<PAGE>
================================================================================
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, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO __________________
Commission File 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 August 14, 1998 was 25,671,205.
================================================================================
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
Table of Contents
-----------------
<TABLE>
<CAPTION>
Item No. Page
- -------- ----
<S> <C> <C>
PART I -- FINANCIAL INFORMATION
1. Financial Statements (unaudited):
Condensed Consolidated Results of Operations
For the Three Months Ended June 30, 1998 and
For the Three Months Ended June 30, 1997 3
Condensed Consolidated Results of Operations
For the Six Months Ended June 30, 1998 and
For the Six Months Ended June 30, 1997 4
Condensed Consolidated Balance Sheets
June 30, 1998 and December 31, 1997 5
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 1998 and
For the Six Months Ended June 30, 1997 6
Notes to Condensed Consolidated Financial Statements 7
2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 12
PART II OTHER INFORMATION 25
</TABLE>
<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
JUNE 30, 1998 JUNE 30, 1997
------------- -------------
<S> <C> <C>
REVENUES $ 40,281 $ 49,200
--------- ---------
OPERATING EXPENSES:
COST OF SERVICES 37,462 44,837
SELLING, GENERAL AND ADMINISTRATIVE 5,035 4,132
AMORTIZATION OF GOODWILL 295 1,814
--------- ---------
TOTAL OPERATING EXPENSES 42,792 50,783
--------- ---------
OPERATING INCOME (LOSS) (2,511) (1,583)
INTEREST INCOME (EXPENSE) (128) (391)
--------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (2,639) (1,974)
INCOME TAX BENEFIT (EXPENSE) - 714
--------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS (2,639) (1,260)
INCOME FROM DISCONTINUED OPERATIONS --------- ---------
- 642
--------- ---------
NET INCOME (LOSS) $ (2,639) $ (618)
========= =========
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
CONTINUING OPERATIONS $ (0.10) $(0.05)
DISCONTINUED OPERATIONS 0.00 0.03
--------- ---------
NET INCOME (LOSS) $ (0.10) $(0.02)
========= =========
</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>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1998 JUNE 30, 1997
------------- -------------
<S> <C> <C>
REVENUES $ 79,915 $ 93,460
-------- --------
OPERATING EXPENSES:
Cost of Services 80,226 81,002
Selling, General and Administrative 11,600 7,108
Amortization of Goodwill 590 3,592
-------- --------
TOTAL OPERATING EXPENSES 92,416 91,702
-------- --------
OPERATING INCOME (LOSS) (12,501) 1,758
INTEREST INCOME (EXPENSE) (933) (174)
-------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES (13,434) 1,584
INCOME TAX BENEFIT (EXPENSE) 247 (720)
-------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS (13,187) 864
479 1,216
INCOME FROM DISCONTINUED OPERATIONS -------- --------
NET INCOME (LOSS) $(12,708) $ 2,080
======== ========
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
CONTINUING OPERATIONS $ (0.52) $ 0.03
DISCONTINUED OPERATIONS 0.02 0.05
-------- --------
NET INCOME (LOSS) $ (0.50) $ 0.08
======== ========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS -- EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
-------------- ------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ -- $ 774
Accounts receivable 33,696 37,360
Income tax refund receivable 1,434 2,912
Prepaid expenses and other 2,692 1,539
Net assets of discontinued operations -- 36,399
--------- ---------
Total current assets 37,822 78,984
PROPERTY AND EQUIPMENT, NET 33,564 36,731
GOODWILL 27,374 27,964
Other Assets 740 1,042
--------- ---------
Total Assets $ 99,500 $ 144,721
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Secured credit facility $ -- $ 29,000
Current maturities of long-term debt 970 1,160
Accounts payable 3,088 4,718
Accrued expenses 7,800 9,125
Accrued compensation 6,679 7,638
Notes payable to sellers of businesses 840 990
Other current liabilities 5,944 5,698
--------- ---------
Total current liabilities 25,321 58,329
--------- ---------
LONG-TERM DEBT 3,151 3,800
--------- ---------
OTHER NONCURRENT LIABILITIES 1,508 2,215
--------- ---------
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,
25,669,732 and 25,213,074 shares issued and outstanding, respectively 257 252
Additional paid-in capital 239,614 237,186
Accumulated deficit (169,533) (156,825)
Deferred compensation (596) ---
Cumulative currency translation adjustment (222) (236)
--------- ---------
Total stockholders' equity 69,520 80,377
--------- ---------
Total liabilities and stockholders' equity $ 99,500 $ 144,721
========= =========
</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>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1997
----------------- -----------------
Cash Flows From Operating Activities:
<S> <C> <C>
Net income (loss) $ (12,708) $ 2,080
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 3,424 3,293
Amortization of goodwill 590 3,594
Provision for bad debts 2,321 --
Deferred compensation 326 147
Other items, net 641 311
Changes in operating assets and liabilities-
Accounts receivable 1,572 (14,934)
Income tax receivable 1,180 --
Prepaid expenses and other 1,453 (1,249)
Accounts payable (1,531) (2,922)
Accrued compensation (1,501) 587
Other accrued expenses (2,277) 1,857
Deferred revenue (153) 2,345
Other liabilities (1,232) (700)
Net operating activities of discontinued operations (433) 3,219
--------- --------
Net cash provided by (used in) operating activities (8,328) (2,372)
--------- --------
Cash Flows From Investing Activities:
Purchases of property and equipment (1,514) (15,877)
Proceeds from sale of business 38,048 --
Acquisition of Initial Operating Businesses, net of cash acquired -- --
Payments related to acquisition of Initial Operating Businesses (303) (27,825)
Acquisition of TeleSpectrum FX (IVR) -- (5,327)
Investment in business held for sale -- (4,211)
Net investing activities of discontinued operations (275) (1,003)
--------- --------
Net cash provided by (used in) investing activities 35,956 (54,243)
--------- --------
Cash Flows From Financing Activities:
Net borrowings (repayments) on secured credit facility (29,000) 28,600
Net borrowings (payments) of long-term debt (172) 512
Payments of capital lease obligations (667) (668)
Proceeds from exercise of stock options and sale of common stock 1,437 --
--------- --------
Net cash provided by (used in) financing activities (28,402) 28,444
--------- --------
Net increase (decrease) in cash and cash equivalents (774) (28,171)
Cash and cash equivalents, beginning of period 774 28,171
--------- --------
Cash and cash equivalents, end of period $ 0 $ 0
========= ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying financial statements are unaudited and have been prepared by
Telespectrum Worldwide Inc. and subsidiaries (the "Company") pursuant to the
rules and regulations of the Securities and Exchange Commission (SEC). The
December 31, 1997 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 year ended
December 31, 1997.
