<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended September 30, 1997
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to __________________
Commission File No. 0-21107
---------------------------
TeleSpectrum Worldwide Inc.
---------------------------
(Exact name of registrant as specified in its charter)
Delaware 23-2845501
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
443 South Gulph Road
King of Prussia, Pennsylvania 19406
----------------------------- -----
(Address of principal executive offices) (ZIP Code)
610-878-7400
------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports to be
filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
------ ------
The number of outstanding shares of the Registrant's Common Stock, par value
$.01 per share, on November 10, 1997 was 25,210,984.
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<PAGE>
TeleSpectrum Worldwide Inc.
Table of Contents
-----------------
<TABLE>
<CAPTION>
Item No. Page
- -------- ----
<C> <S> <C>
PART I -- FINANCIAL INFORMATION
1. Financial Statements (unaudited):
Condensed Consolidated Results of Operations
For the Three Months Ended September 30, 1997 and
Three Months Ended September 30, 1996 3
Condensed Consolidated Results of Operations
For the Nine Months Ended September 30, 1997 and
For the period from April 26, 1996 (Inception) to September 30, 1996 4
Condensed Consolidated Balance Sheets
September 30, 1997 and December 31, 1996 5
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1997 and
For the Period from April 26, 1996 (Inception) to September 30, 1996 6
Notes to Condensed Consolidated Financial Statements 7
2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 15
PART II - OTHER INFORMATION 27
</TABLE>
2
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Condensed Consolidated Results of Operations
(Unaudited)
(Dollars in Thousands -- Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Revenues $ 45,800 $ 17,295
-------- --------
Operating Expenses:
Cost of services 42,986 11,528
Selling, general and administrative 16,045 3,241
Amortization of goodwill 2,103 834
-------- --------
Total operating expenses 61,134 15,603
-------- --------
Operating income (loss) (15,334) 1,692
Interest Income (Expense), net (636) 321
-------- --------
Income (Loss) before taxes (15,970) 2,013
Income Tax (Expense) Benefit 2,689 (805)
-------- --------
Net Income (Loss) $(13,281) $ 1,208
======== ========
Net Income (Loss) Per Share $ (0.53) $ 0.07
======== ========
Weighted average number of common shares and
equivalent shares outstanding 25,211 16,923
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Condensed Consolidated Results of Operations
(Unaudited)
(Dollars in Thousands -- Except Per Share Amounts)
<TABLE>
<CAPTION>
Period From
Nine Months April 26, 1996
Ended (Inception) to
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Revenues $ 149,576 $ 17,295
--------- ---------
Operating Expenses:
Cost of services 118,632 11,528
Selling, general and administrative 36,500 3,660
Amortization of goodwill 6,235 834
--------- ---------
Total operating expenses 161,367 16,022
--------- ---------
Operating income (loss) (11,791) 1,273
Interest Income (Expense), net (810) 321
--------- ---------
Income (Loss) before taxes (12,601) 1,594
Income Tax (Expense) Benefit 1,400 (638)
--------- ---------
Net Income (Loss) $ (11,201) $ 956
========= =========
Net Income (Loss) Per Share $ (0.44) $ 0.07
========= =========
Weighted average number of common shares and
equivalent shares outstanding 25,211 13,409
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Dollars in Thousands -- Except Per Share Amounts)
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
(unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ -- $ 30,715
Accounts receivable, net 41,399 32,373
Income tax refund receivable 2,941 --
Prepaid expenses and other 2,962 3,633
--------- ---------
Total current assets 47,302 66,721
Property and Equipment, net 45,999 30,171
Goodwill, net 199,623 200,187
Investment in Business Held for Sale 4,502 --
Other Assets 2,978 1,976
--------- ---------
Total Assets $ 300,404 $ 299,055
========= =========
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term debt $ 1,332 $ 1,768
Accounts payable 2,264 6,185
Accrued expenses 8,805 5,042
Accrued compensation 7,628 3,980
Notes payable to seller's of businesses 1,077 27,005
Deferred revenue 847 2,300
Other current liabilities 4,471 2,165
--------- ---------
Total current liabilities 26,424 48,445
--------- ---------
Deferred Income Taxes 655 655
--------- ---------
Secured Credit Facility Debt 35,900 --
--------- ---------
Long-term Debt 4,092 4,199
--------- ---------
Acquisition Related Liabilities 2,539 4,810
--------- ---------
Other Noncurrent Liabilities 1,604 435
--------- ---------
Stockholders' Equity:
Preferred Stock, $.01 par value, 5,000,000 shares authorized,
no shares issued or outstanding -- --
Common Stock, $.01 par value, 200,000,000 shares authorized,
25,210,984 shares issued and outstanding 252 252
Additional paid-in capital 236,678 236,678
(Accumulated deficit) Retained earnings (7,551) 3,650
Cumulative translation adjustment (189) (69)
--------- ---------
229,190 240,511
--------- ---------
Total Liabilities and Stockholders' Equity $ 300,404 $ 299,055
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Period From
April 26, 1996
Nine Months Ended (Inception) To
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ (11,201) $ 956
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 8,198 1,175
Amortization of goodwill 6,235 834
Provision for bad debts 1,101 --
Provision for deferred taxes -- (195)
Utilization of tax carry-back benefit (2,048) --
Other Items, net 492 --
Changes in operating assets and liabilities-
Accounts receivable (9,858) 166
Income tax receivable 532 --
Prepaid expenses and other (1,130) 1,439
Accounts payable (4,285) (699)
Accrued compensation 3,853 --
Other accrued expenses 3,627 (531)
Deferred revenue (1,453) --
Other liabilities 2,535 (116)
--------- ---------
Net cash provided by (used in) operating activities (3,402) 3,029
--------- ---------
Cash Flows From Investing Activities:
Purchases of property and equipment (24,315) (5,453)
Acquisition of Initial Operating Businesses, net of cash acquired -- (91,356)
Payments related to acquisition of Initial Operating Businesses (28,488) --
Acquisition of TeleSpectrum FX (IVR) (5,327) --
Investment in business held for sale (4,502) --
Proceeds on sale of marketable securities -- 40
--------- ---------
Net cash used in investing activities (62,632) (96,769)
--------- ---------
Cash Flows From Financing Activities:
Capital contribution received -- 2,110
Net proceeds from sale of stock -- 162,016
Borrowings on secured credit facility 35,900 --
Borrowings of long-term debt 720 --
Payments of long-term debt (407) (9,479)
Payments of capital lease obligations (894) (2,964)
--------- ---------
Net cash provided by financing activities 35,319 151,683
--------- ---------
Net increase (decrease) in cash and cash equivalents (30,715) 57,943
Cash and cash equivalents, beginning of period 30,715 --
--------- ---------
Cash and cash equivalents, end of period $ -- $ 57,943
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
- --------------------------------------------------------------------------------
1. Company Background
TeleSpectrum Worldwide Inc. and Subsidiaries ("TeleSpectrum" or "the Company")
was incorporated in Delaware on April 26, 1996. On August 12, 1996, the Company
completed its initial public offering. Simultaneous with the offering, the
Company began material operations with the acquisition of substantially all of
the assets and the assumption of certain liabilities of six companies engaged in
telemarketing, market research, and direct mail and fulfillment businesses
(collectively, the "Initial Operating Businesses").
Subsequent to the acquisition of the Initial Operating Businesses, the Company
completed the acquisitions of the TARP and PR Response businesses (collectively,
the "Fourth Quarter 1996 Acquisitions"), which were acquired on October 1, 1996
and November 1, 1996, respectively. The acquisition of TARP expanded the
Company's customer service consulting capabilities. The acquisition of PR
Response, which operates three call centers in the Canadian provinces of Ontario
and Manitoba, represents the Company's penetration into the Canadian
teleservices market.
