<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 June 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
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TeleSpectrum Worldwide Inc.
---------------------------
(Exact name of registrant as specified in its charter)
Delaware 23-2845501
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(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 August 12, 1997 was 25,210,984.
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TeleSpectrum Worldwide Inc.
<TABLE>
<CAPTION>
Table of Contents
-----------------
Item No. Page
- -------- ----
PART I -- FINANCIAL INFORMATION
<S> <C>
1. Financial Statements (unaudited):
Condensed Consolidated Results of Operations
For the Three Months Ended June 30, 1997 and
For the Period from April 26, 1996 (Inception) to June 30, 1996 3
Condensed Consolidated Results of Operations
For the Six Months Ended June 30, 1997 and
For the period from April 26, 1996 (Inception) to June 30, 1996 4
Condensed Consolidated Balance Sheets
June 30, 1997 and December 31, 1996 5
Condensed Consolidated Statement of Cash Flows
For the Six Months Ended June 30, 1997 and
For the Period from April 26, 1996 (Inception) to June 30, 1996 6
Notes to Condensed Consolidated Financial Statements 7
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
PART II - OTHER INFORMATION 19
</TABLE>
2
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Condensed Consolidated Results of Operations
(Unaudited)
(Dollars in Thousands -- Except Per Share Amounts)
<TABLE>
<CAPTION>
Period From
Three Months April 26, 1996
Ended (Inception) to
June 30, 1997 June 30, 1996
------------- --------------
<S> <C> <C>
Revenues $ 54,622 $ --
Operating Expenses:
Cost of services 41,564 --
Selling, general and administrative 11,584 419
Amortization of goodwill 2,084 --
--------- ---------
Total operating expenses 55,232 419
--------- ---------
Operating income (loss) (610) (419)
Interest (Expense), net (391) --
--------- ---------
(Loss) before tax benefit (1,001) (419)
Income Tax Benefit 383 --
(Loss) $ (618) $ (419)
========= =========
(Loss) Per Share $ (0.02) $ (0.05)
========= =========
Weighted average number of common shares and
equivalent shares outstanding 25,211 8,510
========= =========
</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
Six Months April 26, 1996
Ended (Inception) to
June 30, 1997 June 30, 1996
------------- --------------
<S> <C> <C>
Revenues $ 103,776 $ --
Operating Expenses:
Cost of services 75,646 --
Selling, general and administrative 20,455 419
Amortization of goodwill 4,132 -
--------- ---------
Total operating expenses 100,233 419
--------- ---------
Operating income (loss) 3,543 (419)
Interest (Expense), net (174) --
--------- ---------
Income (Loss) before tax (expense) 3,369 (419)
Income Tax (Expense) (1,289) --
--------- ---------
Net Income (Loss) $ 2,080 $ (419)
========= =========
Net Income (Loss) Per Share $ 0.08 $ (0.05)
========= =========
Weighted average number of common shares and
equivalent shares outstanding 25,261 8,510
========= =========
</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>
June 30, 1997 December 31, 1996
------------- -----------------
(unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ -- $ 30,715
Accounts receivable, net 48,237 32,373
Prepaid expenses and other 3,712 3,633
--------------- ---------------
Total current assets 51,949 66,721
Property and Equipment, net 45,706 30,171
Goodwill, net 205,760 200,187
Other Assets 3,796 1,976
--------------- ---------------
Total Assets $ 307,211 $ 299,055
============== ==============
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term debt $ 1,525 $ 1,768
Accounts payable 3,389 6,185
Accrued expenses 9,040 5,042
Accrued compensation 4,959 3,980
Notes payable to seller's of businesses 452 27,005
Deferred revenue 5,407 2,300
Other current liabilities 2,775 2,165
--------------- ---------------
Total current liabilities 27,547 48,445
--------------- ---------------
Deferred Income Taxes 777 655
--------------- ---------------
Secured Credit Facility Debt 28,600 --
--------------- ---------------
Long-term Debt 4,333 4,199
--------------- ---------------
Acquisition Related Liabilities 2,756 4,810
--------------- ---------------
Other Noncurrent Liabilities 659 435
--------------- ---------------
Stockholder's 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
Retained earnings 5,730 3,650
Cumulative translation adjustment (121) (69)
---------------- ----------------
242,539 240,511
--------------- ---------------
Total Liabilities and Stockholders' Equity $ 307,211 $ 299,055
============== ==============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Condensed Consolidated Statement of Cash Flows
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Period From
April 26, 1996
Six Months Ended (Inception) To
June 30, 1997 June 30, 1996
------------- -------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ 2,080 $ (419)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 3,746 --
Amortization of goodwill 4,132 --
Provision for bad debts 176 --
Provision for deferred taxes 122 --
Other Items, net 191 --
Changes in operating assets and liabilities-
Accounts receivable (15,507) --
Prepaid expenses and other (1,112) --
Accounts payable (2,984) 222
Accrued compensation 732 --
Other accrued expenses 1,708 216
Deferred revenue 2,030 --
Other liabilities (230) --
------------------ ---------------
Net cash provided by (used in) operating activities (4,916) 19
------------------ ---------------
Cash Flows From Investing Activities:
Purchases of property and equipment (16,785) (22)
Payments related to acquisition of Initial Operating Businesses (27,920) (2,107)
Acquisition of TeleSpectrum FX (5,327) --
Acquisition of FX Direct, Inc. (4,211) --
------------------ ---------------
Net cash used in investing activities (54,243) (2,129)
------------------ ----------------
Cash Flows From Financing Activities:
Capital contribution received -- 2,110
Borrowings on credit facility 28,600 --
Borrowings of long-term debt 720 --
Payments on long-term debt (208) --
Payments on capital lease obligations (668) --
------------------ ---------------
Net cash provided by financing activities 28,444 2,110
----------------- ---------------
Decrease in cash and cash equivalents (30,715) --
Cash and cash equivalents, beginning of period 30,715 --
----------------- ---------------
Cash and cash equivalents, end of period $ -- $ --
================= ===============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
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 the businesses
(through 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 care 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 (and referred
to hereafter as) TeleSpectrum FX, provides interactive voice response solutions
within the interactive promotion and direct response marketplace. The effective
date of the TeleSpectrum FX acquisition was March 1, 1997.
In June 1997, the Company completed its acquisition of the business and
substantially all of the assets of FX Direct, Inc. This new division of the
Company (referred to as "FX Direct") creates, develops and implements product
sample programs, fulfillment services and direct mail and marketing programs.
The effective date of the FX Direct acquisition was June 30, 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 June 30, 1997, the Company operated 31
call centers with approximately 3,800 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, but does not include all disclosures required by generally
accepted accounting principles. In the opinion of management, these financial
statements include all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the results of operations, financial
position and cash flows. 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 such 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>
3. 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 six months ended June 30, 1997. 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.