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 year ended December 31, 1997. Certain reclassifications have been made to
the three and six months ended June 30, 1997 condensed consolidated results of
operations to conform to the presentation used in the current period.
2. COMPANY BACKGROUND
The Company was incorporated in Delaware on April 26, 1996 and provides services
to its customers through its Telemarketing and Customer Care Segments. On August
12, 1996, the Company completed its initial public offering and, concurrent with
the offering, the Company began material operations with the acquisition of the
assets of a number of businesses. The results of operations of the Market
Research Segment and Direct Mail and Fulfillment Segment have been accounted for
as discontinued operations (see Note 5).
3. RECENT DEVELOPMENTS
Operating Results
The Company's operating results have deteriorated since the first quarter of
1997. The Company recorded operating losses in the second, third and fourth
quarters of 1997, and the first and second quarters of 1998. The Company
attributes these losses to the costs associated with expanding its telemarketing
call center capacity in the first and second quarters of 1997 to meet its growth
expectations and the costs associated with subsequently reducing its capacity.
The Company has closed 15 of its 25 outbound call centers and the Company's
workforce has been significantly reduced.
Goodwill Impairment Charge
In the fourth quarter of 1997, the Company performed an in-depth evaluation of
the carrying value of goodwill due to the Company's poor operating performance,
and the overall significant changes in the industry outlook, and recorded a
goodwill impairment charge of $139,072,000, which represented the goodwill
associated with the Telemarketing Segment. As of June 30, 1998 the remaining
goodwill of $27,374,000 relates exclusively to the Customer Care Segment, which
the Company believes is realizable.
7
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
- --------------------------------------------------------------------------------
Goodwill Impairment Charge (continued)
Whenever events or circumstances have occurred that indicate an impairment may
have occurred, the Company will estimate the future discounted cash flows of the
business segment to which goodwill relates. When such estimate of the future
discounted cash flows, net of the estimated fair value of the net tangible
assets, is less than the carrying amount of goodwill, the difference is charged
to operations. For purposes of determining future discounted cash flows of the
business segments to which goodwill relates, the Company, based upon historical
results, current projections and internal earnings targets, determines the
projected operating cash flows, net of income taxes, of the individual business
segment. These projected future cash flows are then discounted at a rate
corresponding to the Company's estimated cost of capital.
Call Center Closing Charges
In the third and fourth quarters of 1997 and first quarter of 1998, the Company
recorded pre-tax charges totaling $13,311,000 in connection with the Company's
decision to close seventeen call centers (fifteen in the Telemarketing Segment
and two in the Customer Care Segment). These charges include a non-cash write-
down of $8,336,000 related to certain call center property and equipment, a
$1,939,000 provision for non-cancelable lease commitments at closed call centers
and a $3,036,000 provision relating to severance and termination benefits for
certain employees.
The Company has recorded an additional provision of $987,000 for severance and
termination benefits in the second quarter of 1998 for certain employees. The
Company expects that all significant activities under the call center closing
plan will be completed by no later than December 31, 1998, with a majority of
these activities already completed by June 30, 1998.
4. EARNINGS PER SHARE
The Company has adopted SFAS No. 128 "Earnings per Share." SFAS No. 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 (loss) 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.
There was no material difference between basic and diluted earnings (loss) per
share. The table below sets forth the reconciliation of the weighted average
number of shares outstanding used to compute basic and diluted earnings (loss)
per share (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ------------------------
JUNE 30, JUNE 30,
-------- --------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Shares used in computing basic earnings (loss)
per share.... 25,480 25,213 25,365 25,213
Dilutive effect of options....................... -- -- -- 50
------- ------- ------- -------
Shares used in computing diluted earnings
(loss) per share............................ 25,480 25,213 25,365 25,263
======== ======= ======= ========
</TABLE>
8
<PAGE>
TeleSpectrum Worldwide Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. DISCONTINUED OPERATIONS
In December 1997, the Company committed to a plan to dispose of its Market
Research Segment and Direct Mail and Fulfillment Segment. As required by APB
Opinion No. 30, "Reporting the Results of Operations, Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," the Company has accounted for the results of
operations and net assets of the Market Research Segment and Direct Mail and
Fulfillment Segment as discontinued operations. The operating results for the
three and six months ended June 30, 1998 and June 30, 1997, and the net assets
at June 30, 1998 and December 31, 1997 have been restated to reflect
discontinued operations.
In the first quarter of 1998, the Company sold substantially all of the assets
and liabilities of the Market Research segment and the Direct Mail and
Fulfillment segment for approximately $38,000,000 in cash, which resulted in a
loss of approximately $907,000, which was recorded as of December 31, 1997. The
Company used the proceeds from these sales to repay all outstanding borrowings
on the secured credit facility.
The following table summarizes the operating results of the discontinued
operations (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JUNE 30, JUNE 30,
-------- --------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues........................................ $ -- $5,422 $4,189 $10,316
Operating expenses.............................. -- 4,430 3,463 8,474
-- ----- ----- -----
Income before income taxes...................... -- 992 726 1,842
Income tax provision............................ -- 350 247 626
-- --- --- ---
Income from discontinued operations............. -- $642 $479 $1,216
== ==== ==== ======
</TABLE>
6. CAPITALIZED SOFTWARE DEVELOPMENT COSTS
The Company capitalizes software development costs in accordance with SFAS No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed." The Company capitalizes software development costs
subsequent to the establishment of technological feasibility and until the
product is available for general release. Costs incurred prior to the
establishment of technological feasibility are charged to product development
expense. Development costs associated with product enhancements that extend
the original product's life or significantly improve the original product's
marketability are also capitalized once technological feasibility has been
established. Software development costs are amortized on a product-by-product,
straight-line basis over the estimated useful lives of the products (three
years), beginning with the initial release to customers. The Company
continually evaluates whether events or circumstances have occurred that
indicate that the remaining useful life of the capitalized software development
costs should be revised or that the remaining balance of such assets may not be
recoverable. The Company evaluates the recoverability of capitalized software
based on the estimated future revenues of each product. As of June 30,1998, the
Company believes that no revisions to the remaining useful life or write-downs
of capitalized software development costs ($225,000 net book value at June 30,
1998) are required.
9
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
(UNAUDITED)
- -------------------------------------------------------------------------------
7. SECURED CREDIT FACILITY
On April 14, 1998, the Company entered into a Loan and Security Agreement with
Mellon, which provides for a $20 million credit facility (the "Credit Facility")
to be repaid in April 2002. Under the terms of the Credit Facility, the Company
can borrow up to the lesser of $20 million or an amount that is determined as
80% of the net accounts receivable aged 90 days or less. The Company can draw on
the Credit Facility in increments of $500,000 or more. The Company can elect at
the time of the draw to pay interest at prime plus 0.50% or at a LIBOR rate plus
2.50% and will pay a commitment fee of 0.375% on the unused borrowing capacity.