In March 1997, the Company completed its acquisition of the interactive voice
response division of Voice FX Corporation. The division, renamed TeleSpectrum FX
("FX (IVR)"), provides interactive voice response solutions within the
interactive promotion and direct response marketplace. The effective date of the
FX (IVR) acquisition was March 1, 1997.
TeleSpectrum provides inbound and outbound telemarketing, inbound customer
services, direct mail and fulfillment, market research, interactive promotion
and direct response and other services including strategic and database
marketing, consulting and training. As of September 30, 1997, the Company
operated 27 call centers with approximately 3,600 workstations throughout the
United States and the provinces of Ontario and Manitoba, Canada.
2. Basis of Presentation
The accompanying financial statements are unaudited and have been prepared by
the Company pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). The December 31, 1996 balance sheet was derived from audited
financial statements, however, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to SEC
rules and regulations. The Company believes that the financial statements
include all adjustments of a normal and recurring nature necessary to present
fairly the results of operations, financial position and cash flows for the
periods presented. These financial statements should be read in conjunction with
the financial statements and notes thereto included in the Company's Form 10-K
for the period from April 26, 1996 (Inception) to December 31, 1996.
The condensed consolidated financial statements include the accounts of
TeleSpectrum Worldwide Inc. and its subsidiaries. All material intercompany
balances and transactions have been eliminated. There have been no material
changes in accounting policies from those stated in the Company's Form 10-K for
the period from April 26, 1996 (Inception) to December 31, 1996. Certain
reclassifications have been made to the December 31, 1996 condensed consolidated
balance sheet to conform to the presentation used in the current period.
As noted above, TeleSpectrum Worldwide Inc. was incorporated on April 26, 1996
and began material operations with the acquisition of the Initial Operating
Businesses. Accordingly, there are no comparable historical actual financial
results prior to April 26, 1996.
7
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
- --------------------------------------------------------------------------------
3. Third Quarter 1997 Charges
During the third quarter of 1997 the Company recorded pre-tax charges totaling
$10,827,000, including $3,725,000 for the write-down of certain property and
equipment to fair value and the provision for future payments under
non-cancelable lease contracts related to the closing of five call centers and
certain regional operations centers; $843,000 related to severance and
termination benefits for approximately 48 employees - consisting primarily of
individuals in management, operations and sales functions; $1,247,000 for
minimum purchase commitments under various telecommunications services
agreements; $875,000 increase to the reserve for the allowance for doubtful
accounts; $3,130,000 for revisions to estimates of the costs of certain employee
benefit programs and certain other items totaling $1,007,000 ("the third quarter
1997 charges").
The third quarter 1997 charges are included in the results of operations for
both the three and nine months ended September 30, 1997, with $6,841,000 as a
component of cost of services expenses and $3,986,000 as a component of selling,
general and administrative expenses. The third quarter 1997 charges are included
in the September 30, 1997 consolidated balance sheet as accrued expenses or
accrued compensation except for the write-down of property and equipment which
is included as a component of accumulated depreciation.
The Company has commenced activities necessary to implement the closing of the
call centers and the consolidation of certain operations. Company management
expects that all significant activities under the implementation plan will be
completed by no later than one year from September 30, 1997, with a majority of
these activities being completed within the next six to nine months.
4. Secured Credit Facility Debt
Under the terms of the Company's secured credit facility ("the credit
facility"), which was most recently amended in November 1997, the Company can
borrow up to the lesser of $35.0 million or an amount that is determined as the
sum of (i) 80% of accounts receivable aged 90 days or less plus (ii) 50% of
unbilled accounts receivable plus (iii) a $5.0 million "over-advance"
adjustment. The $5.0 million over-advance adjustment decreases ratably by
$625,000 per quarter, with the first decrement occurring for the quarter ended
March 31, 1998.
Borrowings can be used for working capital requirements, and certain other
limited purposes. The credit facility is secured by accounts receivable,
equipment, and other assets of the Company and contains financial covenants
including the maintenance of certain financial ratios, specified minimum levels
of working capital and net worth, a maximum level of purchases of fixed assets
and restrictions on the payment of distributions, among others.
Advances under the credit facility bear interest at optional borrowing rates of
either the then current prime rate plus 0.25% or the LIBOR rate plus a margin
that ranges from 1.0% to 3.0%, depending upon certain conditions specified in
the credit facility agreement. At September 30, 1997, the weighted average
interest rate of borrowings under the credit facility was 7.1%. The credit
facility terminates in January 2000.
5. Investment in Business Held for Sale
On June 30, 1997, the Company purchased substantially all of the assets and
assumed certain liabilities of FX Direct, Inc. ("FX Direct"). As of September
30, 1997, the Company's net cash investment in FX Direct amounted to $4,502,000,
which is included in the September 30, 1997 Balance Sheet as an investment in
business held for sale. On October 3, 1997, the Company sold its investment in
FX Direct for approximately $6,300,000 in cash. The Company's results of
operations for the three months and nine months ended September 30, 1997 do not
include those of FX Direct. During October 1997, the Company used the proceeds
from the sale to repay borrowings on the credit facility and recorded a pre-tax
gain of approximately $1,800,000.
8
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
- --------------------------------------------------------------------------------
6. Supplemental Cash Flow Information
During the nine months ended September 30, 1997, the Company paid $916,000 of
interest expense (net of capitalized interest expense of $78,000) and $1,180,000
of income taxes.
In March 1997, the Company settled the earn-out agreement with the seller of one
of the Initial Operating Businesses under which the Company paid $25.0 million
in March 1997 and agreed to pay $600,000 over a two year period in equal
installments of which, the Company has paid $125,000 through September 30, 1997.
In connection with the acquisition of FX (IVR), the Company's consolidated
financial statements reflect acquired net assets of approximately $71,000,
consisting primarily of $321,000 of accounts receivable, $176,000 of property
and equipment and $6,000 of other assets and the assumption of $432,000 of
accounts payable and accrued expenses. The $5,256,000 of purchase price in
excess of the estimated fair value of net assets acquired has been recorded as
goodwill and is being amortized on a straight-line basis over a twenty five year
period.
The following table displays the net noncash assets that were consolidated on
August 12, 1996, as a result of the acquisition of the Initial Operating
Businesses:
<TABLE>
<S> <C>
Noncash assets (liabilities):
Accounts receivable $21,416,000
Prepaid expenses and other 4,461,000
Property and equipment 18,472,000
Other assets 869,000
Goodwill 153,204,000
Current maturities of long-term debt (16,476,000)
Accounts payable (6,000,000)
Other accrued expenses (13,217,000)
Other liabilities (1,430,000)
Long-term debt (4,426,000)
-----------
Net noncash assets acquired 156,873,000
Less: Common stock issued (44,691,000)
Warrants issued to sellers (2,077,000)
CRW Warrants (18,749,000)
-----------
Cash paid for Initial Operating Businesses $91,356,000
===========
</TABLE>
In May 1996 CRW Financial, Inc. (CRW) made an initial capital contribution to
the Company of $2,110,000. These proceeds represented borrowings by CRW under
subordinated notes issued to certain officers and directors of CRW and the
Company. As additional consideration, the lenders to CRW received warrants from
CRW to purchase 1,433,454 shares of the Company's Stock owned by CRW at $1.50
per share ("CRW Lender Warrants"). CRW also issued warrants to purchase 839,108
shares of the Company's Stock owned by CRW at $1.50 per share to certain
officers of CRW and the Company ("CRW Management Warrants"). The deemed value
for accounting purposes of $18,749,000 of both the CRW Lender Warrants and CRW
Management Warrants were recorded as additional purchase price of the Initial
Operating Businesses and additional paid-in capital.