4. Debt
The Company maintains a $70.0 million secured credit facility. The credit
facility can be used for certain acquisitions, the satisfaction of indebtedness,
working capital requirements, and certain other 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 1.00% to 1.75%, depending upon certain conditions specified in
the credit facility agreement. At June 30, 1997, the weighted average interest
rate of borrowings under the credit facility was 7.0%. The credit facility
terminates in January 2001
8
<PAGE>
5. Supplemental Cash Flow Information
During the six months ended June 30, 1997, the Company paid $344,000 of interest
expense (net of capitalized interest expense of $34,000) and $1,180,000 of
income taxes.
At June 30, 1997, the Condensed Consolidated Balance Sheet includes
approximately $3,000,000 of accrued property and equipment purchases.
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 $50,000 through June 30, 1997.
In connection with the TeleSpectrum FX acquisition, the financial statements
reflect acquired net assets of approximately $82,000, consisting primarily of
$327,000 of accounts receivable, $176,000 of property and equipment and $6,000
of other assets and the assumption of $427,000 of accounts payable and accrued
expenses. The $5,245,000 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.
In connection with the FX Direct, Inc. acquisition, the financial statements
reflect net liabilities assumed of approximately $559,000, consisting primarily
of $233,000 of accounts receivable, $475,000 of prepaid expenses, $280,000 of
property and equipment and $34,000 of other assets and the assumption of
$504,000 of accounts payable and accrued expenses, and $1,077,000 of deferred
revenue. The $4,770,000 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.
In May 1996 CRW Financial, Inc. (CRW) made an initial capital contribution to
the Company of $2.1 million. 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 $18.7 million of both the CRW Lender Warrants and CRW
Management Warrants was recorded as deferred acquisition costs and additional
paid-in capital in the June 30, 1996 consolidated balance sheet.
6. Pro Forma Combined Summary Results of Operation
The following table summarizes the unaudited pro forma combined results of
operations for the six months ended June 30, 1996, assuming the Initial
Operating Business and TARP had been acquired on January 1, 1996 (for purposes
of this disclosure, PR Response, TeleSpectrum FX and FX Direct, Inc. are not
deemed material):
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1996
(unaudited)
-----------
<S> <C>
Revenues $ 62,906
Operating income $ 5,468
Net Income $ 3,070
Earnings Per Share $ 0.14
</TABLE>
9
<PAGE>
7. 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 receivables. 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 June 30, 1997.
The Company had one customer which accounted for approximately 25% of total
revenues for the six months ended June 30, 1997 and 21% of total accounts
receivable at June 30, 1997. No other customer accounted for more than 10% of
the Company's revenues or accounts receivable.
8. 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.
The Initial Operating Businesses' results of operations for the three and six
months ended June 30, 1996 and statement of cash flows for the six months ended
June 30, 1996 are presented below. These results 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
are not necessarily indicative of the results to be expected for any other
interim period.
These results should be read in conjunction with the more complete financial
statements 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.
10
<PAGE>
8. Predecessor Company Financial Information (continued)
Results of Operations
Three Months Ended June 30, 1996
(unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
SOMAR NBG Reich TS: MD TRC Harris
----- --- ----- ------ --- ------
<S> <C> <C> <C> <C> <C> <C>
Revenues $11,529 $4,964 $5,882 $4,309 $1,802 $2,750
Operating Expenses:
Cost of services 8,957 3,243 3,527 2,807 904 1,438
Selling, general and administrative 1,538 758 629 1,170 421 753
----- --- --- ----- --- ---
Total operating expenses 10,495 4,001 4,156 3,977 1,325 2,191
------ ----- ----- ----- ----- -----
Operating income 1,034 963 1,726 332 477 559
Interest (Expense), net (231) (7) (20) (76) -- (21)
----- --- ---- ---- -- ----
Income $803 $956 $1,706 $256 $477 $538
=== === ===== === === ===
Pro Forma Information
Historical Income $803 $956 $1,706 $256 $477 $538
Pro Forma Income Tax (Expense) (299) (392) (696) (101) (189) (243)
----- ----- ----- ----- ----- -----
Pro Forma Net Income $504 $564 $1,010 $155 $288 $295
=== === ===== === === ===
</TABLE>
11
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8. Predecessor Company Financial Information (continued)
Results of Operations
Six Months Ended June 30, 1996
(unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
SOMAR NBG Reich TS:MD TRC Harris
----- --- ----- ----- --- ------
<S> <C> <C> <C> <C> <C> <C>
Revenues $20,803 $8,924 $11,347 $8,034 $3,231 $5,367
Operating Expenses:
Cost of services 16,888 5,995 6,692 5,290 1,690 2,762
Selling, general and administrative 3,092 1,389 1,199 2,121 1,296 1,521
----- ----- ----- ----- ----- -----
Total operating expenses 19,980 7,384 7,891 7,411 2,986 4,283
------ ----- ----- ----- ----- -----
Operating income (loss) 823 1,540 3,456 623 245 1,084
Interest (Expense), net (444) (22) (31) (119) -- (33)
----- ---- ---- ----- -- ----
Income $379 $1,518 $3,425 $504 $245 $1,051
=== ===== ===== === === =====
Pro Forma Information
Historical Income $379 $1,518 $3,425 $504 $245 $1,051
Pro Forma Income Tax (Expense) (141) (622) (1,397) (199) (97) (474)
----- ----- ------- ----- ---- -----
Pro Forma Net Income $238 $896 $2,028 $305 $148 $577
=== === ===== === === ===
</TABLE>
12
<PAGE>
8. Predecessor Company Financial Information (continued)
Statements of Cash Flows
Six Months Ended June 30, 1996
(unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
SOMAR NBG Reich TS:MD TRC Harris
----- --- ----- ----- --- ------
<S> <C> <C> <C> <C> <C> <C>
Operating Activities
Net Income $379 $1,518 $3,425 $504 $245 $1,051
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities:
Depreciation and amortization 593 230 180 99 35 309
Provision for bad debts -- 15 -- -- -- 29
Changes in operating assets
and liabilities, net (1,692) 400 (1,279) (773) (562) (1,640)
------- --- ------- ----- ----- -------
Net cash provided by (used in)
operating activities (720) 2,163 2,326 (170) (282) (251)
------ ----- ----- ----- ----- -----
Investing Activities
Purchases of property and equipment (511) (92) (829) (526) (97) (305)
Proceeds from short-term investments -- 40 -- -- -- --
Other, net -- -- -- -- (2) --
Advances to stockholder (44) -- -- -- -- --
Advances to affiliates (102) -- -- -- -- --
----- -- -- -- -- --
Net cash used in investing activities (657) (52) (829) (526) (99) (305)
----- ---- ----- ----- ---- -----
Financing Activities
Payments of long-term debt (1,077) (500) (116) (1,003) -- (130)
Payments of capital lease obligations (468) (232) -- -- --
Net borrowings on line of credit 3,256 -- -- 2,289 -- --
Net repayments to affiliates (123) -- -- -- -- --
Net repayments to stockholder -- -- (500) -- -- --
Distributions to stockholder (232) (120) (730) -- (53) (1,356)
----- ----- ----- -- ---- -------
Net cash provided by (used in)
financing activities 1,356 (852) (1,346) 1,286 (53) (1,486)
----- ----- ------- ----- ---- -------
Increase (decrease) in cash
and cash equivalents (21) 1,259 151 590 (434) (2,042)
Cash and cash equivalents, beginning of period 25 700 220 15 1,178 2,919
-- --- --- -- ----- -----
Cash and cash equivalents, end of period $4 $1,959 $371 $605 $744 $877
= ===== === === === ===
</TABLE>
13
<PAGE>
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 create a premier provider of teleservice services by providing a
single source for complete, integrated solutions to clients' teleservices needs,
including but not limited to, business acquisition, customer
activation/service/retention, consumer affairs, catalogue sales, help desk
services and registration services.