The Credit Facility also makes available to the Company letters of credit, which
can be issued, on the outstanding undrawn amount of the Credit Facility. The
letters of credit shall not exceed $1.5 million and have a fee equal to 1.00%
per annum on the face amount of each letter of credit. Borrowings under the
Credit Facility are collateralized by substantially all of the assets of the
Company. The Credit Facility also contains various financial and non-financial
covenants. At June 30, 1998, the Company had no outstanding borrowings under its
Credit Facility and $18,162,000 available under the Credit Facility.
8. SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid $168,000 and $273,000 of interest expense for the three months
ended June 30, 1998 and June 30, 1997 and $599,000 and $344,000 for the six
months ended June 30, 1998 and June 30, 1997, respectively. The Company did not
pay any income taxes during the three and six months ended June 30, 1998 and
June 30, 1997.
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 $350,000 through June 30, 1998.
9. CONCENTRATIONS OF RISK
The Financial Instruments which potentially subject the Company to
concentrations of credit risk consist principally of accounts receivable.
Concentrations of credit risk with respect to accounts receivable are limited
due to the large number of customers comprising the Company's customer base, and
their dispersion across many different industries and geographies. The Company
does not require collateral or other securities to support customer accounts
receivable. The Company performs periodic reviews of its clients' condition to
reduce the collection risk.
The Company does not believe a significant credit risk exists for unreserved
accounts receivable at June 30, 1998. The Company had two clients, which
accounted for approximately 10.9% and 10.2% of total revenues for the three
months ended June 30, 1998, respectively, and 5.6% and 12.7% of total accounts
receivable at June 30, 1998, respectively. The Company also had one other client
which accounted for 18.7% of total accounts receivable at June 30, 1998. On July
8, 1988, a large telemarketing client of the company suspended operations
pending regulatory review. The Company was able to replace the majority of this
client's business through increases within existing clients as well as with new
clients. No client accounted for more than 10% of total revenues for the six
months ended June 30, 1998.
10
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
- --------------------------------------------------------------------------------
10. COMPREHENSIVE INCOME
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income," which is
effective for financial statements issued for fiscal years beginning after
December 15, 1997. The Company's comprehensive income includes net income
(loss) and unrealized gains and losses from foreign currency translation. Total
comprehensive income (loss) for the three months ended June 30, 1998 and 1997
was $(2,648,000) and $(616,000), respectively, and for the six months ended June
30, 1998 and 1997 was $(12,694,000) and $2,028,000, respectively.
11
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RECENT DEVELOPMENTS
Executive Management Changes
On March 18, 1998, Keith E. Alessi executed an agreement to become the Chairman,
Chief Executive Officer and President of the Company. Concurrent with Mr.
Alessi's hiring, J. Brian O'Neill resigned as Chairman, Chief Executive Officer
and President. Mr. O'Neill has continued as a Director. The Company's ability
to execute its plan and return to profitability is largely dependent on the
efforts of its senior management team, including the efforts of Mr. Alessi.
Operational Losses
The Company's operating results have deteriorated since the first quarter of
1997. The Company incurred a net loss of $160 million for the year ended
December 31, 1997. Included in the net loss was a $139 million goodwill
impairment charge and $11.6 million in charges related to call center closings.
Notwithstanding the foregoing charges, the Company incurred operating losses in
1997. The Company also incurred a loss of $10.1 million in the first quarter of
1998 and $2.6 million in the second quarter of 1998. The Company mainly
attributes these losses to the costs associated with expanding its telemarketing
call center capacity in the first and second quarters of 1997 to meet its growth
expectations and the costs associated with subsequently reducing in the third
and fourth quarters of 1997 and first and second quarters of 1998. The Company
determined to reduce its capacity when the Company's largest customer, MBNA,
dramatically reduced its telemarketing programs with the Company and the Company
was not able to procure new clients to fill its excess capacity. The Company
also attributes these losses to decreased telemarketing rates resulting from
industry pricing pressures and its acceptance of lower-margin business in an
effort to fill some of its overcapacity. The Company believes that there has
been a decline in the growth in the outsourcing of teleservices. This decline
has resulted in overcapacity in the telemarketing industry and greater price
competition. The ability of the Company to return to profitability will be
dependent on its ability to achieve additional operating efficiencies, while
maintaining or expanding its customer base. There can be no assurance that the
Company will accomplish these objectives.
Discontinued Operations
In the first quarter of 1998, the Company sold substantially all of the assets
and liabilities of the Market Research Segment and the Direct Mail and
Fulfillment segment for approximately $38,000,000 in cash, which resulted in a
loss of approximately $907,000, which was recorded as of December 31, 1997. The
Company used the proceeds from these sales to repay all outstanding borrowings
on the secured credit facility.
Goodwill Impairment
In the fourth quarter of 1997, the Company performed an in-depth evaluation of
the carrying value of goodwill due to the Company's poor operating performance,
and the overall significant changes in the industry outlook, and recorded a
goodwill impairment charge of $139,072,000, which represented the goodwill
associated with the Telemarketing Segment. As of June 30, 1998, the remaining
goodwill of $27,374,000 relates exclusively to the Customer Care Segment, which
the Company believes is realizable.
12
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS
Comparison of the Actual results of operations for the three months ended June
30, 1998 to the three months ended June 30, 1997.
<TABLE>
<CAPTION>
ACTUAL
RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
----------------------------------
THREE MONTHS AS A THREE MONTHS AS A
ENDED PERCENTAGE OF ENDED PERCENTAGE OF
JUNE 30, 1998 REVENUES JUNE 30,1997 REVENUES
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Telemarketing................................ $30.4 75% $40.9 83%
Customer care................................ 9.9 25% 8.3 17%
---- ---- ---- ----
Total revenue.................................. 40.3 100% 49.2 100%
Cost of services:
Telemarketing................................ 27.8 69% 36.8 75%
Customer care................................ 9.7 24% 8.1 16%
---- ---- ---- ----
Total cost of services......................... 37.5 93% 44.9 91%
Total selling, general and administrative...... 5.0 12% 4.1 8%
Amortization of goodwill....................... 0.3 1% 1.8 4%
---- ---- ---- ----
Total operating expenses....................... 42.8 106% 50.8 103%
Operating income (loss)........................ (2.5) (6)% (1.6) (3)%
Interest (expense) income, net................. (0.1) --% (0.4) (1)%
---- ---- ---- ----
Income (loss) before taxes..................... (2.6) (6)% (2.0) (4)%
Income tax benefit (expense)................... --% 0.7 1%
---- ---- ----
Income (loss) from continuing operations....... (2.6) (6)% (1.3) (3)%
Income from discontinued operations ---- ---- ---- ----
(net of tax)................................... ---- ---% 0.7 2%
---- ---- ---- ----
Net income (loss).............................. $(2.6) (6)% $(0.6) (1)%
===== ===== ===== =====
</TABLE>
13
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
The Company's results of operations classify its Market Research Segment and
Direct Mail and Fulfillment Segment as discontinued operations (see Note 5 to
the Condensed Consolidated Financial Statements).