9
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
- --------------------------------------------------------------------------------
7. Pro Forma Results of Operation
The following table summarizes the unaudited pro forma combined results of
operations for the nine months ended September 30, 1996, assuming the Initial
Operating Business and TARP had been acquired on January 1, 1996 (for purposes
of this disclosure, PR Response and FX (IVR) acquisitions have been deemed not
material):
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1996
(unaudited)
-----------
<S> <C>
Revenues $ 98,657,000
Operating income $ 9,473,000
Net Income $ 5,644,000
Earnings Per Share $ 0.25
</TABLE>
8. Earnings Per Share
Earnings per share (EPS) is calculated using the weighted average number of
shares of common stock and common stock equivalent shares (dilutive incremental
shares caused by stock options and warrants using the treasury stock method)
outstanding during the three and nine months ended September 30, 1997 and the
three months ended September 30, 1996 and for the period April 26, 1996
(Inception) to September 30, 1996. Common stock equivalent shares are only
included in the EPS calculations to the extent their inclusion would have an
aggregate dilutive effect.
The Company currently calculates EPS under the provisions of APB Opinion No. 15,
"Earnings Per Share" ("APB 15"). In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standard No. 128,
"Earnings Per Share" ("SFAS 128"). SFAS 128 requires a dual presentation of
"basic" and "diluted" EPS on the face of the income statement. Basic EPS is
computed by dividing net income by the weighted average number of shares of
common stock outstanding for the period. Diluted EPS includes the effect, if
any, from the potential exercise or conversion of securities, such as stock
options, which would result in the issuance of shares of common stock. SFAS 128
is required to be adopted for December 31, 1997 year-end financial statements
(earlier application is not permitted). Based upon current facts and
circumstances, the Company does not expect the basic and diluted EPS computed
under SFAS 128 to be materially different than the EPS that would have been
computed under APB 15.
9. Concentrations of Risk
Financial Instruments which potentially subject the Company to concentrations of
credit risk consist principally of accounts receivable. The Company does not
require collateral or other securities to support customer account receivable.
The Company performs periodic reviews of its clients' condition to reduce the
collection risk on accounts receivable.
The Company does not believe significant credit risk exists at September 30,
1997. The Company had one client in the financial services industry which
accounted for approximately 20% of total revenues for the nine months ended
September 30, 1997. No other client accounted for more than 10% of the Company's
revenues or accounts receivable.
10
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
- --------------------------------------------------------------------------------
10. Predecessor Company Financial Information
As noted above, simultaneous with the completion of the initial public offering
in August 1996, the Company acquired the Initial Operating Businesses,
including:
Somar, Inc. ("SOMAR"), provided outsourced telephone-based sales, marketing and
- ----------
customer management services, to clients principally in the insurance, financial
service, telecommunications and consumer products industries.
NBG Services, Inc.. ("NBG"), was a provider of outbound telemarketing data
- -----------------
processing and fulfillment services in the financial services,
telecommunications and high-technology industries.
The Reich Group Companies. ("Reich"), provided telemarketing services to clients
- -------------------------
in the financial services, insurance, telecommunications and publishing
industries.
Telespectrum Inc. and Telespectrum Training Services Inc. ( together "TS: MD"),
- --------------------------------------------------------
provided inbound and outbound telemarketing services and fulfillment to the
high-technology, pharmaceutical and healthcare and consumer industries.
The Response Center, Inc. and The Tab House, Inc. (collectively "TRC") provide
- ------------------------------------------------
custom market research and analysis, principally to clients in the
telecommunications, financial services, pharmaceutical and healthcare
industries.
Harris Direct Marketing, Inc. and Harris Fulfillment Inc. (together, "Harris"),
- --------------------------------------------------------
a regional vertically integrated direct mail and fulfillment organization
provided service to companies in the pharmaceutical, financial services and
insurance industries.
As noted above, the Company did not commence material operations until August
1996 with the acquisition of the businesses and net assets of the Initial
Operating Businesses. The Company's actual results of operations from April 26,
1996 (Inception) through September 30, 1996 include the results of operations
and cash flows related to the Initial Operating Businesses from August 13, 1996
to September 30, 1996. In connection with the initial public offering, the
Initial Operating Businesses were deemed to be predecessor companies to
TeleSpectrum Worldwide Inc. Accordingly, the following historical results of
operations for the periods of July 1, 1996 to August 12, 1996 and January 1,
1996 to August 12, 1996 and statements of cash flows for the period January 1,
1996 to August 12, 1996 are presented below to comply with the historical
interim financial statement requirements of a Form 10-Q. The results of
operations and statements of cash flows are unaudited. However, in the opinion
of management, they reflect all normal and recurring adjustments necessary for a
fair presentation of the interim financial results. These results reflect the
elimination of all intercompany transactions. These results should be read in
conjunction with the more complete financial statements and related footnotes of
the Initial Operating Businesses contained in the Company's Form 10-K for the
period from April 26, 1996 (Inception) to December 31, 1996.
These results are not necessarily indicative of the results to be expected for
any other interim period.
