<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
TO
COMMISSION FILE NO. 0-21107
TELESPECTRUM WORLDWIDE INC.
---------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 23-2845501
-------- ----------
(STATE OR OTHER JURISDICTION OF (I.R.S. 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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
--------------------------------------
1
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(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-----------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 27, 1998, the aggregate market value of the Common Stock held
by non-affiliates of the registrant was $81,904,259. Such aggregate market
value was computed by reference to the closing sale price of the Common Stock as
reported on The Nasdaq NationalMarket on such date. For purposes of making this
calculation only, the registrant has defined affiliates as including all
directors, executive officers and beneficial owners of more than five percent of
the Common Stock of the Company.
As of March 27, 1998, there were 25,213,074 shares of the registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement for the Registrant's 1998 Annual
Meeting of Stockholders to be filed within 120 days after the end of the fiscal
year covered by this annual report on Form 10-K--Part III.
2
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I
<S> <C> <C>
Item 1. Business 1
Item 2. Properties 8
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 9
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 9
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 13
Item 8. Financial Statements and Supplementary Data 40
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 40
PART III
Item 10. Directors and Executive Officers of the Registrant 41
Item 11. Executive Compensation 42
Item 12. Security Ownership of Certain Beneficial Owners and Management 42
Item 13. Certain Relationships and Related Transactions 42
PART IV
Item 14. Exhibits, Financial Statement Schedule and Report on Form 8-K 43
Index to Financial Statements and Schedule F-1
</TABLE>
This Report contains, in addition to historical information, forward-
looking statements that involve risks and uncertainties. These forward-looking
statements include statements regarding the Company's development, growth and
expansion plans, industry conditions, cost reductions, call center closings,
operating efficiencies and the sufficiency of the Company's liquidity and
capital. Such statements are based on the Company's current expectations and are
subject to a number of uncertainties and risks that could cause actual results
to differ materially from those described in the forward-looking statements.
Unless the context indicates otherwise, the terms "TeleSpectrum" and
"Company" collectively refer to TeleSpectrum Worldwide Inc. and its
subsidiaries.
3
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TELESPECTRUM WORLDWIDE INC.
PART I
ITEM 1. BUSINESS
TeleSpectrum Worldwide Inc. (the "Company," or "TeleSpectrum") provides services
to its clients through its two business segments, Telemarketing and Customer
Care. In August 1996, the Company began material operations when it
concurrently completed its initial public offering and acquired the assets,
businesses and certain liabilities of six companies engaged in telemarketing,
customer care, market research and direct mail and fulfillment services
(collectively, the "Initial Operating Businesses"). In October 1996, the Company
acquired its consulting business ("TARP"). In February 1998, the Company sold
its market research business, and in March 1998, the Company sold its direct
mail and fulfillment business. Unless otherwise indicated, all historical
references to the Company's business includes the activities, where applicable,
of its predecessor companies.
The Company's operating results have deteriorated significantly since the first
quarter of 1997 (see Item 7). The Company recorded operating losses in the
second, third and fourth quarters of 1997. The Company expects that it will
continue to realize significant operating losses during the first two quarters
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 the number of its Telemarketing call centers in the third
and fourth quarters of 1997. The Company determined to further reduce its
capacity in the first quarter of 1998 when its largest customer, MBNA America
("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 a
significant decrease in the growth of outsourcing of telemarketing has occurred
which has reduced the Company's growth expectations. In addition, approximately
19% of the Company's revenues in 1997 were generated from MBNA, mainly in the
first and second quarters of 1997. The Company expects to generate significantly
lower revenues from MBNA in 1998.
Beginning in the third quarter of 1997 and continuing in the fourth quarter of
1997 and the first two quarters of 1998, the Company took actions to restructure
its Telemarketing segment in response to industry and Company-specific
developments (see Note 2 to Consolidated Financial Statements). In connection
with the restructuring, the Company closed or plans to close 15 of its 25
telemarketing call centers and the Company's workforce will be significantly
reduced. In the fourth quarter of 1997, the Company recorded a goodwill
impairment charge of $139,072,000, which represented the goodwill associated
with the Telemarketing Segment. As of December 31, 1997, the remaining goodwill
of $27,964,000 relates exclusively to the Customer Care Segment (see Note 2 to
the Consolidated Financial Statements).