REVENUE
Total revenue for the three months ended June 30, 1998 amounted to $40.3
million, a decrease of $8.9 million or 18% from $49.2 million for the three
months ended June 30, 1997. This decrease in aggregate revenue was driven by the
reduction of calling hours within the Telemarketing Segment.
Telemarketing Segment
Telemarketing revenue of $30.4 million for the three months ended June 30, 1998
accounted for 75% of the Company's total revenue for the three months ended June
30, 1998 and represents a decrease of $10.5 million or 26% from $40.9 million
for the same prior year period. The decrease in Telemarketing revenues is
principally attributable to decreased calling hours. Of this decrease, $28.3
million was attributable to the loss of clients of which one client, MBNA
America ("MBNA"), represented $16.8 million of the entire loss. The decrease of
revenue from loss of clients was offset by an increase of $13.9 million
attributable to services initiated for new clients, and an increase of $3.9
million attributable to services initiated for existing clients. On July 8,
1998, a large Telemarketing client of the Company suspended operations pending
regulatory review. This client represented 10% of the Company's revenues for
the three months ended June 30, 1998. The Company was able to replace the
majority of this clients business through increases within existing clients as
well as with new clients.
Customer Care Segment
Customer Care revenue of $9.9 million for the three months ended June 30, 1998
accounted for 25% of total revenue for the three months ended June 30, 1998 and
represents an increase of $1.6 million or 19% from $8.3 million for the same
prior year period. Of this increase, $2.3 million was attributable to services
initiated for new clients, and $1.1 million was attributable to services
initiated for existing clients, offset by a decrease in revenues attributable to
the loss of clients of $1.8 million.
COST OF SERVICES
Cost of services amounted to $37.5 million for the three months ended June 30,
1998, a decrease of $7.4 million or 16% from $44.9 million for the same prior
year period. As a percentage of total revenues, cost of services were 93% and
91% for the three months ended June 30, 1998 and 1997, respectively.
Telemarketing Segment
Telemarketing costs of services for the three months ended June 30, 1998
accounted for 74% of the Company's total cost of services from continuing
operations for the three months ended June 30, 1998 and represents a decrease of
$9.0 million or 24% when compared to Telemarketing cost of services of $36.8
million for the same prior year period. Cost of services for the three months
ended June 30, 1998 includes $0.3 million related to employee severance and
termination benefits for certain employees. As a percentage of Telemarketing
revenue, Telemarketing cost of service expenses were 91% and 90% for the three
months ended June 30, 1998 and 1997, respectively. The Company attributes this
increase in cost of services as a percentage of revenue primarily to the
expansion of the Company's productive capacity in the first and second quarter
of 1997, which in turn resulted in the lower utilization of telemarketing
personnel and facilities. In addition, as a result of industry pricing pressures
and in an effort to fill some of its over capacity, the Company accepted less
profitable telemarketing contracts to utilize some of its capacity. Due to lower
calling volume activity, the Company is in the process of renegotiating its long
distance telecommunications contracts with its major vendors. The Company does
not believe that the renegotiating of these contracts will have a material
adverse effect on its results of operations.
14
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
Customer Care Segment
Customer Care cost of services for the three months ended June 30, 1998
accounted for 26% of the Company's total cost of services from continuing
operations for the three months ended June 30, 1998 and represents an increase
of $1.6 million or 20% when compared to Customer Care cost of services of $8.1
million for the same prior year period. As a percentage of Customer Care
revenue, Customer Care cost of service expenses were 98% for the three months
ended June 30, 1998 and 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses amounted to $5.0 million,
an increase of $0.9 million or 22% when compared to SG&A expenses of $4.1
million for the same prior year period. As a percentage of total revenue, SG&A
expenses were 12% and 8% for the three months ended June 30, 1998 and 1997,
respectively.
Selling, general and administrative expenses for the three months ended June 30,
1998 include a $0.2 million charge related to employee severance agreements, a
$2.3 million provision for bad debts offset by a reduction in certain employee
benefit accruals of $0.6 million. SG&A expenses, without this net charge of
$1.9 million, would have decreased $1.0 million or 24% for the three months
ended June 30, 1998 when compared to the same prior year period. As a percentage
of revenue, SG&A expenses, without the charges, would have been 8%.
AMORTIZATION OF GOODWILL
Amortization of Goodwill expense amounted to $0.3 million, a decrease of $1.5
million or 83% when compared to amortization of goodwill expense of $1.8 million
for the same prior year period. As a percentage of total revenue, amortization
of goodwill expense was 1% and 4% for the three months ended June 30, 1998 and
1997, respectively. The decrease in amortization of goodwill expense resulted
from the Company recording a goodwill impairment charge of $139.1 million in the
fourth quarter of 1997, which represented the goodwill associated with the
Telemarketing Segment. As of June 30, 1998, the remaining net goodwill of $27.4
million relates exclusively to the Customer Care Segment.
INTEREST (EXPENSE) INCOME
Net interest expense for the three months ended June 30, 1998 amounted to $0.1
million a decrease of $0.3 million when compared to net interest expense of $0.4
million from the same prior year period. The decrease in net interest expense
resulted from reduced borrowings outstanding under the credit facility during
the three months ended June 30, 1998 as compared to the three months ended June
30, 1997.
15
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
INCOME TAX (EXPENSE) BENEFIT
Income tax (expense) benefit is a function of pretax income (loss) and the
combined effective tax rate of federal and state income taxes. This combined
rate was 0% and 36.0% for the three months ended June 30, 1998 and 1997,
respectively. The income tax benefit for the three months ended June 30, 1997 is
a result of an offset of a provision recorded during the first three months of
1997. As of June 30, 1998, the Company has a net operating loss carryforward of
approximately $9.0 million. Also, as of June 30, 1998, the Company has
approximately $125.0 million of future income tax deductible amounts (to be
amortized principally over 15 years) related to the 1997 goodwill impairment and
call center charges. Due to the uncertain realization of these deferred tax
assets, the Company has recorded a full valuation allowance as of June 30, 1998.