11
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
- --------------------------------------------------------------------------------
10. Predecessor Company Financial Information (continued)
Results of Operations
For the Period July 1, 1996 to August 12, 1996
(unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
SOMAR NBG Reich TS: MD TRC Harris
----- --- ----- ------ --- ------
<S> <C> <C> <C> <C> <C> <C>
Revenues $5,618 $2,387 $3,211 $2,495 $696 $937
----- ----- ----- ----- --- ---
Operating Expenses:
Cost of services 4,518 1,691 1,858 1,684 411 378
Selling, general and administrative 725 256 267 808 223 465
--- --- --- --- --- ---
Total operating expenses 5,243 1,947 2,125 2,492 634 843
----- ----- ----- ----- --- ---
Operating income 375 440 1,086 3 62 94
Interest Income (Expense), net (117) (11) -- (10) 20 (11)
----- ---- -- ---- -- ----
Income before taxes 258 429 1,086 (7) 82 83
Income taxes -- (79) -- -- -- --
-- ---- -- -- -- --
Income $258 $350 $1,086 $(7) $82 $83
=== === ===== === == ==
Pro Forma Information
Historical Income $258 $350 $1,086 $(7) $82 $83
Pro Forma Income Tax (Expense) (96) (143) (443) 3 (33) (37)
---- ----- ----- - ---- ----
Pro Forma Net Income $162 $207 $643 $(4) $49 $46
=== === === === == ==
</TABLE>
12
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
- --------------------------------------------------------------------------------
10. Predecessor Company Financial Information (continued)
Results of Operations
For the Period from January 1, 1996 to August 12, 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
SOMAR NBG Reich TS: MD TRC Harris
----- --- ----- ------ --- ------
<S> <C> <C> <C> <C> <C> <C>
Revenues $26,421 $11,311 $14,558 $10,529 $3,927 $6,304
------ ------ ------ ------ ----- -----
Operating Expenses:
Cost of services 21,406 7,686 8,550 6,974 2,101 3,140
Selling, general and administrative 3,817 1,645 1,466 2,929 1,519 1,986
----- ----- ----- ----- ----- -----
Total operating expenses 25,223 9,331 10,016 9,903 3,620 5,126
------ ----- ------ ----- ----- -----
Operating income (loss) 1,198 1,980 4,542 626 307 1,178
Interest (Expense), net (561) (33) (31) (129) 20 (44)
----- ---- ---- ----- -- ----
Income before taxes 637 1,947 4,511 497 327 1,134
Income taxes -- (79) -- -- -- --
-- ---- -- -- -- --
Income $637 $1,868 $4,511 $497 $327 $1,134
=== ===== ===== === === =====
Pro Forma Information
Historical Income $637 $1,868 $4,511 $497 $327 $1,134
Pro Forma Income Tax (Expense) (237) (765) (1,840) (196) (130) (511)
----- ----- ------- ----- ----- -----
Pro Forma Net Income $400 $1,103 $2,671 $301 $197 $623
=== ===== ===== === === ===
</TABLE>
13
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
- --------------------------------------------------------------------------------
10. Predecessor Company Financial Information (continued)
Statements of Cash Flows
For the Period from January 1, 1996 to August 12, 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
SOMAR NBG Reich TS: MD TRC Harris
----- --- ----- ------ --- ------
<S> <C> <C> <C> <C> <C> <C>
Operating Activities
- --------------------
Net Income $637 $1,868 $4,511 $497 $327 $1,134
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities
Depreciation and amortization 749 273 239 127 43 347
Provision for bad debts -- -- -- 53 -- 36
Changes in operating assets
and liabilities, net 738 (807) (2,215) 292 (547) (715)
--- ----- ------- --- ----- -----
Net cash provided by (used in)
operating activities 2,124 1,334 2,535 969 (177) 802
----- ----- ----- --- ----- ---
Investing Activities
- --------------------
Purchases of property and equipment (828) (126) (935) (2,044) (107) (289)
Advances to stockholder (847) -- -- -- -- --
Advances to affiliates (248) -- -- -- -- --
Other, net -- 45 -- -- 14 --
-- -- -- -- -- --
Net cash used in investing activities (1,923) (81) (935) (2,044) (93) (289)
------- ---- ----- ------- ---- -----
Financing Activities
- --------------------
Net borrowings (repayments) of debt (1,212) (500) (633) (1,344) -- (154)
Payments of capital lease obligations (641) (260) -- -- -- --
Net borrowings on line of credit 2,269 -- 700 3,060 -- --
Net borrowings (repayments) to affiliates (102) -- -- -- -- --
Distributions to stockholder (535) (120) (1,770) -- (798) (1,575)
----- ----- ------- -- ----- -------
Net cash provided by (used in)
financing activities (221) (880) (1,703) 1,716 (798) (1,729)
----- ----- ------- ----- ----- -------
Increase (decrease) in cash and cash
equivalents (20) 373 (103) 641 (1,068) (1,216)
Cash and cash equivalents, beginning of
period 25 700 220 15 1,178 2,919
-- --- --- -- ----- -----
Cash and cash equivalents, end of period $5 $1,073 $117 $656 $110 $1,703
= ===== === === === =====
</TABLE>
14
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Company Background
TeleSpectrum Worldwide Inc. ("TeleSpectrum" or "the Company") was founded in
April 1996 to provide a single source for complete, integrated solutions to
clients' teleservices needs, including but not limited to, business acquisition,
customer activation, customer service, customer retention, consumer affairs,
catalogue sales, help desk services and registration services.
On August 12, 1996, simultaneous with completing its initial public offering,
the Company began material operations with the acquisition of the businesses
conducted by six companies engaged in telemarketing, market research, and direct
mail and fulfillment businesses (collectively, the "Initial Operating
Businesses").
Subsequent to the acquisition of the Initial Operating Businesses, the Company
completed the acquisitions of TARP and PR Response, which were acquired as of
October 1, 1996 and November 1, 1996, respectively (collectively, the "Fourth
Quarter 1996 Acquisitions"). The TARP acquisition expanded the Company's
customer service consulting capabilities and the acquisition of PR Response
added two Canadian call centers.
In March 1997, the Company completed its acquisition of the interactive voice
response division of Voice FX Corporation. The division, renamed TeleSpectrum FX
("FX (IVR)"), provides interactive voice response solutions within the
interactive promotion and direct response marketplace. The Company's results of
operation include those of FX (IVR) as of March 1, 1997.
Services Overview
A summary of the Company's service offerings is as follows:
Telemarketing - The Company generates telemarketing revenue by providing both
business-to-consumer and business-to business outbound telemarketing services -
primarily direct sales activities initiated by the Company on behalf of its
clients.
Customer Care - The Company generates customer care revenue by providing
customer service expertise to its clients. The Company's customer services
expertise include inbound teleservices support, typically through toll-free
telephone numbers, for activities such as responses to clients' customer service
inquiries, catalogue sales and electronic order processing; consulting services,
through its TARP division, to a range of clients, including numerous Fortune 500
companies, that focus on providing innovative design solutions for it's clients'
customer service departments, ranging from the design of a customer service
function, quality reviews and audits of customer service groups' performance, as
well as market research survey capabilities regarding the performance of the
client's customer service capabilities, and integrated interactive voice
response (i.e. "IVR") solutions and capabilities through its FX (IVR) division.
Market Research Revenue - The Company's market research capabilities include
problem conceptualization, program design and data gathering and analyses to
answer clients' marketing questions and suggest further avenues of inquiry.
Direct Mail and Fulfillment - Direct mail services include preparing,
addressing, coordinating, sorting, and mailing materials, in most instances
through the Company's in-house postal facility, to current and potential
customers on behalf of the Company's clients. The Company's fulfillment
services, which also include the storage of client-supplied products and
literature in the Company's warehouse space, involve the filling and mailing of
orders on behalf of the Company's clients.
15
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition (Continued)
Results of Operations
Actual Results of Operations
Actual results of operations for the three and nine months ended September 30,
1997 amounted to a loss of $13.3 million or $0.53 loss per share and a loss of
$11.2 million or $0.44 loss per share, respectively. The Company recorded total
revenue of $45.8 million and $149.6 million for the three and nine months ended
September 30, 1997, respectively.
As noted above, the Company did not commence material operations until August
1996 with the acquisition of the businesses and net assets of the Initial
Operating Businesses. The Company's actual results of operations from April 26,
1996 (Inception) through September 30, 1996 include the revenue, cost of
services, selling, general and administrative expenses, goodwill amortization,
net interest income and income tax expense related to the Initial Operating
Businesses from August 13, 1996 only.
The actual results of operations for the three months ended September 30, 1996
and for the period April 26, 1996 (Inception) to September 30, 1996 amounted to
net income of $1.2 million or $0.07 earnings per share and $1.0 million or $0.07
earnings per share, respectively. The Company recorded total revenue of $17.3
million for both the three months ended September 30, 1996 and for the period
April 26, 1996 (Inception) to September 30, 1996.
Third Quarter 1997 Charges
During the third quarter of 1997 the Company recorded pre-tax charges totaling
$10.8 million, including $3.7 million for the write-down of certain property and
equipment to fair value and the provision for future payments under
non-cancelable lease contracts related to the closing of five call centers and
certain regional operations centers; $0.8 million related to severance and
termination benefits for approximately 48 employees - consisting primarily of
individuals in management, operations and sales functions; $1.3 million for
minimum purchase commitments under various telecommunications services
agreements; $0.9 million to increase the reserve for the allowance for doubtful
accounts; $3.1 million for revisions to estimates of the costs of certain
employee benefit programs and certain other items totaling $1.0 million ("the
third quarter 1997 charges").