SERVICES OVERVIEW
Telemarketing Segment
The Company provides business-to-consumer and business-to-business outbound
telemarketing services, which consist primarily of direct sales activities
initiated by the Company on behalf of clients. These activities involve the use
of client-generated, electronically transmitted lists of customers selected to
match the demographic profile of the targeted customer for the offered product
or service. The Company's computerized call management systems utilize
predictive dialers to automatically dial telephone numbers, determine if a live
connection is made and present connected calls to a call center representative
(a "CCR") who has been trained for the client's program. The client or the
Company provides a prepared script to assist the CCR in marketing the product or
service to the call recipient. The Company also provides direct sales
activities in response to its client's direct marketing campaigns and
interactive voice response services.
Customer Care Segment
The Company provides customer care services to its clients, including inbound
teleservices, consulting services and call center management. Inbound
teleservices typically involve activities such as responding to clients'
customer service inquiries, catalogue sales and electronic order processing.
Consulting services are provided to a range of clients and involve providing
innovative design solutions for clients' customer service departments and
conducting market research surveys regarding the performance of the client's
customer service capabilities. The Company also licenses its proprietary
customer service software which clients can use to benchmark and improve their
customer service performance. Call center management involves all aspects of
recruiting, staffing, managing operations and providing analysis and reports to
clients at their own on-site teleservices facilities.
4
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INDUSTRY OVERVIEW
The teleservices industry facilitates the direct communication of information to
and from current and prospective customers by telephone. Indirect marketing
methods, such as radio, television and print advertising, employ a "one-to-many"
approach to convey marketing information that can position products and services
within a broad market context. Direct marketing methods, such as telemarketing,
employ a "one-to-one" approach to deliver a marketing message directly to a
specific current or prospective customer and to elicit immediate customer
response. In addition to traditional outbound and inbound telemarketing,
teleservices include inbound telephone-based customer service and support and
related value-added services such as training, consulting, call center
management and interactive voice response.
As businesses have sought greater returns from their investments in marketing
activities, many have coupled traditional indirect marketing methods such as
advertising with direct marketing methods such as telemarketing. Advances in
computer and telecommunications technology have assisted telemarketers to more
accurately identify and contact potential customers, and have provided CCRs
with more complete on-line guidance and support. Businesses have historically
relied overwhelmingly upon in-house call center personnel to provide
telemarketing and telephone-based customer support services. Providers of
outsourced teleservices can offer clients economies of scale in sharing the cost
of new technology among a larger base of users than might be possible with in-
house telemarketing, while at the same time better matching available capacity
to fluctuating client demand.
The Company believes that there has been a significant decline in the growth in
the outsourcing of teleservices. Because the industry had previously enjoyed
rapid growth, many organizations, such as the Company, made significant
additions to their call center capacities in order to accommodate anticipated
growth. As a result, the Company believes that currently there is significant
overcapacity in the teleservices industry, and given the general short-term
nature of most teleservices outsourcing contracts, there is currently rather
intense price competition for new teleservices contracts. While the Company
believes that there will be continued growth in the teleservices outsourcing
industry, it does not expect that prior growth rates will resume in the near
future, if at all (see Note 2 to the Consolidated Financial Statements).
COMPETITION
The telemarketing industry is intensely competitive. Industry participants
compete on price, value, available capacity, range of service offerings, quality
and customer service. The Company competes with numerous independent
telemarketing firms, as well as the in-house telemarketing operations of many of
its clients or potential clients. In addition, most businesses that are
significant consumers of teleservices utilize more than one telemarketing firm
and reallocate work among various firms from time to time. A significant amount
of such work is contracted on an individual project basis with the effect that
the Company, and other firms seeking such business frequently are required to
compete with each other as individual projects are initiated. The Company may
not be able to compete effectively against its current competitors, and the
Company cannot assure that additional competitors with greater resources than
the Company will not enter the industry and compete effectively against the
Company. To the extent that the Company is unable to compete successfully
against its existing and future competitors, its business, operating results and
financial condition would be materially adversely affected.
SALES AND MARKETING; CUSTOMER CONCENTRATION
As of December 31, 1997, there were a total of 37 sales personnel employed by
the Company. Sales personnel are compensated by salary, commissions and bonuses
based on individual performance and overall profitability.
The Company generally operates under short-term cancellable contractual
relationships with its clients. Pricing often includes an initial fee, a base
service charge and separate charges for ancillary services. Service charges for
telemarketing services are based upon hourly rates for outbound calls, per
minute rates for inbound calls or a commission or performance payment on
successful sales or results. Charges for other services may be computed on a
fee-for-service or piecework basis.