INCOME FROM DISCONTINUED OPERATIONS
In February 1998 the Company sold its Market Research Segment and in March 1998
the Company consummated the sale of its Direct Mail and Fulfillment Segment. For
the three months ended June 30, 1998, there were no operations for these
segments. For the three months ended June 30, 1997, the Company has accounted
for the results of operations of the Market Research Segment and Direct Mail and
Fulfillment Segment as discontinued operations. Income from discontinued
operations for the three months ended June 30, 1997 amounted to $0.7 million
(net of tax).
16
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS
Comparison of the Actual results of operations for the six months ended June 30,
1998 to the six months ended June 30, 1997.
<TABLE>
<CAPTION>
ACTUAL
RESULTS OF OPERATIONS
(Dollars In Millions)
----------------------------------
SIX MONTHS AS A SIX MONTHS AS A
ENDED PERCENTAGE OF ENDED PERCENTAGE OF
JUNE 30, 1998 REVENUES JUNE 30,1997 REVENUES
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Telemarketing................................ $59.2 74% $77.2 83%
Customer care................................ 20.7 26% 16.3 17%
---- ---- ---- ----
Total revenue.................................. 79.9 100% 93.5 100%
Cost of services:
Telemarketing................................ 60.2 75% 65.9 71%
Customer care................................ 20.0 25% 15.1 16%
---- ---- ---- ----
Total cost of services......................... 80.2 100% 81.0 87%
Total selling, general and administrative...... 11.6 15% 7.1 7%
Amortization of goodwill....................... 0.6 1% 3.6 4%
---- ---- ---- ----
Total operating expenses....................... 92.4 116% 91.7 98%
Operating income (loss)........................ (12.5) (16)% 1.8 2%
Interest (expense) income, net................. (0.9) (1)% (0.2) --%
---- ---- ---- ----
Income (loss) before taxes..................... (13.4) (17)% 1.6 2%
Income tax benefit (expense)................... 0.2 --% (0.7) (1)%
---- ---- ---- ----
Income (loss) from continuing operations....... (13.2) (17)% 0.9 1%
Income from discontinued operations
(net of tax)................................... 0.5 1% 1.2 1%
---- ---- ---- ----
Net income (loss).............................. $(12.7) (16)% $2.1 2%
====== ====== ====== ======
</TABLE>
17
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
The Company's results of operations classify its Market Research Segment and
Direct Mail and Fulfillment Segment as discontinued operations (see Note 5 to
the Condensed Consolidated Financial Statements).
REVENUE
Total revenue for the six months ended June 30, 1998 amounted to $79.9 million,
a decrease of $13.6 million or 15% from $93.5 million for the six months ended
June 30, 1997. This decrease in aggregate revenue was driven by the reduction of
calling hours within the Telemarketing Segment.
Telemarketing Segment
Telemarketing revenue of $59.2 million for the six months ended June 30, 1998
accounted for 74% of the Company's total revenue for the six months ended June
30, 1998 and represents a decrease of $18.0 million or 23% from $77.2 million
for the same prior year period. The decrease in Telemarketing revenues is
principally attributable to decreased calling hours. Of this decrease, $45.8
million was attributable to the loss of clients of which one client, MBNA
America ("MBNA"), represented $25.6 million of the entire loss. The decrease of
revenue from loss of clients was offset by an increase of $23.5 million
attributable to services initiated for new clients, and an increase of $4.3
million attributable to services initiated for existing clients. On July 8,
1998, a large Telemarketing client of the Company suspended operations pending
regulatory review. This client represented 9% of the Company's revenues for the
six months ended June 30, 1998. The Company was able to replace the majority of
this clients business through increases within existing clients as well as with
new clients.
Customer Care Segment
Customer Care revenue of $20.7 million for the six months ended June 30, 1998
accounted for 26% of total revenue for the six months ended June 30, 1998 and
represents an increase of $4.4 million or 27% from $16.3 million for the same
prior year period. Of this increase, $4.5 million was attributable to services
initiated for new clients, $1.5 million was attributable to services initiated
for existing clients offset by a decrease in revenues attributable to the loss
of clients of $1.6 million.
COST OF SERVICES
Cost of services amounted to $80.2 million for the six months ended June 30,
1998, a decrease of $0.8 million or 1% from $81.0 million for the same prior
year period. As a percentage of total revenues, cost of services were 100% and
87% for the six months ended June 30, 1998 and 1997, respectively.
Telemarketing Segment
Cost of services for the six months ended June 30, 1998 accounted for 75% of the
Company's total cost of services from continuing operations for the six months
ended June 30, 1998 and represents an increase of $5.7 million or 9% when
compared to Telemarketing cost of services of $65.9 million for the same prior
year period. Cost of services for the six months ended June 30, 1998 includes
$0.8 million related to employee severance and termination benefits related to
the closing of fifteen Telemarketing call centers. As a percentage of
Telemarketing revenue, Telemarketing cost of service expenses were 102% and 85%
for the six months ended June 30, 1998 and 1997, respectively. The Company
attributes this increase in cost of services as a percentage of revenue
primarily to the expansion of the Company's productive capacity in the first and
second quarter of 1997, which in turn resulted in the lower utilization of
telemarketing personnel and facilities. In addition, as a result of industry
pricing pressures and in an effort to fill some of its over capacity, the
Company accepted less profitable telemarketing contracts to utilize some of its
capacity. Due to lower calling volume activity, the Company is in the process of
renegotiating its long distance telecommunications contracts with its major
vendors. The Company does not believe that the renegotiating of these contracts
will have a material adverse effect on its results of operations.
18
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
Customer Care Segment
Customer Care cost of services for the six months ended June 30, 1998 accounted
for 25% of the Company's total cost of services from continuing operations for
the six months ended June 30, 1998 and represents an increase of $4.9 million or
32% when compared to Customer Care cost of services of $15.1 million for the
same prior year period. As a percentage of Customer Care revenue, Customer Care
cost of service expenses were 97% and 93% for the six months ended June 30, 1998
and 1997, respectively. The increase in Customer Care cost of service expenses
for the six months ended June 30, 1998, as a percentage of revenue, as compared
to the same prior year period, resulted primarily from the expansion of the
administrative infrastructure of the TARP business in anticipation of expected
growth.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses amounted to $11.6 million,
an increase of $4.5 million or 63% when compared to SG&A expenses of $7.1
million for the same prior year period. As a percentage of total revenue, SG&A
expenses were 15% and 7% for the six months ended June 30, 1998 and 1997,
respectively.