The third quarter 1997 charges are included in the results of operations for
both the three and nine months ended September 30, 1997, with $6.8 million as a
component of cost of services expenses and $4.0 million as a component of
selling, general and administrative expenses. The third quarter 1997 charges are
included in the September 30, 1997 consolidated balance sheet as accrued
expenses or accrued compensation except for the write-down of property and
equipment which is included as a component of accumulated depreciation.
The Company has commenced activities necessary to implement the closing of the
call centers and the consolidation of certain operations. Company management
expects that all significant activities under the implementation plan will be
completed by no later than one year from September 30, 1997, with a majority of
these activities being completed within the next six to nine months.
A more detailed discussion of the third quarter 1997 charges is presented below
in the discussions in "Cost of Services" and "Selling, General & Administrative"
expenses for both the three and nine months ended September 30, 1997.
16
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition (Continued)
Results of Operations (continued)
Summary of Actual and Supplemental Pro Forma Results of Operations
As noted above, the Company did not commence material operations until August
1996 with the acquisition of the businesses and net assets of the Initial
Operating Businesses. Accordingly, primarily for purposes of comparing the
results of operations of the Initial Operating Businesses, management has
presented in the table below the consolidated actual (unaudited) results of
operations for the three and nine months ended September 30, 1997 compared to
the combined Supplemental Pro Forma 1 (unaudited) results of operations for the
three and nine months ended September 30, 1996.
<TABLE>
<CAPTION>
Actual and Supplemental Pro Forma /1/
Results of Operations
Dollars in millions
(Unaudited)
-----------------------------------------------------------------------------
Supplemental Pro Supplemental Pro
Actual Forma Actual Forma
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
----------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenues:
- --------
Telemarketing $30.4 $22.2 $107.1 $63.2
Customer Care 10.2 6.0 27.1 14.0
Market Research and Direct Mail and
Fulfillment 5.2 4.4 15.4 13.1
--------------------------------------------------------------------------
Total Revenue 45.8 32.6 149.6 90.3
Cost of services 43.0 22.1 118.6 61.4
Selling, general and administrative 16.0 5.9 36.5 16.7
Amortization of goodwill 2.1 1.5 6.2 4.7
--------------------------------------------------------------------------
61.1 29.5 161.4 82.8
Operating Income (Loss) (15.3) 3.1 (11.8) 7.5
Interest (expense), net (0.7) 0.3 (0.8) 0.2
--------------------------------------------------------------------------
Income (Loss) before taxes (16.0) 3.4 (12.6) 7.7
Income Tax (Expense) Benefit 2.7 (1.4) 1.4 (3.3)
--------------------------------------------------------------------------
Net Income (Loss) $(13.3) $2.0 $(11.2) $4.4
==========================================================================
</TABLE>
- ------------------------
/1/ The Supplemental Pro Forma results of operations include only the results of
the Initial Operating Businesses for the three and nine months ended September
30, 1996 and exclude the results of operations of the Fourth Quarter 1996
Acquisitions and FX (IVR).
17
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition (Continued)
Results of Operations (continued)
Comparison of the Actual results of operations for the three months ended
- -------------------------------------------------------------------------
September 30, 1997 to the Supplemental Pro Forma results of operations for the
- ------------------------------------------------------------------------------
three months ended September 30, 1996.
- -------------------------------------
Revenue
Total revenue for the three months ended September 30, 1997 amounted to $45.8
million, an increase of $13.2 million or 40% as compared to total revenue of
$32.6 million for the three months ended September 30, 1996. Of the total
increase, $12.4 million or 94%, was attributable to the aggregate increases in
Telemarketing and Customer Care revenue. This period over period increase in
aggregate Telemarketing and Customer Care revenue was driven by increased
calling hours and volumes. The Company's ability to service the increase in
calling hours and volumes resulted from the significant capital investment in
both new call center capacity and capital investment in technology upgrades and
capacity enhancements to existing call centers (See Liquidity and Capital
Resources for a discussion of the capital investment program).
In terms of the number of workstations and call centers, the Company currently
operates approximately 3,600 workstations in 27 call centers as compared to the
same period of the prior year when the Initial Operating Businesses operated (on
a combined basis) an estimated 1,500 workstations in 19 call centers. A
discussion of each significant revenue component is presented below.
Telemarketing Revenue - Telemarketing revenue of $30.4 million for the three
months ended September 30, 1997 accounted for 66% of the Company's total revenue
for the three month period ended September 30, 1997 and represents an increase
of $8.2 million or 37% when compared to telemarketing revenue of $22.2 million
for the same prior year period. The increase in telemarketing revenues is
principally attributable to increased calling volume and hours of production as
a result of increased demand from new and existing clients.
Customer Care Revenue - Customer care revenue of $10.2 million for the three
months ended September 30, 1997 accounted for 22% of total revenue for the three
months ended September 30, 1997 and represents an increase of $4.2 million or
70% as compared to customer care revenue of $6.0 million for the same prior year
period. This increase resulted from increased volumes from new and existing
clients and the addition of revenue from TARP and FX (IVR). The Company acquired
the TARP and FX (IVR) businesses as of October 1, 1996 and March 1, 1997,
respectively. As such, TARP and FX (IVR) are not part of the Initial Operating
Businesses and the related revenue is therefore not included in the Supplemental
Pro Forma results of operations..
Market Research and Direct Mail and Fulfillment Revenue - Market Research and
Direct Mail and Fulfillment revenue for the three months ended September 30,
1997 amounted to $5.2 million and represents an increase of $0.8 million or 18%
over the aggregate revenues of $4.4 million for the same prior year period. This
increase is attributable to increased demand for these services.
18
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition (Continued)
Results of Operations (continued)
Comparison of the Actual results of operations for the three months ended
- -------------------------------------------------------------------------
September 30, 1997 to the Supplemental Pro Forma results of operations for the
- ------------------------------------------------------------------------------
three months ended September 30, 1996. (Continued)
- --------------------------------------
Operating Expenses
Aggregate operating expenses, excluding the amortization of goodwill, for the
three months ended September 30, 1997 amounted to $59.0 million, an increase of
$31.0 million or 111% over the aggregate expenses of $28.0 million for same
prior year period. Absent the $10.8 million of third quarter 1997 charges,
aggregate operating expenses, excluding goodwill amortization, for the three
months ended September 30, 1997 would have increased approximately $20.2 million
or 72% when compared to the same prior year period.
Cost of Services
Cost of services expenses amounted to $43.0 million for the three months ended
September 30, 1997, an increase of $20.9 million or 95% when compared to cost of
services expenses of $22.1 million for the same prior year period. As a
percentage of total revenues, cost of services expenses were 94% and 68% for the
three months ended September 30, 1997 and 1996, respectively.
As noted above, cost of services expenses for the three months ended September
30, 1997 include $6.8 million related to the cost of service component of the
third quarter 1997 charges, including $2.9 million for the write-down of certain
property and equipment to fair value and the provision for future payments under
non-cancelable lease contracts related to the closing of five call centers and
certain regional operations centers; $0.4 million related to employee severance
agreements; $1.3 million associated with amounts related to minimum commitments
under various telecommunication service contracts; $1.6 million for revisions to
estimates of the costs of certain employee benefit programs and certain other
items totaling $0.6.
Cost of services, excluding the $6.8 million of third quarter 1997 charges,
would have increased $14.1 million or 64% for the three months ended September
30, 1997 when compared to the same period of the prior year. As a percentage of
revenue, cost of services expenses, without the third quarter 1997 charges,
would have been 79%. This increase in cost of services expenses as a percentage
of revenue, as compared to the same period of the prior year, resulted primarily
from the expansion of the company's productive capacity, which in turn resulted
in the lower utilization of telemarketing personnel and facilities and the
acceptance of less profitable telemarketing contracts to utilize capacity.