On August 12, 1996, the Company completed its initial public offering,
generating net cash proceeds to the Company of approximately $162 million.
Simultaneous with the 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").
The Company believes that its ability to bundle teleservices enables its clients
to more efficiently manage their teleservice marketing efforts at a lower cost
while delivering a unified and consistent message.
Subsequent to the acquisition of the Initial Operating Businesses, the Company
completed the acquisitions of TARP and PR Response (collectively, the "Fourth
Quarter 1996 Acquisitions"), which were acquired as of October 1, 1996 and
November 1, 1996, respectively. The aggregate purchase price of these
acquisitions was $22.0 million in cash and shares of the Company's Common Stock.
The TARP acquisition expanded the Company's customer care consulting
capabilities. The acquisition of PR Response added two Canadian call centers,
and represented the Company's initial penetration into the Canadian teleservices
market.
During the first quarter of 1997, the Company acquired the business and
substantially all of the assets and assumed certain liabilities of the
interactive voice response division of Voice FX Corporation (this business is
referred to hereafter as "TeleSpectrum FX") for $5.3 million in cash. The
Company's results of operation include TeleSpectrum FX as of March 1, 1997.
On June 30, 1997, the Company acquired substantially all of the assets and
assumed certain liabilities of FX Direct, Inc. ("FX Direct") for $4.2 million in
cash. The acquisition of FX Direct augments the Company's Fulfillment and Direct
Mail operations and represents the Company's entrance into the distribution of
consumer sample products. The Company's results of operations do not include
those of FX Direct for either the three or six months ended June 30, 1997.
FX Direct's operations are subject to seasonal fluctuations. The
majority of its operations and contribution to the Company's results of
operations are confined to the months of July, August and September with
substantial activity related to the distribution of sample packages to colleges
and universities across the United States.
The Company believes that these acquisitions enhance its ability to provide
fully integrated and bundled teleservice solutions. See Liquidity and Capital
Resources.
14
<PAGE>
Results of Operations
As discussed above, the Company was incorporated in April 1996, and did not
commence full-scale operations within the teleservices industry until August
1996 with the acquisition of the Initial Operating Businesses.
For the period April 26, 1996 (Inception) to June 30, 1996, the Company incurred
a net loss of $0.4 million. This loss was attributable to general and
administrative expenses, including officers' salaries, executive placement fees
and other non-deferrable initial expenses.
For purposes of comparing the results of the Initial Operating Businesses,
management has presented the actual unaudited results of operations for the
three and six months ended June 30, 1997 to the Supplemental Pro Forma/1/
unaudited results of operations for the three and six months ended June 30,
1996.
Actual and Supplemental Pro Forma
Results of Operations
<TABLE>
<CAPTION>
Three Months Six Months
Three Months Ended Ended
Dollars in thousands Ended June 30, 1996 Six Months Ended June 30, 1996
(Unaudited) June 30, 1997 (Supplemental June 30, 1997 (Supplemental
(Actual) Pro Forma) (Actual) Pro Forma)
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Revenues:
Telemarketing $40.8 $22.4 $77.3 $41.1
Customer Care 8.1 4.2 15.9 8.0
Market Research, Direct Mail and
Fulfillment 5.7 4.6 10.5 8.6
-----------------------------------------------------------------------------
Total Revenue 54.6 31.2 103.7 57.7
Cost of services 41.5 20.9 75.6 39.3
Selling, general and administrative 11.6 5.6 20.5 10.9
Amortization of goodwill 2.1 1.5 4.1 3.1
-----------------------------------------------------------------------------
55.2 28.0 100.2 53.3
Operating Income (Loss) (0.6) 3.2 3.5 4.4
Interest (expense), net (0.4) (0.1) (0.2) (0.2)
-----------------------------------------------------------------------------
Income (Loss) before taxes (1.0) 3.1 3.3 4.2
Income Tax (Expense) Benefit 0.4 (1.4) (1.2) (1.9)
-----------------------------------------------------------------------------
Net Income (Loss) ($0.6) $1.7 $2.1 $2.3
=============================================================================
</TABLE>
- --------
/1/ The Supplemental Pro Forma results of operations include only the results
of the Initial Operating Businesses for the three and six months ended June
30, 1996 and exclude the results of operations of the Fourth Quarter 1996
Acquisitions, TeleSpectrum FX, and of FX Direct.
15
<PAGE>
Comparison of the Actual results of operations for the three months ended June
- --------------------------------------------------------------------------------
30, 1997 to the Supplemental Pro Forma results of operations for the three
- --------------------------------------------------------------------------------
months ended June 30, 1996.
- ---------------------------
Revenues--Overall, revenues increased 75% during the three months ended June 30,
1997 when compared to the three months ended June 30, 1996. Telemarketing,
customer care and market research, direct mail and fulfillment revenues
increased 82%, 93% and 24%, respectively, when compared to the same period of
the prior year.
The 82% increase in telemarketing revenues is principally attributable to
increased calling volume and hours of production as a result of stronger demand
from new and existing customers. When viewed on a combined basis as of June 30,
1996, the Initial Operating Businesses operated 19 call centers with
approximately 1,500 workstations; while at June 30, 1997, the Company operated
31 call centers with approximately 3,800 workstations.
The 93% increase in customer care revenues is attributable to revenues from TARP
(which was acquired as of October 1, 1996) combined with increased inbound
revenues due to both increased volume and pricing.
The increase in market research and direct mail and fulfillment revenue is
attributable to increased and expanded demand for these services.
Cost of Services--Cost of Services increased by 98% during the three months
ended June 30, 1997 when compared to the same prior year period. As a percentage
of total revenues, cost of services were 76% and 67% for the three months ended
June 30, 1997 and 1996, respectively. The increase as a percentage of revenue is
attributable to the expansion of the company's capacity, the acceptance of less
profitable telemarketing contracts to utilize capacity, lower utilization of
telemarketing personnel, lower yields on performance based contracts and
additional costs of building the company's telemarketing infrastructure.