Selling, general and administrative expenses for the six months ended June 30,
1998 include a $1.3 million charge related to corporate overhead reduction
related to employee severance agreements, a $2.3 million provision for bad debts
offset by a reduction in certain employee benefit accruals of $0.6 million. SG&A
expenses, without the charges of $3.0 million, would have increased $1.5 million
or 21% for the six months ended June 30, 1998 when compared to the same prior
year period. As a percentage of revenue, SG&A expenses, without the charge of
$3.0 million, would have been 11%. The increase in SG&A expenses for the six
months ended June 30, 1998, as a percentage of revenue, as compared to the same
prior year period, resulted primarily from the expansion of the Company's
administrative infrastructure in response to the Company's growth, and the
expenses associated with the consolidation of the Initial Operating Businesses.
In addition for the six months ended June 30, 1998, SG&A expenses, includes $0.4
million of expense associated with a stock subscription agreement entered into
with an executive of the Company.
AMORTIZATION OF GOODWILL
Amortization of Goodwill expense amounted to $0.6 million, a decrease of $3.0
million or 83% when compared to amortization of goodwill expense of $3.6 million
for the same prior year period. As a percentage of total revenue, amortization
of goodwill expense was 1% and 4% for the six months ended June 30, 1998 and
1997, respectively. The decrease in amortization of goodwill expense resulted
from the Company recording a goodwill impairment charge of $139.1 million in the
fourth quarter of 1997, which represented the goodwill associated with the
Telemarketing Segment. As of June 30, 1998, the remaining net goodwill of $27.4
million relates exclusively to the Customer Care Segment.
INTEREST (EXPENSE) INCOME
Net interest expense for the six months ended June 30, 1998 amounted to $0.9
million an increase of $0.7 million when compared to net interest expense of
$0.2 million from the same prior year period. The increase in net interest
expense resulted from increased borrowings outstanding under the credit facility
during the six months ended June 30, 1998 as compared to the six months ended
June 30, 1997.
19
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
INCOME TAX (EXPENSE) BENEFIT
Income tax (expense) benefit is a function of pretax income (loss) and the
combined effective tax rate of federal and state income taxes. This combined
rate was (1.8)% and 45.5% for the six months ended June 30, 1998 and 1997,
respectively. Income tax benefit for the six months ended June 30, 1998 amounted
to $0.2 million a difference of $0.9 million when compared to income tax expense
of $0.7 million for the same prior year period. The 1998 income tax benefit is a
result of an offset recorded for the $0.2 million tax provision of the
discontinued operations. As of June 30, 1998, the Company has a net operating
loss carryforward of approximately $9.0 million. Also, as of June 30, 1998, the
Company has approximately $125.0 million of future income tax deductible amounts
(to be amortized principally over 15 years) related to the 1997 goodwill
impairment and call center charges. Due to the uncertain realization of these
deferred tax assets, the Company has recorded a full valuation allowance as of
June 30, 1998.
INCOME FROM DISCONTINUED OPERATIONS
In February 1998 the Company sold its Market Research Segment and in March 1998
the Company consummated the sale of its Direct Mail and Fulfillment Segment. For
the six months ended June 30, 1998 and 1997, the Company has accounted for the
results of operations of the Market Research Segment and Direct Mail and
Fulfillment Segment as discontinued operations. Income from discontinued
operations for the six months ended June 30, 1998 and 1997 amounted to $0.5
million and $1.2 million (net of tax), respectively. Revenues for the six months
ended June 30, 1998 amounted to $4.2 million a decrease of $6.1 million or 59%
when compared to revenues of $10.3 million for the same prior year period.
Operating expenses for the six months ended June 30, 1998 amounted to $3.5
million a decrease of $5.1 million or 59% when compared to operating expenses of
$8.6 million for the same prior year period.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
DOLLARS IN MILLIONS SIX MONTHS ENDED SIX MONTHS ENDED
CASH FLOWS PROVIDED BY (USED IN): JUNE 30,1998 JUNE 30,1997
- --------------------------------- ------------------ ------------------
<S> <C> <C>
Operating Activities.......................................................... $(8.6) $(2.4)
Investing Activities.......................................................... 36.2 (54.2)
Financing Activities.......................................................... (28.4) 28.4
</TABLE>
For the six months ended June 30, 1997
- --------------------------------------
At June 30, 1997 the Company had a zero cash balance. The Company generated
$28.4 million through financing activities. The Company borrowed $28.6 million
under its Credit Facility. During this period the Company used net $0.2 million
to repay other debt and capital lease obligations.
During this period the Company used $54.2 million for investing activities. The
Company used $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 terms of the Initial
Operating Businesses' purchase agreements, and $1.6 million related to accrued
separation costs for certain former owners of the Initial Operating Businesses.
The Company also used $5.3 million to purchase the net assets of TeleSpectrum
FX, and $15.9 million for the purchase of property and equipment associated with
the commencement of the Company's call center expansion and centralization
initiatives. In addition the Company used $4.2 million to purchase a business
which was subsequently sold and $1.0 million related to capital investments for
discontinued operations.
20
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
During this period the Company used $2.4 million from operating activities
consisting of $5.6 million used in continuing operations and $3.2 million
generated from discontinued operations.
For the six months ended June 30, 1998
At June 30, 1998, the Company had a zero cash balance. During the six months
ended June 30, 1998, the Company used $0.8 million in cash which consisted of
$8.6 million in net cash used in operating activities, $36.2 million net cash
provided by investing activities and $28.4 million of net cash used in financing
activities.
The $8.3 million of cash used in operating activities consisted of $8.0 million
used in continuing operations and $0.3 million used in discontinued operations.
The $8.0 million of cash used in continuing operations was principally related
to operating losses and the funding of working capital requirements.
The $36.0 million of cash provided from investing activities consisted of $38.0
million of cash received from the sale of the Market Research and the Direct
Mail and Fulfillment Segments in February and April of 1998. During the six
months ended June 30, 1998 purchases of property and equipment were $1.8
million. The Company used $0.3 million related to capital investments for
discontinued operations.
The net cash used in financing activities primarily consisted of $29.0 million
of net payments made against the Company's Credit Facility dated January 24,
1997, as amended. In addition, the Company made payments on debt and capital
lease obligations totaling approximately $0.8 million and received proceeds from
the exercise of stock options and sale of common stock totaling $1.4 million.
On March 25, 1998, the Company was notified by its primary lending institution,
Mellon Bank N.A. (Mellon), that the Company was in default of certain loan
covenants of its Credit Facility. The Company repaid this facility on April 1,
1998, with the proceeds from the sale of its Direct Mail and Fulfillment
Segment. On April 14, 1998, the Company entered into a new Credit Facility with
Mellon which provides for a $20 million Credit Facility that expires in April
2002. Under the terms of the Credit Facility, the Company can borrow up to the
lesser of $20 million or an amount that is determined as 80% of the net accounts
receivable aged 90 days or less. The Company had $18,162,000 of available
borrowings at June 30, 1998. The Company can draw on the Credit Facility in
increments of $500,000 or more. The Company can elect at the time of the draw to
pay interest at prime plus 0.50% or at a LIBOR rate plus 2.50% and will pay a
commitment fee of 0.375% of the unused borrowing capacity. The Credit Facility
also makes available to the Company letters of credit, which may be issued on
the outstanding undrawn amount of the Credit Facility. The letters of credit
shall not exceed $1.5 million and have a fee equal to 1.00% per annum on the
face amount of each letter of credit. Borrowings under the Credit Facility are
collateralized by substantially all of the assets of the Company. The Credit
Facility also contains various financial and non-financial covenants.
