUSE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONCLUDED)
(INFORMATION AS OF MARCH 31, 1996 AND JUNE 30, 1996 AND FOR THE SIX MONTHS
ENDED
MARCH 31, 1995 AND 1996 AND THE NINE MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED)
3. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
SEPTEMBER 30
-------------- MARCH 31 JUNE 30
1994 1995 1996 1996
------ ------ -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Computer equipment......................... $ 161 $ 154 $ 198 $ 199
Furniture and office equipment............. 89 96 148 145
Leasehold improvements..................... 19 19 65 74
------ ------ ----- -----
269 269 411 418
Less--Accumulated depreciation and
amortization.............................. (105) (130) (161) (178)
------ ------ ----- -----
$ 164 $ 139 $ 250 $ 240
====== ====== ===== =====
</TABLE>
Depreciation and amortization expense for the fiscal years ended September
30, 1994 and 1995, the six months ended March 31, 1996 and the nine months
ended June 30, 1996 was $43,000, $48,000, $30,000 and $47,000, respectively.
4. ACCRUED EXPENSES:
<TABLE>
<CAPTION>
SEPTEMBER 30
------------- MARCH 31 JUNE 30
1994 1995 1996 1996
------ ------ -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Accrued compensation and
related expenses............ $ 115 $ 132 $103 $175
Accrued local taxes.......... 19 30 30 32
Other accrued liabilities.... 192 113 108 80
------ ------ ---- ----
$ 326 $ 275 $241 $287
====== ====== ==== ====
</TABLE>
5. COMMITMENTS AND CONTINGENCIES:
The Company leases a facility and equipment. Such leases have terms which
extend through 2000. Rent expense for the fiscal years ended September 30, 1994
and 1995 and the six months ended March 31, 1996 and the nine months ended June
30, 1996 was $157,000, $161,000, $64,000 and $90,000, respectively.
Future minimum lease payments under the Company's leases as of September 30,
1995 are as follows (in thousands):
<TABLE>
<S> <C>
1996................................................................... $138
1997................................................................... 111
1998................................................................... 58
1999................................................................... 55
2000................................................................... 55
----
Total minimum lease payments........................................... $417
====
</TABLE>
6. SALE OF BUSINESS:
In April 1996, an asset purchase agreement was entered into among
TeleSpectrum Worldwide Inc. a wholly-owned subsidiary of CRW Financial, the
Company, and the shareholders of the Company whereby TeleSpectrum Worldwide
agreed to purchase substantially all of the net assets of the Company.
F-68
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To TeleSpectrum, Inc. and TeleSpectrum Training Services, Inc.:
We have audited the accompanying combined balance sheet of TeleSpectrum, Inc.
and TeleSpectrum Training Services, Inc. (Maryland corporations) as of December
31, 1995, and the related combined statements of income, stockholders' equity
and cash flows for the year then ended. These financial statements are the
responsibility of the Companies' management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of TeleSpectrum, Inc.
and TeleSpectrum Training Services, Inc. as of December 31, 1995, and the
results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Philadelphia, Pa.,
April 17, 1996
(Except with respect
to the matter
discussed in Note 3,
as to which the date
is May 1, 1996)
F-69
<PAGE>
TELESPECTRUM, INC. AND TELESPECTRUM TRAINING SERVICES, INC.
COMBINED BALANCE SHEET
(IN THOUSANDS--EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31
----------- JUNE 30
1995 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash................................................. $ 15 $ 605
Accounts receivable, net of reserves of $22 and $30.. 2,690 3,409
Due from TeleSpectrum Worldwide, Inc................. -- 51
Due from shareholder/officer......................... 4 --
Prepaid expenses and other........................... 95 283
------ ------
Total current assets............................... 2,804 4,348
PROPERTY AND EQUIPMENT, net............................ 657 1,085
OTHER ASSETS........................................... 88 157
------ ------
Total assets....................................... $3,549 $5,590
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit....................................... $1,350 $2,289
Current portion of long-term debt.................... 198 594
Accounts payable..................................... 498 534
Accrued compensation................................. 161 240
Deferred revenue..................................... 197 261
Other accrued expenses............................... 363 464
------ ------
Total current liabilities.......................... 2,767 4,382
------ ------
LONG-TERM DEBT AND OTHER NONCURRENT LIABILITIES........ 81 3
------ ------
DEFERRED TAXES......................................... 14 14
------ ------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY:
Common stock, TeleSpectrum, Inc. $.01 par value,
5,000 shares authorized, 3,000 shares issued and
outstanding......................................... -- --
Common stock, TeleSpectrum Training Services, Inc. no
par value, 5,000 shares authorized, 200 shares
issued and outstanding.............................. 6 6
Additional paid-in capital........................... 217 217
Retained earnings.................................... 464 968
------ ------
Total stockholders' equity......................... 687 1,191
------ ------
Total liabilities and stockholders' equity......... $3,549 $5,590
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-70
<PAGE>
TELESPECTRUM, INC. AND TELESPECTRUM TRAINING SERVICES, INC.