Selling, General and Administrative Expenses--Selling, general and
administrative expenses increased 107% during the three months ended June 30,
1997 when compared with the three months ended June 30, 1996. As a percentage of
revenue, these costs increased to 21% from 18%, primarily as a result of the
expansion of the Company's infrastructure, combined with additional
administrative expenses associated with operating as a public company.
16
<PAGE>
Amortization of goodwill - The Company has recorded the purchase price in excess
of the estimated fair value of the net assets acquired plus the net liabilities
assumed of the acquired businesses including the Initial Operating Businesses,
TARP, PR Response, TeleSpectrum FX and FX Direct, as goodwill. These amounts are
being amortized on a straight-line basis over a twenty five year period.
Amortization expense for the three months ended June 30, 1997 represents three
months of amortization of goodwill related to its acquisitions of the Initial
Operating Businesses, TARP, PR Response, and TeleSpectrum FX. Amortization
expense for the three months ended June 30, 1996 represents three months of
amortization of goodwill related to the Initial Operating Businesses only.
As a percentage of revenue, amortization expense decreased to 4% from 5% during
the three months ended June 30, 1997 when compared with the three months ended
June 30, 1996. The decrease was principally the result of the substantial
revenue growth period over period.
Comparison of the Actual results of operations for the six months ended June 30,
- --------------------------------------------------------------------------------
1997 to the Supplemental Pro Forma results of operations for the six months
- ---------------------------------------------------------------------------
ended June 30, 1996.
- --------------------
Revenues--Overall, revenues increased 80% during the six months ended June 30,
1997 when compared to the six months ended June 30, 1996. Telemarketing,
customer care and market research, direct mail and fulfillment revenues
increased 88%, 99% and 22%, respectively, when compared to the same prior year
period.
The 88% increase in telemarketing revenues is principally attributable to
increased calling volume and hours of production as a result of stronger
demand from new and existing customers.
Cost of Services--Cost of Services increased by 92% during the six months ended
June 30, 1997 when compared to the same prior year period. As a percentage of
total revenues, cost of services were 73% and 68% for the six months ended June
30, 1997 and 1996, respectively. The increase as a percentage of revenue is
attributable to the expansion of the Company's capacity, the acceptance of less
profitable telemarketing contracts to utilize capacity, lower utilization of
telemarketing personnel, lower yields on performance based contracts and
additional costs of building the Company's telemarketing infrastructure.
Selling, General and Administrative Expenses--Selling, general and
administrative expenses increased 88% during the six months ended June 30, 1997
as compared with the six months ended June 30, 1996. As a percentage of revenue,
these costs remained relatively constant at 20% and 19% for the six months ended
June 30, 1997 and June 30, 1996, respectively.
Amortization of goodwill - Amortization expense for the six months ended June
30, 1997 represents six months of amortization of goodwill related to the
acquisitions of the Initial Operating Businesses, TARP, and PR Response plus
four months of amortization of goodwill related to the TeleSpectrum FX
acquisition. Amortization expense for the six months ended June 30, 1996
represents six months of amortization of goodwill related to the Initial
Operating Businesses only.
As a percentage of revenue, amortization expense decreased to 4% from 5% during
the six months ended June 30, 1997 when compared with the six months ended June
30, 1996. The decrease was principally the result of the substantial revenue
growth period over period.
17
<PAGE>
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 customers, obtain new customers, 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 customers generally do not assure that the
Company will achieve a specific level of revenue and generally are terminable by
the customers on relatively short notice. Additionally, the amount of revenue
the Company generates from a particular customer is dependent upon a number of
factors, including, the ability of the Company to achieve marketing and sales
results desired by the customer and the results achieved by the Company as
compared to both the customers' in-house operations and/or other competing
outsource service providers. In addition to these factors noted above, numerous
agreements with its customers 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 customer's products as well as
the quality of the lists provided by its customers.
The Company's outbound telemarketing operations are also subject to seasonal
variations. Customer's traditionally reduce direct marketing operations during
the summer months. There can be no assurance that the Company will be able to
predict or compensate for any such seasonal downturns.
Liquidity and Capital Resources
During the six months ended June 30, 1997, the Company used $4.9 million to fund
operations, principally related to the funding of working capital requirements.
During the six months ended June 30, 1997, the Company used $54.2 million for
investing activities. Of this amount, $16.8 million was used to purchase
property and equipment related to the Company's call center expansion and
infrastructure improvement programs discussed above. The Company also used $5.3
million and $4.2 for the acquisition of TeleSpectrum FX and FX Direct,
respectively, as discussed above. The Company paid $25.0 million in settlement
of an earn-out obligation under the terms of the purchase agreement of one of
the Initial Operating Businesses, $1.2 million related to purchase price
adjustments under the terms of the Initial Operating Businesses' purchase
agreements, $1.4 million related to accrued separation costs for certain former
owners of the Initial Operating Businesses, and $0.3 million of other payments
related to the acquisition of the Initial Operating Businesses. As a result of
the excess capacity discussed above and the limited closings of certain less
profitable call centers, the Company does not expect to continue its call center
expansion strategy for the remainder of 1997.
During the six months ended June 30, 1997, the Company obtained net cash from
financing activities of $28.4 million, which resulted from $28.6 million of net
proceeds related to borrowings under its credit facility discussed below and
$0.7 million under other long-term debt. The Company paid $0.9 million of
principal related to other debt and capital lease obligations.
The Company has a $70.0 million secured credit facility agreement ("credit
facility"). The credit facility can be used for certain acquisitions, the
satisfaction of indebtedness, working capital requirements, and certain other
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, engaging in
mergers and consolidations 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 which ranges from 1.00% to 1.75%, depending upon certain
conditions specified in the credit facility agreement. The credit facility
terminates in January, 2001. As of June 30, 1997, the net borrowings under the
credit facility amounted to $28.6 million. At June 30, 1997, the weighted
average interest rate of borrowings under the credit facility was 7.0%.
The Company believes that cash to be generated from operations and the cash
available under its credit facility are sufficient to meet its on-going
operating requirements as well as expansion and business acquisition needs for
the foreseeable future.
18
<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
At the Company's Annual Meeting of Shareholders held on May 28,
1997, the shareholders elected six directors, and approved an
amendment to the Company's 1996 Equity Compensation Plan. In
the election of the directors, 22,242,613 shares were voted in
the favor of J. Brian O'Neill and 77,165 shares voted against,
22,242,613 shares were voted in favor of the election of
Michael C. Boyd and 77,165 shares voted against, 22,248,813
shares were voted in favor of the election of Joseph Delraso
and 70,965 shares voted against, 22,242,313 shares were voted
in favor of the election of William F. Rhatigan and 77,465
shares voted against, 22,242,613 shares were voted in favor of
the election of Richard W. Virtue and 77,165 shares voted
against, and 22,249,813 shares were voted in favor of the
election of Kevin W. Walsh and 69,965 shares voted against.