In order to satisfy the financial covenants under this facility on a continuing
basis, the Company must successfully complete its current restructuring plans.
Though the Company believes it will remain in compliance with the 1998 credit
facility covenants, there is no assurance the Company will be able to satisfy
such covenants.
The Company believes borrowings available under its April 1998 Credit Facility
will be sufficient to meet its operating and capital needs into 1999.
21
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
OTHER INFORMATION -- RISK FACTORS
Results of Operations
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 telemarketing 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
outsource service providers. In addition to these factors, 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 combined with the quality of the
lists of prospective customers provided by the Company's clients.
The Company is continuing its review of its costs, organizational structure and
information technology in an effort to identify opportunities for cost reduction
and efficiency. While the Company expects to achieve further cost reductions,
there can be no assurance that it will be able to successfully achieve its
desired results.
Reliance on Major Clients
Although only two customers of the Company represent more than 10% of the
Company's revenues, the Company may in the future develop relationships with
clients that represent a large concentration of revenues. Since most client
contracts can generally be canceled by the client upon relatively short notice,
the Company will be vulnerable to any unexpected termination or non-renewal of
such a relationship. On July 8, 1998, one of these customers suspended
operations pending regulatory review. The Company was able to replace the
majority of this customers business through increases within existing customers
as well as with new customers.
Difficulties of Managing Rapid Growth
The Company has experienced rapid growth over the past several years. Continued
future growth will depend on a number of factors, including the Company's
ability to (i) initiate, develop and maintain new client relationships and
expand its existing client programs; (ii) recruit, motivate and retain qualified
management and hourly personnel; (iii) rapidly identify, acquire or lease
suitable call center facilities on acceptable terms and complete build-outs of
such facilities in a timely and economic fashion; and (iv) maintain the high
quality of the services and products that it provides to its clients. There can
be no assurance that the Company will be able to maintain or accelerate its
growth rate, effectively manage its expanding operations or maintain its
profitability. If the Company is unable to maintain its historical growth rate
or effectively manage its growth, its business, results of operations or
financial condition could be materially adversely affected.
The Company's profitability is influenced significantly by its call center
capacity utilization. The Company attempts to maximize utilization; however,
because almost all of the Company's business is outbound, the Company has
significantly higher utilization during peak (weekday) periods than during off-
peak (night and weekend) periods. In addition, the Company has experienced, and
in the future may experience, at least short-term, excess peak period capacity
when it opens a new call center or terminates or completes a large client
program. There can be no assurance that the Company will be able to achieve or
maintain optimal call center capacity utilization.
22
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
Need for Additional Financing
The Company currently estimates proceeds available under the Company's credit
facility and cash generated from operations, will be sufficient to finance its
current operations. There can be no assurance, however, that these sources will
actually be sufficient to meet the Company's needs, particularly if the Company
does not achieve its planned cost reductions or generate expected revenue
levels. If these sources are not sufficient, the Company will be required to
seek additional debt or equity financing and there can be no assurance given
that any such financing will be available on terms acceptable to the Company, if
at all. If additional financing is raised by issuing equity securities, existing
shareholders may experience significant dilution.
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. 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. The Company is sensitive to seasonal downturns; however, there can
be no assurance that the Company will be able to predict or compensate for any
such seasonal downturns.
Reliance on Technology
The Company has made significant investments in technology and anticipates that
it will be necessary to continue making significant additional technology
investments to remain competitive. No assurance can be given that the Company
will be successful in anticipating continuing technological changes or in
implementing new or enhanced technology, and the failure of the Company to so
anticipate or implement could have a material adverse effect on the Company's
business.
Dependence on Labor Force
The Company's industry is very labor intensive and has experienced high
personnel turnover. Many of the Company's employees receive modest hourly wages
and a significant number are employed on a part-time basis. A higher turnover
rate among the Company's employees would increase the Company's recruiting and
training costs and decrease operating efficiencies and productivity. Some of the
Company's operations, particularly insurance product sales and technology-based
inbound customer service, require specifically trained employees. Growth in the
Company's business will require it to recruit and train qualified personnel at
an accelerated rate from time to time. There can be no assurance that the
Company will be able to continue to hire, train and retain a sufficient labor
force of qualified employees. A significant portion of the Company's costs
consists of wages to hourly workers. An increase in hourly wages, costs of
employee benefits or employment taxes could materially adversely effect the
Company.
Dependence on Telephone Service
The Company's business is materially dependent on service provided by various
local and long distance telephone companies. A significant increase in the cost
of telephone services that is not recoverable through an increase in the price
of the Company's services, or any significant interruption in telephone
services, could have a materially adverse impact on the Company.
23
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
Control by Principal Stockholder
CRW Financial, Inc. ("CRW") beneficially owns approximately 28% of the
outstanding Common Stock of the Company. As a result, CRW is able to exercise
significant influence over the outcome of matters submitted to the Company's
stockholders. Such voting concentration may have the effect of discouraging,
delaying or preventing a change in control of the Company.
Risks Associated with the Year 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. In other words, date
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in system failures or miscalculations causing
disruptions of operations, including, among others, a temporary inability to
process transactions, send invoices, or engage in similar normal business
activities. The Company does not believe that it has material exposure to the
Year 2000 issue with respect to its own information systems since its existing
systems correctly define the year 2000. The Company is in the process of
conducting an analysis, which it expects to complete in 1998, to determine the
extent to which its customers' and suppliers' systems (insofar as they relate to
the Company's business) are subject to the Year 2000 issue. Accordingly, the
Company is currently unable to predict the extent to which the Year 2000 issue
will affect its customers or suppliers, or to the extent to which it would be
vulnerable to the failure of its customers or suppliers to remediate any Year
2000 issues on a timely basis.
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, cost reductions,
efficiencies and growth are forward-looking statements that could 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 1995. 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, cost reductions and
efficiencies may not be achieved, 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.
24
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in the following legal proceedings:
1. Manufacturing Administration and Management Systems, Inc. vs
TeleSpectrum Worldwide Inc. The plaintiff alleges a patent infringement
with respect to dialer technology. The Company's provider of the dialer
technology has accepted defense of the Company in this matter.