COMBINED STATEMENT OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
JUNE 30
FOR THE YEAR ENDED --------------
DECEMBER 31, 1995 1995 1996
------------------ ------ ------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES.................................... $11,854 $5,592 $8,034
------- ------ ------
OPERATING EXPENSES:
Cost of services.......................... 8,338 3,828 5,290
Selling, general and administrative ex-
penses................................... 3,072 1,652 2,121
------- ------ ------
Total operating expenses................ 11,410 5,480 7,411
------- ------ ------
Operating income........................ 444 112 623
INTEREST EXPENSE............................ (184) (85) (119)
------- ------ ------
Income before income taxes.............. 260 27 504
INCOME TAX BENEFIT.......................... 18 -- --
------- ------ ------
NET INCOME.................................. $ 278 $ 27 $ 504
======= ====== ======
PRO FORMA DATA (UNAUDITED)
Historical net income..................... $ 278 $ 27 $ 504
Pro forma provision for income taxes...... 112 11 199
------- ------ ------
Pro forma net income...................... $ 166 $ 16 $ 305
======= ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-71
<PAGE>
TELESPECTRUM, INC. AND TELESPECTRUM TRAINING SERVICES, INC.
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS--EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------------
TELESPECTRUM
TRAINING
TELESPECTRUM, SERVICES, ADDITIONAL TOTAL
INC. INC. PAID-IN RETAINED STOCKHOLDERS'
SHARES SHARES AMOUNT CAPITAL EARNINGS EQUITY
------------- ------------ ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1,
1995................... 3,000 200 $ 6 $217 $186 $ 409
Net income............ -- -- -- -- 278 278
----- --- ---- ---- ---- ------
BALANCE, DECEMBER 31,
1995................... 3,000 200 6 217 464 687
----- --- ---- ---- ---- ------
Net income (unau-
dited)............... -- -- -- -- 504 504
----- --- ---- ---- ---- ------
BALANCE, JUNE 30, 1996
(unaudited)............ 3,000 200 $ 6 $217 $968 $1,191
===== === ==== ==== ==== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-72
<PAGE>
TELESPECTRUM, INC. AND TELESPECTRUM TRAINING SERVICES, INC.
COMBINED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
JUNE 30
FOR THE YEAR ENDED --------------
DECEMBER 31, 1995 1995 1996
------------------ ------ -------
(UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income................................ $ 278 $ 154 $ 504
Adjustments to reconcile net income to net
cash used in operating activities--
Depreciation and amortization........... 343 107 99
Changes in operating assets and
liabilities--
Accounts receivable................... (679) (42) (720)
Due from TeleSpectrum Worldwide,
Inc.................................. -- -- (51)
Due from stockholder/officer.......... 1 5 --
Prepaid expenses and other............ (2) (162) (187)
Other, net ........................... (114) 57 63
Deferred revenue...................... (205) (405) 64
Accounts payable and accrued
liabilities.......................... 374 278 58
----- ----- -------
Net cash used in operating
activities......................... (4) (8) (170)
----- ----- -------
INVESTING ACTIVITIES:
Purchases of property and equipment....... (99) (288) (526)
----- ----- -------
Net cash used in investing
activities......................... (99) (288) (526)
----- ----- -------
FINANCING ACTIVITIES:
Net borrowings on line of credit.......... 807 (14) 2,289
Proceeds from notes payable............... -- 204 500
Principal payments on long-term debt and
capital leases........................... (852) (16) (1,503)
Bank overdraft............................ -- (41) --
----- ----- -------
Net cash used in financing
activities......................... (45) 133 1,286
----- ----- -------
NET (DECREASE) INCREASE IN CASH............. (148) (163) 590
CASH, BEGINNING OF PERIOD................... 163 163 15
----- ----- -------
CASH, END OF PERIOD......................... $ 15 $ -- $ 605
===== ===== =======
CASH PAID FOR:
Interest.................................. 182 82 116
===== ===== =======
Taxes..................................... 36 35 81
===== ===== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-73
<PAGE>
TELESPECTRUM, INC. AND TELESPECTRUM TRAINING SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND
1996 IS UNAUDITED)
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
INDUSTRY INFORMATION
TeleSpectrum, Inc. and TeleSpectrum Training Services, Inc. (together the
"Company") specializes in providing both outbound and inbound telemarketing
services and fullfillment to the high technology, pharmaceutical and healthcare
and consumer products industries.
The financial statements reflect the combined financial position and results
of operations of TeleSpectrum, Inc. and TeleSpectrum Training Services, Inc.