16,669,773 shares were voted in favor of the ratification of
the amendment to the Company's 1996 Equity Compensation Plan,
4,228,801 shares voted against and 52,770 shares abstained.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.20 Amendment to Amended and Restated Asset Purchase
Agreement dated as of April 14, 1997 by and among
TeleSpectrum Worldwide Inc., SOMAR, Inc., and
Richard W. Virtue
10.21 Warrant to purchase up to 1,500,000 shares of
Common Stock granted to SOMAR, Inc. dated as of
April 14, 1997.
(b) Form 8-K
The Company filed a Current Report on Form 8-K on
June 25, 1997 announcing expected earnings for the
three months ended June 30, 1997.
19
<PAGE>
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: August 14, 1997 /s/ Richard C. Schwenk, Jr.
--------------- -----------------------------------------
Richard C. Schwenk, Jr.
TeleSpectrum Worldwide Inc.
Executive Vice President and
Chief Financial Officer
20
<PAGE>
AMENDMENT TO AMENDED AND RESTATED ASSET PURCHASE AGREEMENT
This is the First Amendment, dated as of the 14th day of April 1997,
to that Amended and Restated Asset Purchase Agreement (the "Agreement"), dated
as of April 26, 1996, as amended and restated as of May 21, 1996, by and among
TeleSpectrum Worldwide Inc., a Delaware corporation ("TeleSpectrum"), CRW
Financial, Inc., a Delaware corporation ("CRW"), SOMAR, INC., a North Carolina
corporation ("SOMAR") and Richard W. Virtue (the "Shareholder").
Capitalized terms used herein and not otherwise defined shall have the
meanings ascribed to them in the Agreement.
BACKGROUND
Pursuant to the terms of the Agreement, on August 13, 1996,
TeleSpectrum acquired the Business and Purchased Assets from SOMAR. Section 2.7
of the Agreement provided, among other things, SOMAR with the opportunity to
earn the 1997 Contingent Payment as additional purchase price for the Business
and the Purchased Assets. TeleSpectrum and SOMAR have determined that it is in
their mutual best interests for TeleSpectrum to have more uniform marketing and
operating strategies and, therefore, to restructure the method by which this
additional purchase price may be earned and the form in which it is paid. The
parties desire to amend the Agreement to provide for the matters contained
herein.
AMENDMENT
NOW, THEREFORE, in consideration of and in reliance on the respective
representations, warranties and covenants contained herein and intending to be
legally bound hereby, the parties hereto agree as follows:
1. Section 2.7 of the Agreement is hereby deleted and replaced in
its entirety by the following:
2.7 Payments.
--------
(a) In addition to assuming the Assumed Liabilities, the
aggregate price to be paid by the Buyer to the Company (the "Purchase
Price") for the purchase of the Purchased Assets shall be (i)
$50,000,000 and (ii) the grant of a stock warrant (the " Contingent
Stock Warrant") described in Section 2.7(b) below. The Buyer shall pay
$50,000,000 of the Purchase Price at the Closing by delivery of (i)
$25,000,000 by certified or bank check or by wire transfer of
immediately available funds pursuant to written instructions provided
by the Company to the Buyer and (ii) certificates to the Company or
its designee (in such
<PAGE>
proportion as set forth on Exhibit 2.7) representing such number of
shares (the "Shares") of the Buyer's common stock, no par value (the
"Buyer Common Stock"), with an aggregate acquisition stock value of
$25,000,000 (the "Acquisition Stock Value"). The Acquisition Stock
Value has been determined based upon the Private Percentage Interest,
as defined in Section 2.8.
(b) The Contingent Stock Warrant shall consist of a warrant
to purchase in the aggregate up to 1,500,000 shares of the Buyer
Common Stock at an exercise price of $12.25 per share, subject to the
vesting requirements and other terms and conditions set forth in the
Warrant Agreement attached as Exhibit I hereto.
2. All references to 1996 and 1997 Contingent Payments in the
Agreement shall be disregarded for all purposes, including for the purpose of
interpreting the Agreement, and SOMAR hereby releases TeleSpectrum from any
obligation on account of the 1996 and 1997 Contingent Payments. Accordingly,
Section 21 of the Agreement is hereby deleted in its entirety and shall have no
further force or effect.
3. The Initial Warrant Shares shall be included in the definition of
Registrable Securities for purposes of Section 20.3 of the Agreement and
entitled to the benefits of such Section. The Additional Warrant Shares shall
not be included in the definition of Registrable Securities for such purposes.
4. Except as provided herein, the terms and provisions of the
Agreement shall remain in full force and effect as originally set forth.
5. This Amendment shall be effective, and shall be binding on the
parties to the Agreement when executed by the parties. This Amendment may be
executed in two or more counterparts, each of which shall be binding as of the
date first written above, and all of which shall constitute one and the same
instrument. Each such copy shall be deemed an original, and it shall not be
necessary in making proof of this Amendment to produce or account for more than
one such counterpart. The hand written letter dated December 13, 1996 between
the Buyer and SOMAR shall be deemed to have been terminated as of December 13,
1996 and shall have no force or effect on any party thereto.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the 14th day of April, 1997.
TELESPECTRUM WORLDWIDE INC.
By: /s/ J. Brian O'Neill
-------------------------------------------
J. Brian O'Neill, Chief Executive Officer
CRW FINANCIAL, INC.
By: /s/ J. Brian O'Neill
-------------------------------------------
J. Brian O'Neill, Chief Executive Officer
SOMAR, INC.
By: /s/ Richard W. Virtue
-------------------------------------------
Richard W. Virtue
Chairman
/s/ Richard W. Virtue
-------------------------------------------
Richard W. Virtue
3
<PAGE>
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAW.
Warrant to Purchase Shares
of Common Stock
Dated as of April 14, 1997
WARRANT
TO PURCHASE COMMON STOCK OF
TELESPECTRUM WORLDWIDE INC.
THIS CERTIFIES that SOMAR, Inc. (the "Holder") is entitled to purchase from
TeleSpectrum Worldwide Inc. (the "Company"), a corporation organized and
existing under the laws of Delaware, at any time, and from time to time, after
the date hereof and until 5:00 P.M. (Eastern Time) on the tenth anniversary
hereof, up to 1,500,000 shares (the "Warrant Shares") of the Company's common
stock, $.01 par value per share (the "Common Stock"), subject to adjustment as
provided herein, at a purchase price of $12.25 per share (the "Warrant Price").
1. Definitions. As used in this Warrant, the following terms have the
-----------
respective meanings set forth below:
"Appraised Value" means, in respect of any share of Common Stock on any
date herein specified, the value attributable to such share of Common Stock if
all of the assets of the Company and its subsidiaries were sold for the
appraised value thereof as of the last day of a fiscal month to end within 60
days prior to such date specified, and thereafter liquidated in accordance with
the terms of the Company's Certificate of Incorporation, as determined in good
faith by the Board of Directors of the Company.