19
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition (Continued)
Results of Operations (continued)
Comparison of the Actual results of operations for the three months ended
- -------------------------------------------------------------------------
September 30, 1997 to the Supplemental Pro Forma results of operations for the
- ------------------------------------------------------------------------------
three months ended September 30, 1996 (Continued)
- -------------------------------------
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses amounted to $16.0 million
for the three months ended September 30, 1997, an increase of $10.1 million or
171% when compared to SG&A expenses of $5.9 million for the same prior year
period. As a percentage of total revenue, SG&A expenses were 35% and 18% for the
three months ended September 30, 1997 and 1996, respectively.
As noted above, SG&A expenses for the three months ended September 30, 1997
include $4.0 million related to the SG&A component of the third quarter 1997
charges, including $0.8 million for the write-down of certain property and
equipment to fair value related to the closing of five call centers and certain
regional operations centers; $0.4 million related to employee severance
agreements; $0.9 million associated with an increase to the reserve for the
allowance for doubtful accounts; $1.5 million for revisions to estimates of the
costs of certain employee benefit programs and certain other items totaling $0.4
million.
Selling, general and administrative expenses, excluding the $4.0 million of the
third quarter 1997 charges, would have increased $6.1 million or 103% for the
three months ended September 30, 1997 when compared to the same prior year
period. As a percentage of revenue, SG&A expenses, without the third quarter
1997 charges, would have been 26%. This increase in SG&A expenses as a
percentage of revenue, as compared to the same period of the prior year,
primarily resulted from the expansion of the company's administrative
infrastructure, combined with additional overhead expenses associated with
operating as a public company.
Amortization of Goodwill
The Company has recorded the aggregate purchase price in excess of the estimated
fair value of the net assets acquired related to the Initial Operating
Businesses, TARP, PR Response, and FX (IVR) , as goodwill. These amounts are
being amortized on a straight-line basis over a twenty five year period.
Amortization of goodwill expense for the three months ended September 30, 1997
amounted to $2.1 million and represents three months of expense related to the
amortization of goodwill associated with the purchases of the Initial Operating
Businesses, TARP, PR Response, and FX (IVR). Amortization of goodwill expense
for the three months ended September 30, 1996 represents an estimate of the
three months of expense related to the amortization of goodwill associated with
the purchase of the Initial Operating Businesses only. As a percentage of
revenue, amortization of goodwill expense was 5% during both the three months
ended September 30, 1997 and September 30, 1996.
The policy of the Company is to continually evaluate whether later events and
circumstances have occurred that indicate whether or not the unamortized balance
of goodwill may be recoverable or the remaining amortization period may warrant
revision. If factors indicate that goodwill should be evaluated for possible
impairment, the Company will use an estimate of the related undiscounted future
cash flows over the remaining amortization period of goodwill in measuring
whether the unamortized balance of goodwill is recoverable. If the amount of
such undiscounted future cash flows is less that the unamortized balance of
goodwill, then the unamortized balance of goodwill will be written down to the
amount of the undiscounted future cash flows. The Company has reviewed the
unamortized balance of goodwill to determine whether such amount is recoverable.
The Company believes that there are no material impairments to the unamortized
balance of goodwill at September 30, 1997. The Company will continue to review
the recoverability of the unamortized balance of goodwill, taking into
consideration future results of operations and future cash flows expected to
result from the use of this asset. If the amount of the undiscounted future cash
flows is less than the unamortized balance of goodwill, then an impairment
charge will be recorded.
20
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition (Continued)
Results of Operations (continued)
Comparison of the Actual results of operations for the nine months ended
- ------------------------------------------------------------------------
September 30, 1997 to the Supplemental Pro Forma results of operations for the
- ------------------------------------------------------------------------------
nine months ended September 30, 1996.
- -------------------------------------
Revenue
Total revenue for the nine months ended September 30, 1997 amounted to $149.6
million, an increase of $59.3 million or 66% as compared to total revenue of
$90.3 million for the nine months ended September 30, 1996. Of this total
increase, $57.0 million or 96% was attributable to the aggregate increase in
Telemarketing and Customer Care revenue. This period over period increase in
aggregate Telemarketing and Customer Care revenue was driven by increased
calling hours and volumes. The Company's ability to service the increase in
calling hours and volumes resulted from the significant capital investment in
new call center capacity and capital investment in technology upgrades and
capacity enhancements to existing call centers (See Liquidity and Capital
Resources for a discussion of the capital investment program).
In terms of the number of workstations and call centers, the Company currently
operates approximately 3,600 workstations in 27 call centers as compared to the
same period of the prior year when the Initial Operating Businesses operated (on
a combined basis) an estimated 1,500 workstations in 19 call centers. A
discussion of each significant revenue component is presented below.
Telemarketing Revenue - Telemarketing revenue of $107.1 million for the nine
months ended September 30, 1997 accounted for 72% of the Company's total revenue
for the nine month period ended September 30, 1997 and represents an increase of
$43.9 million or 69% when compared to telemarketing revenue of $63.2 million for
the same period of the prior year. The increase in telemarketing revenues is
principally attributable to increased calling volume and hours of production as
a result of increased demand from new and existing clients.
Customer Care Revenue - Customer care revenue of $27.1 million for the nine
months ended September 30, 1997 accounted for 18% of total revenue for the nine
months ended September 30, 1997 and represents an increase of $13.1 million or
94% as compared to customer care revenue of $14.0 million for the same prior
year period. This increase resulted from increased volumes from new and existing
clients and the addition of revenue from TARP and FX (IVR). The Company acquired
the TARP and FX (IVR) businesses as of October 1, 1996 and March 1, 1997,
respectively. As such, TARP and FX (IVR) are not part of the Initial Operating
Businesses and the related revenue is therefore not included in the Supplemental
Pro Forma results of operations..
Market Research and Direct Mail and Fulfillment Revenue - Market Research and
Direct Mail and Fulfillment revenue for the nine months ended September 30, 1997
amounted to $15.4 million and represents an increase of $2.3 million or 18% over
the aggregate revenues of $13.1 million for same prior year period. This
increase is attributable to increased demand for these services.
21
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition (Continued)
Results of Operations (continued)
Comparison of the Actual results of operations for the nine months ended
- ------------------------------------------------------------------------
September 30, 1997 to the Supplemental Pro Forma results of operations for the
- ------------------------------------------------------------------------------
nine months ended September 30, 1996. (Continued)
- -------------------------------------
Operating Expenses
Aggregate operating expenses, excluding the amortization of goodwill, for the
nine months ended September 30, 1997 amounted to $155.1 million, an increase of
$77.0 million or 99% over the aggregate expenses of $78.1 million for the same
period of the prior year. Absent the $10.8 million of third quarter 1997
charges, aggregate operating expenses, excluding goodwill amortization, for the
nine months ended September 30, 1997 would have increased approximately $66.2
million or 85% when compared to the same prior year period.
Cost of Services
Cost of Services expenses amounted to $118.6 million for the nine months ended
September 30, 1997, an increase of $57.2 million or 93% when compared to cost of
services expenses of $61.4 million for the same prior year period. As a
percentage of total revenues, cost of services expenses were 79% and 68% for the
nine months ended September 30, 1997 and 1996, respectively.