The accompanying financial statements are presented on a combined basis, as
TeleSpectrum, Inc. and TeleSpectrum Training Services, Inc. are owned by the
same stockholders who have identical ownership in each entity. The financial
statements reflect the elimination of all significant intercompany accounts and
transactions.
REVENUE RECOGNITION AND CONCENTRATION OF CREDIT RISK
The Company recognizes revenues on programs as services are performed for the
clients, generally based upon hours incurred. In 1995 and the six months ended
June 30, 1996, the Company had one client which accounted for approximately 12%
and 25% of revenues and 15% and 28% of accounts receivable, respectively.
The concentration of credit risk is limited to trade accounts receivables and
is subject to the financial conditions of the Company's clients. The Company
does not require collateral or other securities to support client receivables.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Property and equipment
capitalized under capital leases are recorded at the present value of the
minimum lease payments due over the term of the lease. Depreciation and
amortization are provided using the straight-line method over the estimated
useful lives of three to ten years.
Expenditures for maintenance, repairs and betterments which do not prolong
the normal useful life of an asset have been charged to operations as incurred.
Additions and betterments which substantially extend the useful life of the
properties are capitalized. Upon sale or other disposition of assets, the cost
and related accumulated depreciation and amortization are removed from the
respective accounts, and the resulting gain or loss, if any, is included in
income.
INCOME TAXES
TeleSpectrum, Inc. elected to be taxed as an S Corporation under the
provisions of the federal and state statutes. In lieu of federal and state
corporate income taxes, the stockholders are taxed on their proportionate share
of the Company's taxable income. Accordingly, no provision for federal or state
income taxes was recorded for the year ended December 31, 1995 or the six
months ended June 30, 1996.
The Company reports certain income and expense items for income tax purposes
on a basis different from that reflected in the accompanying financial
statements. The principal differences relate to the timing of the recognition
of accrued expenses which are not deductible for federal income tax purposes
until paid and the use of accelerated methods of depreciation for income tax
purposes. At December 31, 1995, the financial reporting basis of the Company's
net assets exceeds the tax basis of the net assets by approximately $140,000.
In the event that the S Corporation is terminated, deferred income taxes
applicable to these differences would be reflected in the accompanying
financial statements.
Given the pending sale of the business (see Note 6), for informational
purposes, the accompanying statements of income include an unaudited pro forma
adjustment for income taxes which would have been recorded if the Company had
not been an S Corporation, based on the tax laws in effect during the
respective periods. The
F-74
<PAGE>
TELESPECTRUM, INC. AND TELESPECTRUM TRAINING SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND
1996 IS UNAUDITED)
differences between the federal statutory income tax rate and the pro forma
income tax rate primarily related to state and local income taxes and expenses
not deductible for tax purposes.
TeleSpectrum Training Services, Inc. is a C Corporation and follows the
provisions of Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." This standard requires an asset and liability approach to
the recognition of deferred tax assets and liabilities related to the expected
future consequences of events that have been recognized in the financial
statements or tax returns.
TeleSpectrum Training Services, Inc. has recorded $14,000 of long-term
deferred tax liabilities as of December 31, 1995 and June 30, 1996. This amount
relates principally to differences between the accelerated depreciation methods
used for income tax purposes and those used for financial reporting purposes.
The (benefit) for income taxes for TeleSpectrum Training Services, Inc. is
comprised of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30,
1995 1996
----------- --------
<S> <C> <C>
Current................................................... $ 2 $--
Deferred.................................................. (20) --
---- ----
Total benefit........................................... $(18) $--
==== ====
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, accounts receivable, accounts payable and accrued liabilities are
reflected in the financial statements at fair value due to the short-term
nature of those instruments. The carrying amounts of line of credit, long-term
debt and capital lease obligations approximate fair value at the balance sheet
dates.
PERVASIVENESS OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
INTERIM FINANCIAL STATEMENTS
The financial statements as of June 30, 1996 and for the six months ended
June 30, 1995 and 1996 are unaudited and, in the opinion of management of the
Company, include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the results for those interim
periods. The results of operations for the six months ended June 30, 1996 are
not necessarily indicative of the results to be expected for the full year.
2. PROPERTY AND EQUIPMENT (IN THOUSANDS--EXCEPT USEFUL LIFE DATA):
<TABLE>
<CAPTION>
USEFUL DECEMBER 31 JUNE 30
LIVES 1995 1996
------ ----------- -------
<S> <C> <C> <C>
Telemarketing equipment.......................... 5-7 $ 825 $1,244
Furniture and office equipment................... 3-5 1,221 1,329
Leasehold Improvements........................... 3-10 91 91
------- ------
2,137 2,664
Less--Accumulated depreciation and amortization.. (1,480) (1,579)
------- ------
$ 657 $1,085
======= ======
</TABLE>
F-75
<PAGE>
TELESPECTRUM, INC. AND TELESPECTRUM TRAINING SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1995
AND 1996 IS UNAUDITED)
Depreciation expense for the year ended December 31, 1995 and the six months
ended June 30, 1996, was $343,000 and $99,000, respectively.