"Book Value" means, in respect of any share of Common Stock on any date
herein specified, the value attributable to such share of Common Stock if all of
the assets of the Company and its subsidiaries were sold for the consolidated
book value thereof as of the last day of any month immediately preceding such
date, and thereafter liquidated in accordance with the Company's Certificate of
Incorporation, as determined in accordance with generally accepted accounting
principles in the United States.
<PAGE>
"Business Day" means any day that is not a Saturday or Sunday or a day on
which banks are required or permitted to be closed in the State of New York.
"Current Market Price" means, in respect of the Common Stock on any date
herein specified, the higher of (a) the Book Value per share of Common Stock at
such date and (b) the Appraised Value per share of Common Stock as at such date,
or if there shall then be a public market for the Stock, the higher of (x) the
amount set forth in clause (a) above and (y) the average of the daily market
prices for 30 consecutive Business Days commencing 45 days before such date.
The daily market price for each such Business Day shall be (i) the last sale
price on such date on the principal stock exchange on which the Common Stock is
then listed or admitted to trading, (ii) if no sale takes place on such day on
any such exchange, the average of the last reported closing bid and asked prices
on such day as officially quoted on any such exchange, (iii) if the Common Stock
is not then listed or admitted to trading on any stock exchange, the average of
the last reported closing bid and asked prices on such day in the over-the-
counter market, as furnished by the National Association of Securities Dealers
Automatic Quotation System or the national Quotation Bureau, Inc., (iv) if
neither such corporation at the time is engaged in the business of reporting
such prices, as furnished by any similar firm then engaged in such business, or
(v) if there is no such firm, as furnished by any member of the National
Association of Securities Dealers, Inc. ("NASD") selected by the Company.
"EPS" means the fully-diluted earnings per share of the Company in its
fiscal year ending December 31, 1997, as calculated in accordance with generally
accepted accounting principles by the Company's independent public accountant
and as reported in the Company's Form 10-K for such year.
"Expiration Date" means the date which is the tenth anniversary of the date
of this Warrant.
"Outstanding" means, when used with reference to Common Stock or any class
thereof, at any date as of which the number of shares thereof is to be
determined, all issued shares of Common Stock or of the relevant class, except
shares then owned or held by or for the account of the Company or any subsidiary
thereof, and shall include all shares issuable in respect of outstanding scrip
or any certificates representing fractional interests in shares of Common Stock
or of the relevant class.
"Vested Warrant Shares" means the Additonal Warrant Shares and the Initial
Warrant Shares.
2. Exercise of Warrant. Subject to Section 5 hereof, this Warrant shall
-------------------
be exercisable at any time, and from time to time, after the Closing Date until
the expiration of the Warrant as provided in Section 3 hereof, in the manner set
forth in Section 4 hereof.
3. Expiration of Warrant. This Warrant, to the extent not exercised,
---------------------
shall expire and cease to be of force and effect at 5:00 P.M. (Eastern Time) on
the Expiration Date.
4. Method of Exercise. Subject to the vesting provisions of Section 5
------------------
hereof, this Warrant may be exercised in whole or in part (but not as to
fractional shares) by the surrender of the Warrant, with the Purchase Agreement
2
<PAGE>
attached hereto as ANNEX A, properly completed and duly executed, at the
principal office of the Company at 443 S. Gulph Road, King of Prussia,
Pennsylvania 19406, or such other location which at that time shall be the
principal office of the Company (the "Principal Office"), and upon payment to it
of the Warrant Price for each Vested Warrant Share to be purchased upon such
exercise (the aggregate of the Warrant Price for all shares to be exercised
being referred to herein as the "Purchase Price"). The Purchase Price shall be
paid by delivering either: (i) a certified check, bank draft or wire transfer of
immediately available funds to the order of the Company or (ii) this Warrant
with instructions that such number of Vested Warrant Shares be retained by the
Company as payment of the Purchase Price (a "Cashless Exercise"). In the event
of a Cashless Exercise, the Holder shall receive that number of Vested Warrant
Shares determined by multiplying the number of Vested Warrant Shares for which
the Cashless Exercise is made by a fraction, the numerator of which shall be the
difference between the then Current Market Price per Vested Warrant Share and
the Warrant Price, and the denominator of which shall be the then Current Market
Price per share of Common Stock. The remaining Vested Warrant Shares for which
Cashless Exercise has been made shall be deemed to have been paid to the Company
as the Purchase Price. The Holder shall be treated for all purposes as the
holder of the Vested Warrant Shares as of the close of business on the date of
exercise, and certificates for the Vested Warrant Shares so purchased shall be
delivered to the person so entitled, properly endorsed for transfer or
accompanied by appropriate stock powers, within a reasonable time, not exceeding
five days, after such exercise. Unless this Warrant shall have expired, a new
Warrant of like tenor and for such number of Vested Warrant Shares as the Holder
shall direct, representing in the aggregate the right to purchase that number of
Vested Warrant Shares with respect to which this Warrant shall not have been
exercised, shall also be issued to the Holder within such time.
3
<PAGE>
5. Vesting Schedule. Effective as of the date hereof, 500,000 of the
----------------
Warrant Shares (the "Initial Warrant Shares") shall vest immediately. The
number of the remaining Warrant Shares, if any, which shall become vested (the
"Additional Warrant Shares") shall be based on the Company's EPS in accordance
with the following schedule (and shall vest, if at all, on the first day
following the issuance of the audit report on the Company's financial statements
for the year ending December 31, 1997):
<TABLE>
<CAPTION>
Cumulative Additional
Warrant Shares Vested EPS
- ----------------------- ---------------
<S> <C>
0 Less than $0.64
50,000 $0.64
100,000 $0.65
150,000 $0.66
200,000 $0.67
250,000 $0.68
300,000 $0.69
350,000 $0.70
400,000 $0.71
450,000 $0.72
500,000 $0.73
550,000 $0.74
600,000 $0.75
650,000 $0.76
700,000 $0.77
750,000 $0.78
800,000 $0.79
850,000 $0.80
900,000 $0.81
950,000 $0.82
1,000,000 $0.83
</TABLE>
This Warrant shall not be exercisable for any Warrant Shares which are not
also Vested Warrant Shares.
6. Certain Covenants.
-----------------
(a) The Company shall cause all Vested Warrant Shares to be listed on
each national securities exchange or securities quotation system, if any, on
which the other outstanding shares of Common Stock of the Company are then
listed or quoted.
(b) The Company shall (i) use its best efforts to comply with the
current public information requirements of Rule 144 ("Rule 144") under the 1933
4
<PAGE>
Act and (ii) at all times Rule 144 is available for use by Holder, furnish the
Holder upon request with all information within the possession of the Company
required for the preparation and filing of Rule 144.