As noted above, cost of services expenses for the three months ended September
30, 1997 include $6.8 million related to the cost of service component of the
third quarter 1997 charges, including $2.9 million for the write-down of certain
property and equipment to fair value and the provision for future payments under
non-cancelable lease contracts related to the closing of five call centers and
certain regional operations centers; $0.4 million related to employee severance
agreements; $1.3 million associated with amounts related to minimum commitments
under various telecommunication service contracts; $1.6 million for revisions to
estimates of the costs of certain employee benefit programs and certain other
items totaling $0.6.
Cost of services, excluding the $6.8 million of the third quarter 1997 charges,
would have increased $50.4 million or 82% for the nine months ended September
30, 1997 when compared to the same prior year period. As a percentage of
revenue, cost of services expenses, without the third quarter 1997 charges,
would have been 75%. This increase in cost of services expenses as a percentage
of revenue, as compared to the same period of the prior year, resulted primarily
from the expansion of the company's productive capacity, which in turn resulted
in the lower utilization of telemarketing personnel and facilities and the
acceptance of less profitable telemarketing contracts to utilize capacity.
22
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition (Continued)
Results of Operations (continued)
Comparison of the Actual results of operations for the nine months ended
- ------------------------------------------------------------------------
September 30, 1997 to the Supplemental Pro Forma results of operations for the
- ------------------------------------------------------------------------------
nine months ended September 30, 1996. (Continued)
- -------------------------------------
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses amounted to $36.5 million,
an increase of $19.8 million or 119% when compared to SG&A expenses of $16.7
million for the same prior year period. As a percentage of total revenue, SG&A
expenses were 24% and 18% for the nine months ended September 30, 1997 and 1996,
respectively.
As noted above, SG&A expenses for the three months ended September 30, 1997
include $4.0 million related to the SG&A component of the third quarter 1997
charges, including $0.8 million for the write-down of certain property and
equipment to fair value related to the closing of five call centers and certain
regional operations centers; $0.4 million related to employee severance
agreements; $0.9 million associated with an increase to the reserve for the
allowance for doubtful accounts; $1.5 million for revisions to estimates of the
costs of certain employee benefit programs and certain other items totaling $0.4
million.
Selling, general and administrative expenses, without the $4.0 million of the
SG&A component of the third quarter 1997 charges, would have increased $15.8
million or 95% for the nine months ended September 30, 1997 when compared to the
same prior year period. As a percentage of revenue, SG&A expenses, without the
third quarter 1997 charges, would have been 22%. The increase in SG&A expenses
for the nine months ended September 30, 1997, as a percentage of revenue, as
compared to the same period of the prior year, primarily resulted from the
expansion of the company's administrative infrastructure, combined with
additional overhead expenses associated with operating as a public company.
Amortization of Goodwill
The Company has recorded the aggregate purchase price in excess of the estimated
fair value of the net assets acquired related to the Initial Operating
Businesses, TARP, PR Response, and FX (IVR) , as goodwill. These amounts are
being amortized on a straight-line basis over a twenty five year period.
Amortization of goodwill expense for the nine months ended September 30, 1997
amounted to $6.2 million and represents nine months of expense related to the
amortization of goodwill associated with the purchases of the Initial Operating
Businesses, TARP, and PR Response, plus seven months of amortization of goodwill
expense related to the FX (IVR) acquisition. Amortization of goodwill expense
for the nine months ended September 30, 1996 represents an estimate of the nine
months of expense related to the to the amortization of goodwill associated with
the purchase of the Initial Operating Businesses only. As a percentage of
revenue, amortization expense decreased to 4% from 5% during the nine months
ended September 30, 1997 when compared with the nine months ended September 30,
1996. The decrease as a percentage of revenue was principally the result of the
substantial revenue growth period over period.
The policy of the Company is to continually evaluate whether later events and
circumstances have occurred that indicate whether or not the unamortized balance
of goodwill may be recoverable or the remaining amortization period may warrant
revision. If factors indicate that goodwill should be evaluated for possible
impairment, the Company will use an estimate of the related undiscounted future
cash flows over the remaining amortization period of goodwill in measuring
whether the unamortized balance of goodwill is recoverable. If the amount of
such undiscounted future cash flows is less that the unamortized balance of
goodwill, then the unamortized balance of goodwill will be written down to the
amount of the undiscounted future cash flows. The Company has reviewed the
unamortized balance of goodwill to determine whether such amount is recoverable.
The Company believes that there are no material impairments to the unamortized
balance of goodwill at September 30, 1997. The Company will continue to review
the recoverability of the unamortized balance of goodwill, taking into
consideration future results of operations and future cash flows expected to
result from the use of this asset. If the amount of the undiscounted future cash
flows is less than the unamortized balance of goodwill, then an impairment
charge will be recorded.
23
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition (Continued)
Results of Operations (continued)
Other Information
- -----------------
Results of Operations Risk Factors
While the Company expects to be able to increase its capacity utilization,
obtain and maintain higher revenue per hour business, maintain its relationships
with existing clients, obtain new clients, manage its costs effectively,
continue to grow its revenues, and return to profitability, there can be no
assurance that it will be able to meet any or all of these objectives.
The Company's agreements with its clients generally do not assure that the
Company will achieve a specific level of revenue and generally are terminable by
the clients on relatively short notice. Additionally, the amount of revenue the
Company generates from a particular client is dependent upon a number of
factors, including, the ability of the Company to achieve marketing and sales
results required by the client and the results achieved by the Company as
compared to both the clients' in-house operations and/or other competing
out-source service providers. In addition to these factors noted above, numerous
agreements with its clients are also based on actual sales achieved.
Accordingly, the ability of the Company to achieve its desired results of
operations is also contingent upon its telephone sales representatives being
able to effectively and efficiently market the clients' products as well as the
quality of the lists of prospective customers provided by the Company's clients.
The Company has completed a systematic review of its costs and organizational
structure in an effort to identify opportunities for cost reduction and
elimination. In this regard, the Company has begun to implement a plan whereby
the strategic purchasing and information technologies functions are being
located in centralized Company facilities. The Company expects that the
implementation of the cost reduction opportunities and the centralization
initiative will reduce its overhead cost structure. While the Company expects to
be able to achieve these cost reductions, there can be no assurance that it will
be able to successfully implement any or all of the cost reduction opportunities
and the centralization initiatives described above. (See "Forward-Looking
Statements" for a discussion of these and other risk factors that could
negatively impact the Company's ability to achieve it's desired results of
operations.)
Quarterly Results and Seasonality
The Company's results of operations in any single interim period should not be
viewed as an indication of future results of operations. The Company has in the
past and may again in the future experience quarterly variations in revenue and
operating profitability as a result of the timing of its clients' marketing
campaigns and customer service programs, the timing of additional selling,
general and administrative expenses incurred to acquire and support such new
business, and changes in the Company's revenue mix among its various service
offerings. While the effects of seasonality on the Company's business are offset
by its ability to add new clients and / or new programs for existing clients,
the Company's business volumes tend to decrease in the first and third quarters
of its fiscal year due to reduced levels of clients' marketing programs which
are typically slower in the post-holiday and summer months, respectively. There
can be no assurance that the Company will be able to predict or compensate for
any such seasonal downturns.
24
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition (Continued)
Liquidity and Capital Resources
<TABLE>
<CAPTION>
Period From
Nine Months April 26, 1996
Dollars in Millions Ended (Inception) to
Cash Flows Provided By (Used In): September 30, 1997 September 30, 1996
- --------------------------------- ------------------ ------------------
<S> <C> <C>
Operating Activities $(3.4) $3.0
Investing Activities (62.6) (96.8)
Financing Activities 35.3 151.7
</TABLE>
Operating Activities
During the nine months ended September 30, 1997, the Company used $3.4 million
to fund operations, principally related to the funding of working capital
requirements.