2. North American Publishing Company vs. Dial Direct, Inc. A
former customer of a predecessor company of the Company alleges damages of
$120,000 as a result of a delay in the Company providing requested
information. The Company is defending the claim.
3. Parcel Consultants Incorporated d/b/a NTC vs. TeleSpectrum
Worldwide Inc. Plaintiff alleges breach of contract and fraud. The Company
disputes the allegations and is defending the claim.
4. TeleSpectrum Worldwide Inc. vs. Parcel Consultants
Incorporated and Anthony Provenzano. The Company has sued for collection of
$4,742,000 due for services performed.
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 27, 1998,
the shareholders elected six directors. In the election of the directors,
22,851,729 shares were voted in the favor of J. Brian O'Neill and 231,938
shares voted against, 23,031,193 shares were voted in favor of the election
of Keith E. Alessi and 52,474 shares voted against, 23,021,356 shares were
voted in favor of the election of Joseph DelRaso and 62,311 shares voted
against, 22,031,316 shares were voted in favor of the election of William
F. Rhatigan and 52,351 shares voted against, 22,032,700 shares were voted
in favor of the election of Richard W. Virtue and 50,961 shares voted
against, and 23,021,410 shares were voted in favor of the election of Kevin
W. Wash and 62,251 voted against.
ITEM 5. OTHER INFORMATION
On April 14, 1998, the Company entered into a new Loan and Security
Agreement with Mellon, which provides for a $20 million credit facility
(the "Credit Facility") to be repaid in April 2002. Under the terms of the
Credit Facility, the Company can borrow up to the lesser of $20 million or
an amount that is determined as 80% of the net accounts receivable aged 90
days or less. The Company can draw on the Credit Facility in increments of
$500,000 or more. The Company can elect at the time of the draw to pay
interest at prime plus 0.50% or at a LIBOR rate plus 2.50% and will pay a
commitment fee of 0.375% on the unused borrowing capacity. The Credit
Facility also makes available to the Company letters of credit, which can
be issued, on the outstanding undrawn amount of the Credit Facility. The
letters of credit shall not exceed $1.5 million and have a fee equal to
1.00% per annum on the face amount of each letter of credit. Borrowings
under the Credit Facility are collateralized by substantially all of the
assets of the Company. The Credit Facility also contains various financial
and non-financial covenants.
25
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Exhibits
<S> <C>
The following is a list of exhibits filed as part of this quarterly report on Form
10-Q. Where so indicated by footnote, exhibits which were previously
filed are incorporated by reference. For exhibits incorporated by reference,
the location of the exhibit in the previous filing is indicated in
parentheses.
3.01 Restated Certificate of Incorporation of TeleSpectrum Worldwide Inc.
is incorporated by reference to exhibit 3.01 of the Company's
Registration Statement on Form S-1 (File No. 333-04349).
3.02 Bylaws of TeleSpectrum Worldwide Inc. are incorporated by reference
to exhibit 3.02 of the Company's Registration Statement on Form S-1
(File No. 333-04349)
10.01 Employment agreement dated as of March 18, 1998, between
TeleSpectrum Worldwide Inc. and Keith E. Alessi is incorporated by
reference to Exhibit 10.08 of the Registrants Form 10-K for the fiscal
year ended December 31, 1997.
10.02 Subscription agreement dated as of March 18, 1998, between
TeleSpectrum Worldwide Inc. and Keith E. Alessi is incorporated by
reference to Exhibit 10.09 of the Registrants Form 10-K for the fiscal
year ended December 31, 1997.
10.03 Stock Option agreement dated as of March 18, 1998, between
TeleSpectrum Worldwide Inc. and Keith E. Alessi is incorporated by
reference to Exhibit 10.10 (a) of the Registrants Form 10-K for the
fiscal year ended December 31, 1997.
10.04 Stock Option agreement dated as of March 18, 1998, between
TeleSpectrum Worldwide Inc. and Keith E. Alessi is incorporated by
reference to Exhibit 10.10 (b) of the Registrants Form 10-K for the
fiscal year ended December 31, 1997.
10.05 Amended and Restated Employment agreement dated as of February
25, 1998, between TeleSpectrum Worldwide Inc. and Brian J. O'Neill is
incorporated by reference to Exhibit 10.11 of the Regstrants Form
10-K for the fiscal year ended December 31, 1997.
10.06 Asset Purchase Agreement dated as of MArch 6, 1998 by and among
TeleSpectrum Worldwide Inc., First Service Corporation, DDS
Dyment Distribution Service Ltd., DDS Harris Limited and DDS
Harris Fulfillment Limited is incorporated by refernce to Exhibit
10.17 of the Registrants Form 10-K for the fiscal year ended December
31, 1997.
10.07 Asset Aquisition Agreement dated as of January 16, 1998 by and among
TeleSpectrum Worldwide Inc., NCO Group, Inc. and NCO Teleservices,
Inc. is incorporated by refernce to Exhibit 10.18 of the Registrants Form
10-K for the fiscal year ended December 31, 1997.
</TABLE>
26
<PAGE>
<TABLE>
<S> <C>
10.08 Loan and Security Agreement dated as of April 14, 1998 by and among
TeleSpectrum Worldwide Inc., TeleSpectrum Trademarks, Inc. and
TeleSpectrum Investments, Inc. and Mellon Bank, N.A. is incorporated
by reference to Exhibit 10.08 of the Registrants Form 10-Q for the
quarter ended March 31, 1998.
27.01 Financial Data Schedule.
(b) Form 8-K
The Company filed a Current Report on Form 8-K with the Commission on
March 24, 1998.
</TABLE>
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, 1998 /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 CONSOLIDATED
BALANCE SHEET AND RESULTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 36,871
<ALLOWANCES> (3,175)
<INVENTORY> 0
<CURRENT-ASSETS> 37,822
<PP&E> 47,903
<DEPRECIATION> 14,339
<TOTAL-ASSETS> 99,500
<CURRENT-LIABILITIES> 25,321
<BONDS> 0
0
0
<COMMON> 257
<OTHER-SE> 69,263
<TOTAL-LIABILITY-AND-EQUITY> 99,500
<SALES> 79,915
<TOTAL-REVENUES> 79,915
<CGS> 99,210
<TOTAL-COSTS> 99,210
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,206
<INTEREST-EXPENSE> 933
<INCOME-PRETAX> (13,434)
<INCOME-TAX> 247
<INCOME-CONTINUING> (13,187)
<DISCONTINUED> 479
<EXTRAORDINARY> (12,708)
<CHANGES> 0
<NET-INCOME> (12,708)
<EPS-PRIMARY> (.50)
<EPS-DILUTED> (.50)
</TABLE>