7. Adjustment of Purchase Price and Number of Shares. The number of
-------------------------------------------------
Vested Warrant Shares purchasable upon the exercise of this Warrant shall be
subject to adjustment from time to time upon the happening of certain events as
follows:
7.1 Stock Dividends, Subdivisions or Combinations. If the Company at
---------------------------------------------
any time while the Warrant remains outstanding and unexpired shall:
(a) subdivide its outstanding shares of Common Stock into a
larger number of shares of Common Stock,
(b) combine its outstanding shares of Common Stock into a smaller
number of shares of Common Stock, or
(c) pay a dividend or make a distribution in shares of its Common
Stock,
then the number of shares of Common Stock purchasable upon the exercise of
this Warrant immediately after the occurrence of any such event shall be
adjusted to equal the number of shares of Common Stock that a record holder
of the same number of shares of Common Stock represented by this Warrant
immediately prior to the occurrence of such event would own or be entitled
to receive after the happening of such event and the Warrant Price shall be
proportionately reduced. Furthermore, if any of the foregoing events shall
occur during 1997, then the EPS targets set forth in Section 5 shall be
proportionately adjusted.
7.2 Certain Other Distributions. If at any time the Company shall
---------------------------
take a record of the holders of its Common Stock for the purpose of
entitling them to receive any dividend or other distribution of:
(a) cash (other than a cash distribution or dividend payable out
of earnings or earned surplus legally available for the payment of
dividends under the laws of the jurisdiction of incorporation of the
Company),
(b) any evidences of its indebtedness, any shares of its stock or
any other securities or property of any nature whatsoever (other than
cash), or
(c) any warrants or other rights to subscribe for or purchase any
evidences of its indebtedness, any shares of its stock or any other
securities or property of any nature whatsoever (other than cash).
then the number of shares of Common Stock issuable upon exercise of this
Warrant shall be adjusted to equal the product of the number of shares of
5
<PAGE>
Common Stock issuable upon exercise of this Warrant immediately prior to
such adjustment by a fraction (i) the numerator of which shall be the
Current Market Price per share of Common Stock at the date of taking such
record and (ii) the denominator of which shall be such Current Market Price
per share of Common Stock minus the amount allocable to one share of Common
Stock of any such cash so distributable and of the fair value (as
determined in good faith by the Board of Directors of the Company) of any
and all such evidences of indebtedness, shares of stock, other securities
or property or warrants or other subscription or purchase rights so
distributable. A reclassification of the Common Stock (other than a change
in par value, or from par value to no par value or from no par value to par
value) into shares of Common Stock and shares of any other class of stock
shall be deemed a distribution by the Company to the holders of its Common
Stock of such shares of such other class of stock within the meaning of
this Section 7.2 and, if the outstanding shares of Common Stock shall be
changed into a larger or smaller number of shares of Common Stock as a part
of such reclassification, such change shall be deemed a subdivision or
combination, as the case may be, of the outstanding shares of Common Stock
within the meaning of Section 7.1.
7.3 Reclassification, Consolidation or Merger. At any time while
-----------------------------------------
this Warrant remains outstanding and unexpired, in case of any
reclassification or change of outstanding securities issuable upon exercise
of this Warrant (other than a change in par value, or from par value to no
par value, or from no par value to par value or as a result of an event
described in Sections 7.1(A) or (B) above) or in case of any consolidation
or merger of the Company with or into another corporation (other than a
merger with another corporation in which the Company is a continuing
corporation and which does not result in any reclassification or change,
other than a change in par value, or from par value to no par value, or
from no par value to par value), or in the case of any sale or transfer to
another corporation of the property of the Company as an entirety or
substantially as an entirety, the Company shall, without payment of any
additional consideration therefor, execute a new Warrant providing that the
Holder shall have the right to exercise such new Warrant (upon terms not
less favorable to the Holder than those then applicable to this Warrant)
and to receive upon such exercise, in lieu of each share of Common Stock of
the Company theretofore issuable upon exercise of this Warrant, the kind
and amount of shares of stock, other securities, money or property
receivable upon such reclassification, change, consolidation, merger, sale
or transfer by the Holder of one share of Common Stock issuable upon
exercise of this Warrant had this Warrant been exercised immediately prior
to such reclassification, change, consolidation, merger, sale or transfer.
Such new Warrant shall provide for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in this
Section 7. The provisions of this Section 7.3 shall similarly apply to
successive reclassification, changes, consolidations, mergers, sales and
transfers. Furthermore, if any of the foregoing events shall occur during
1997, then the EPS targets set forth in Section 5 shall be proportionately
adjusted.
7.4 Liquidating Dividends, Etc. If the Company at any time while
---------------------------
this Warrant remains outstanding and unexpired makes a distribution of its
assets to the holders of its Common Stock as a dividend in liquidation or
6
<PAGE>
by way of return of capital or other than as a dividend payable out of
earnings or surplus legally available for dividends under applicable law or
any distribution to such holders made in respect of the sale of all or
substantially all of the Company's assets (other than under the
circumstances otherwise provided for in this Section 7), the holder of this
Warrant shall be entitled to receive upon the exercise hereof, in addition
to the shares of Common Stock receivable upon such exercise, and without
payment of any consideration other than the Warrant Price, an amount in
cash equal to the value of such distribution per share of Common Stock
multiplied by the number of shares of Common Stock which, on the record
date for such distribution, are issuable upon exercise of this Warrant
(with no further adjustment being made following any event which causes a
subsequent adjustment in the number of shares of Common Stock issuable upon
the exercise hereof), and an appropriate provision therefor should be made
a part of any such distribution. The value of a distribution which is paid
in other than cash shall be determined in good faith by the Company's Board
of Directors.
7.5 Other Action Affecting Common Stock. If after the date hereof
-----------------------------------
the Company shall take any action affecting the outstanding number of
shares of Common Stock, other than an action described in any of the
foregoing subsections of Section 7 hereof, inclusive, that would have a
materially adverse effect upon the rights of the Holder, the Warrant Shares
and the Warrant Price shall be adjusted in such manner and at such time as
the Company's Board of Directors on the advice of the the Company's
independent public accountants may in good faith determine to be equitable
in the circumstances.
7.6 Other Provisions Applicable to Adjustment under this Section.
------------------------------------------------------------
The following provisions shall be applicable to the making of adjustment of
the number of shares of Common Stock issuable upon exercise of this Warrant
provided for in this Section 7:
(a) When Adjustments to Be Made. The adjustments required by
---------------------------
this Section 7 shall be made whenever and as often as any specified
event requiring an adjustment shall occur, except that any adjustment
of the number of shares of Common Stock issuable upon exercise of the
Warrant that would otherwise be required may be postponed (except in
the case of a subdivision or combination of shares of the Common
Stock, as provided for in Section 7.1) up to, but not beyond the date
of exercise if such adjustment either by itself or with other
adjustments not previously made adds or subtracts less than 1% of the
shares of Common Stock issuable upon exercise of the Warrant
immediately prior to the making of such adjustment. Any adjustment
representing a change less than such minimum amount (except as
aforesaid) which is postponed shall be carried forward and made as
soon as such adjustment, together with other adjustments required by
this Section 7 and not previously made, would result in a minimum
adjustment or on the date of exercise. For the purpose of any
adjustment, any specified event shall be deemed to have occurred at
the close of business on the date of its occurrence.