As noted above, the Company did not commence material operations until August
1996 with the acquisition of the businesses and net assets of the Initial
Operating Businesses. The Company's actual results of operations from April 26,
1996 (Inception) through September 30, 1996 include those of the Initial
Operating Businesses from August 13, 1996 only. During the period April 26, 1996
(Inception) to September 30, 1996, the Company generated $3.0 million from
operating activities, principally from profitable operations and a positive cash
flow from working capital related to the timing of the payment of certain
operational expenses.
Investing Activities
During the nine months ended September 30, 1997, the Company used $62.6 million
in investing activities, summarized as follows:
Purchases of Property and Equipment - During the nine months ended September 30,
1997, purchases of property and equipment were $24.3 million, including $10.6
million associated with the development of six new call centers, $9.1 million
related to capital investments in technology upgrades and capacity enhancements
to existing call centers, $2.5 million related to capital investments for the
Consulting, Market Research, Direct Mail and Fulfillment and FX (IVR) businesses
and $2.1 million related to capital investments associated with development of
and enhancement to production and administrative infrastructure projects. As a
result of the call center closings and the consolidation of facilities discussed
above, the Company does not expect to make any additional investment in call
center expansion for the remainder of 1997. During the period April 26, 1996
(Inception) to September 30, 1996 the company used $5.5 million for the purchase
of property and equipment, associated with the commencement of the Company's
call center expansion and centralization initiative.
Acquisitions of Businesses - During the nine months ended September 30, 1997,
the Company used $28.5 million for payments related to the acquisition of the
Initial Operating Business, including the payment of $25.1 million in settlement
of an earn-out obligation under the terms of one of the purchase agreements,
$1.2 million related to purchase price adjustments under the terms of one of the
purchase agreements, $1.8 million related to accrued separation costs for
certain former owners, and $0.4 million of other payments. Additionally, during
the nine months ended September 30, 1997, the Company used $5.3 million for the
acquisition of FX (IVR). During the period April 26, 1996 (Inception) to
September 30, 1996 the company used $91.4 million to fund the cash portion of
its August 1996 acquisition of the Initial Operating Businesses.
Investment in Business Held for Sale - During the nine months ended September
30, 1997, the Company used $4.5 million to invest in the ownership of FX Direct,
Inc. The Company's net cash investment in FX Direct is included in the September
30, 1997 Balance Sheet as an investment in business held for sale. As noted
above, this investment was sold in October 1997 generating net cash proceeds of
approximately $6.3 million. During October 1997, the Company used the proceeds
from the sale to repay borrowings on the credit facility and recorded a pre-tax
gain of approximately $1.8 million.
25
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition (Continued)
Liquidity and Capital Resources (Continued)
Financing Activities
During the nine months ended September 30, 1997, the Company obtained net cash
from financing activities of $35.3 million, including $35.9 million of net
proceeds from borrowings under its credit facility discussed below and $0.7
million under other long-term debt. The Company used $1.3 million to pay
principal related to other debt and capital lease obligations.
During the period April 26, 1996 (Inception) to September 30, 1996 the Company
obtained net cash from financing activities of $151.7 million, including $162.0
million related to the Company's August 1996 initial public offering and $2.1
million related to proceeds of the Company's initial capitalization. During this
period, the Company used $12.4 million to pay principal related to other debt
and capital lease obligations
Secured Credit Facility
Under the terms of the Company's secured credit facility ("the credit
facility"), which was most recently amended in November 1997, the Company can
borrow up to the lesser of $35.0 million or an amount that is determined as the
sum of (i) 80% of accounts receivable aged 90 days or less plus (ii) 50% of
unbilled accounts receivable plus (iii) a $5.0 million "over-advance"
adjustment. The $5.0 million over-advance adjustment decreases ratably by
$625,000 per quarter, with the first decrement occurring for the quarter ended
March 31, 1998.
Borrowings can be used for working capital requirements and certain other
limited purposes. The credit facility is secured by accounts receivable,
equipment, and other assets of the Company and contains financial covenants
including the maintenance of certain financial ratios, specified minimum levels
of working capital and net worth, a maximum level of purchases of fixed assets
and restrictions on the payment of distributions, among others.
Advances under the credit facility bear interest at optional borrowing rates of
either the then current prime rate plus 0.25% or the LIBOR rate plus a margin
that ranges from 1.0% to 3.0%, depending upon certain conditions specified in
the credit facility agreement. At September 30, 1997, the weighted average
interest rate of borrowings under the credit facility was 7.1%. The Company
expects its cost of borrowings under the credit facility to increase as a result
of the higher borrowing rates included in the most recent amendments to the
credit facility. The credit facility terminates in January 2000. As noted above,
the investment in the business held for sale was sold in October 1997 generating
net cash proceeds of approximately $6.3 million. These proceeds were used to
repay outstanding borrowings on the credit facility.
The Company believes that future cash to be generated from operations and the
cash available under its credit facility are sufficient to meet its on-going
operating requirements.
Forward-Looking Statements
Statements contained in Management's Discussion and Analysis of Financial
Results and Financial Condition and elsewhere in this Form 10-Q, regarding
capacity utilization rate, new clients, expected revenues and growth are
forward-looking statements that involve substantial risk and uncertainty. For
these statements the Company claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1996. The following are factors that could cause the Company's actual
results to differ materially from those expressed or implied by such
forward-looking statements: agreements with its existing clients generally do
not assure a specific level or duration of revenue, revenue assumptions may not
be realized, the growth and profitability assumptions assume the addition of new
clients not currently identified, and contracts may not be realized and capacity
utilization rate may be adversely affected due to competitors' actions or
clients" requirements.
26
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
TeleSpectrum Worldwide Inc.
--------------------------------------
(Registrant)
Date: November 14, 1997 \s\ Richard C. Schwenk, Jr.
----------------- --------------------------------------
Richard C. Schwenk, Jr.
TeleSpectrum Worldwide Inc.
Executive Vice President and
Chief Financial Officer
27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TELESPECTRUM
WORLDWIDE INC.'S 1997 THIRD QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-Q FILING.
</LEGEND>
<MULTIPLIER> 1
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 APR-12-1996
<PERIOD-END> SEP-30-1997 SEP-30-1996
<CASH> 0 30,715
<SECURITIES> 0 0
<RECEIVABLES> 42,861 32,956
<ALLOWANCES> 1,462 583
<INVENTORY> 0 0
<CURRENT-ASSETS> 47,302 66,721
<PP&E> 56,155 32,081
<DEPRECIATION> 10,156 1,910
<TOTAL-ASSETS> 300,404 299,055
<CURRENT-LIABILITIES> 26,424 48,445
<BONDS> 39,992 4,199
0 0
0 0
<COMMON> 252 252
<OTHER-SE> 228,938 240,259
<TOTAL-LIABILITY-AND-EQUITY> 300,404 299,055
<SALES> 149,576 17,295
<TOTAL-REVENUES> 149,576 17,295
<CGS> 0 0
<TOTAL-COSTS> 161,367 16,022
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 810 (321)
<INCOME-PRETAX> (12,601) 1,594
<INCOME-TAX> (1,400) 638
<INCOME-CONTINUING> (11,201) 956
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (11,201) 956
<EPS-PRIMARY> (0.44) 0.07
<EPS-DILUTED> (0.44) 0.07
</TABLE>