3. LINE OF CREDIT:
The Company entered into a new line of credit agreement in May 1996 (the
"new line") and used proceeds from the new line to pay down the amount owed
under the existing line of credit (the "old line"). The amount available for
borrowing under the new line is $4.0 million, with interest at the bank's
prime rate plus 1.5% (under the old line, interest, calculated as the bank's
prime rate plus 2.5%, was 11% at December 31, 1995). At December 31, 1995, the
balance of the old line was $1.35 million. Interest expense on borrowings
under the old line amounted to $127,000 during 1995 and interest expense under
the old and new lines amounted to $95,000 during the six months ended June 30,
1996.
4. LONG-TERM DEBT (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ --------
<S> <C> <C>
Note payable to bank (see Note 3), interest at the bank's
prime rate plus 2%, monthly principal payments of
$13,000 plus interest, maturing July 1996,
collateralized by all assets of the Company; eighty
percent (80%) guaranteed by the United States Small
Business Administration (SBA); personally guaranteed by
the Company's officers.................................. $ 91 $ --
Note payable, interest at 15%, monthly principal and in-
terest payments of $2,000, maturing October 1997, guar-
anteed by an officer of the
company................................................. 38 24
Note payable, interest at 22%, maturing June 1996,
guaranteed by an officer of the Company................. -- --
Note Payable, interest at 9%, maturity May 1997,
guaranteed by CRW Financial, Inc........................ -- 500
Capitalized lease obligations (Note 5)................... 126 73
----- -----
255 597
Less--Current portion.................................... (198) (594)
----- -----
$ 57 $ 3
===== =====
</TABLE>
Minimum principal repayments of long-term debt as of December 31, 1995,
excluding capitalized lease obligations, are as follows (in thousands):
<TABLE>
<S> <C>
1996................................................................. $110
1997................................................................. 19
----
$129
====
</TABLE>
5. COMMITMENTS AND CONTINGENCIES:
The Company is party to various claims and other matters arising in the
normal course of business. In the opinion of management, the outcome of these
matters will not have a material adverse effect on the Company's financial
position or results of operations.
F-76
<PAGE>
TELESPECTRUM, INC. AND TELESPECTRUM TRAINING SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND
1996 IS UNAUDITED)
The Company leases facilities and equipment at several locations. Rent
expense under operating leases for the year ended December 31, 1995 and the six
months ended June 30, 1996 was $264,000 and $194,000 respectively.
Future minimum lease payments under the Company's leases as of December 31,
1995 are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- -------
<S> <C> <C>
1996...................................................... $ 395 $ 99
1997...................................................... 447 36
1998...................................................... 441 4
1999...................................................... 382 --
2000...................................................... 19 --
------ ----
Total minimum lease payments.............................. $1,684 139
======
Less--Amount representing interest........................ (13)
----
Present value of future minimum lease payments............ 126
Less--Current portion..................................... (88)
----
$ 38
====
</TABLE>
6. SALE OF BUSINESS:
In April 1996, an asset purchase agreement was entered into among CRW
Financial, Inc. ("CRW"), the Company and the shareholders of the Company
whereby TeleSpectrum Worldwide Inc., a wholly-owned subsidiary of CRW, agreed
to purchase substantially all of the net assets of the Company.
Upon signing the asset purchase agreement, CRW advanced the Company $500,000
in the form of a promissory note due one year from the date the proceeds are
received with interest at 9%. Upon the closing of the transaction, a portion of
the purchase price will be paid by cancellation of the promissory note.
F-77
<PAGE>
The inside back cover depicts two flow charts. The first flow chart is
entitled "Inbound Process" and describes the inbound process using the following
text:
Customers Desire Product or Service or Have Questions
Response Via
Phone, Mail, Internet
Connect With
Telespectrum Representative
Who
Collects, Verifies, and Enhances Data and Interfaces with
External Customer Database
Client Needs Met Through
Fulfillment, E-Mail, Internet
Phone Call Back, Customer Satisfied, Client Reports
The second flow chart is entitled "Outbound Process" and describes the
outbound process using the following text:
Product/Service Offering
Generate List & Conduct Market Research to Segment List
Ongoing Database Management to Adjust Offering
Outbound Autodialing by Telespectrum Representative to Reach Customers
Customer Says Yes or Customer Says No
Quality Control
Fulfill/Take Orders or Capture Why
Update Master File/Generate Reports for Client
The back cover depicts the Company logo above the words "Telespectrum
Worldwide, Inc."