7
<PAGE>
(b) Fractional Interest. In computing adjustments under this
-------------------
Section 7, fractional interests in Common Stock shall be taken into
account to the nearest 1/10th of a share.
(c) When Adjustment Not Required. If the Company shall take a
----------------------------
record of the holders of its Common Stock for the purpose of entitling
them to receive a dividend or distribution or subscription or purchase
rights and shall, thereafter and before the distribution to
stockholders thereof, legally abandon its plan to pay or deliver such
dividend, distribution, subscription or purchase rights, then
thereafter no adjustment shall be required by reason of the taking of
such record and any such adjustment previously made in respect thereof
shall be rescinded and annulled.
(d) Escrow of Warrant Stock. If after any property becomes
-----------------------
distributable pursuant to this Section 7 by reason of the taking of
any record of the holders of Common Stock, but prior to the occurrence
of the event for which such record is taken, and the Holder exercises
this Warrant, any additional shares of Common Stock obtainable upon
exercise by reason of such adjustment shall be deemed the last shares
of Common Stock for which this Warrant is exercised (notwithstanding
any other provision to the contrary herein) and such shares or other
property shall be held in escrow for the Holder by the Company to be
transferred to the Holder upon and to the extent that the event
actually takes place, upon payment of the Warrant Price.
Notwithstanding any other provision to the contrary herein, if the
event for which such record was taken fails to occurred or is
rescinded, then such escrowed shares shall be cancelled by the Company
and escrowed property returned.
8. Legend. Each certificate for shares obtained upon exercise of this
------
Warrant shall bear the following legend:
"The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended (the "1933 Act"). Such
securities have been acquired for investment and may not be sold or
transferred in the absence of an effective registration statement for
such securities under the 1933 Act, unless, in the opinion (which
shall be in form and substance satisfactory to the Corporation) of
counsel satisfactory to the Corporation, such registration is not
required."
In addition, the certificate shall bear such additional legend with respect to
state securities or blue sky laws as reasonably determined by counsel to the
Company.
9. Notice of Adjustments. Whenever the number of shares of Common Stock
---------------------
issuable upon exercise of this Warrant shall be adjusted pursuant to Section 7
hereof, the Company shall promptly notify the Holder in writing of such
adjustment, setting forth in reasonable detail the event requiring the
8
<PAGE>
adjustment, the amount of the adjustment, the method by which such adjustment
was calculated (including a description of the basis on which the Company's
Board of Directors made any determination hereunder), and the number of shares
of Common Stock obtainable upon exercise of this Warrant after giving effect to
such adjustment. Such notice shall be mailed (by first class and postage
prepaid) to the Holder.
10. Fractional Shares. No fractional shares of the Company's Common Stock
-----------------
will be issued in connection with any purchase hereunder but in lieu of such
fractional shares, the Company shall make a cash refund therefor equal in amount
to the product of the applicable fraction multiplied by the Warrant Price paid
by the Holder for its Vested Warrant Shares upon such exercise.
11. Representations and Warranties of the Company. The Company hereby
---------------------------------------------
represents and warrants to the Holder as follows:
(a) This Warrant has been duly authorized by all necessary corporate
action on the part of the Company and has been duly executed by a duly
authorized officer of the Company and constitutes a valid and binding obligation
of the Company.
(b) Neither the execution and delivery of this Warrant, nor the
consummation of the transactions contemplated hereby, will violate or result in
any violation of or be in conflict with or constitute a default under any term
of the charter or bylaws of the Company or of any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation applicable to
the Company.
(c) Upon exercise of this Warrant and payment of the Warrant Price by
the Holder, the Vested Warrant Shares will be duly issued, fully paid and
nonassessable shares of Common Stock.
12. Loss, Theft, Destruction or Mutilation. Upon receipt by the Company
--------------------------------------
of evidence reasonably satisfactory to it that this Warrant has been mutilated,
destroyed, lost or stolen, and in the case of any destroyed, lost or stolen
Warrant, a bond of indemnity reasonably satisfactory to the Company, or in the
case of a mutilated Warrant, upon surrender and cancellation thereof, the
Company will execute and deliver in the Holder's name, in exchange and
substitution for the Warrant so mutilated, destroyed, lost or stolen, a new
Warrant of like tenor substantially in the form thereof with appropriate
insertions and variations.
13. Successors and Assigns. This Warrant and the rights evidenced hereby
----------------------
shall inure to the benefit of and be binding upon the successors of the Company
and the Holder.
14. Amendment. This Warrant may be modified with the written consent of
---------
the Company and the Holder.
15. Transferability. This Warrant, and any Vested Warrant Shares issued
---------------
upon exercise of this Warrant, may be sold, pledged or otherwise transferred or
encumbered by the Holder.
9
<PAGE>
16. Headings. The descriptive headings of the several sections of this
--------
Warrant are inserted for convenience only and do not constitute a part of this
Warrant.
17. Governing Law. This Warrant shall be governed by the laws of the
-------------
State of Delaware without regard to the provisions thereof relating to conflict
of laws.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its
duly authorized officer, attested by its duly authorized officer, on the date of
this Warrant.
TELESPECTRUM WORLDWIDE INC.
By: /s/ J. BRIAN O'NEILL
-------------------------
J. BRIAN O'NEILL,
CHIEF EXECUTIVE OFFICER
10
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<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 APR-26-1996
<PERIOD-END> JUN-30-1997 JUN-30-1996
<CASH> 0 30,715
<SECURITIES> 0 0
<RECEIVABLES> 48,718 0
<ALLOWANCES> 481 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 51,949 66,721
<PP&E> 51,362 32,081
<DEPRECIATION> 5,656 1,910
<TOTAL-ASSETS> 307,211 299,055
<CURRENT-LIABILITIES> 27,547 48,445
<BONDS> 32,933 4,199
0 0
0 0
<COMMON> 252 252
<OTHER-SE> 242,287 240,259
<TOTAL-LIABILITY-AND-EQUITY> 307,211 299,055
<SALES> 103,776 0
<TOTAL-REVENUES> 103,776 0
<CGS> 75,646 0
<TOTAL-COSTS> 100,233 419
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 174 0
<INCOME-PRETAX> 3,369 (419)
<INCOME-TAX> 1,289 0
<INCOME-CONTINUING> 2,080 (419)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,080 (419)
<EPS-PRIMARY> 0.08 (0.05)
<EPS-DILUTED> 0.08 8.51
</TABLE>