5
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Approximately 19% of the Company's total revenues in 1997 were generated from
MBNA. The Company did not generate more than 10% of its revenues in 1997 from
any other clients and does not expect to generate more than 10% of revenues in
1998 from any individual client. The Company expects to receive significantly
lower revenues from MBNA in 1998.
TARGETED INDUSTRIES
The Company targets its marketing efforts toward clients in the following
principal industries:
Telecommunications
The Company provides telemarketing programs for major telecommunications
companies for long distance, cellular and cable products and services, as well
as regional telecommunications companies marketing advanced telephone features.
The Company offers its telecommunications industry clients a range of services,
including customer service, sales and survey campaigns.
Utilities
The Company works with large public and private utilities in providing customer
service, consumer affairs service, collection efforts and survey campaigns.
Insurance
The Company works with large consumer insurance companies and their agents,
complementing its clients' own sales efforts by offering products such as life
and accidental death and dismemberment insurance. As of December 31, 1997, the
Company employed 256 agents collectively holding state insurance licenses from
35 states.
Financial Services
The Company provides banks and other financial services clients with a wide
range of services, which primarily consist of credit cardholder acquisitions,
and also include active account generation, account balance transfer, account
retention and customer service.
Pharmaceuticals and Health care
The Company provides pharmaceuticals clients with product support and customer
service. In addition, the Company performs market research and analysis for
clients in the health care industry.
Consumer Products
The Company provides its consumer products clients with customer service, order
entry and new customer acquisition services and can support inbound calls 24
hours per day and 365 days per year.
Technology
The Company provides product support and customer service inbound teleservices
for clients in the computer hardware and software industry. In addition, the
Company provides business-to-business teleservices such as lead generation,
customer qualification and account management, as well as call center
management, for technology clients.
6
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PERSONNEL AND TRAINING
As of December 31, 1997, the Company employed approximately 5,100 individuals on
a full-time basis and 1,000 individuals on a part-time basis. Teleservices
Representatives account for approximately 4,500 employees of the total force
level of 6,100. The Company's ability to hire, train and manage qualified
employees is critical to its ability to provide high quality services to its
clients. Beginning in the third quarter of 1997 and continuing in the fourth
quarter of 1997 and the first quarter of 1998, the Company took actions to
restructure its Telemarketing Segment. In connection with the restructuring,
the Company laid-off employees as a result of call center closings (see Note 2
to the Consolidated Financial Statements).
GOVERNMENT REGULATION
Telemarketing sales practices are regulated at both the federal and state level.
The Federal Telephone Consumer Protection Act of 1991 (the "TCPA"), enforced by
the Federal Communications Commission, imposes restrictions on unsolicited
automated telephone calls to residential telephone subscribers. Under the TCPA
it is unlawful to initiate telephone solicitations to residential telephone
subscribers before 8:00 a.m. or after 9:00 p.m., local time at the subscriber's
location, or to use automated telephone dialing systems or artificial or
prerecorded voices to call certain subscribers. Additionally, the TCPA requires
teleservice firms to develop a written policy implementing a "do not call" list,
including the training of its telemarketing personnel to comply with these
restrictions. Currently, the Company trains its service representatives to
comply with the regulations of the TCPA and programs its call management system
to prevent initiating telephone calls during restricted hours or to individuals
maintained on the Company's "do not call" list.
The Federal Trade Commission (the "FTC") regulates both general sales practices,
and telemarketing specifically. Under the Federal Trade Commission Act (the "FTC
Act"), the FTC has broad authority to prohibit a variety of advertising or
marketing practices that may constitute "unfair or deceptive acts and
practices."
The FTC also administers the Federal Telemarketing and Consumer Fraud and Abuse
Prevention Act of 1994 (the "TCFAPA"). Under the TCFAPA, the FTC has issued
regulations prohibiting a variety of deceptive, unfair or abusive practices in
telemarketing sales. Generally, these rules prohibit misrepresentations of the
cost, quantity, terms, restrictions, performance or characteristics of products
or services offered by telephone solicitation or of refund, cancellation or
exchange policies. The regulations also regulate the use of prize promotions in
telemarketing to prevent deception and require that a telemarketer identify
promptly and clearly the seller on whose behalf the telemarketer is calling, the
purpose of the call, the nature of the goods or services offered and, if
applicable, that no purchase or payment is necessary to win a prize. The
regulations also require that telemarketers maintain records on various aspects
of their business. The Company believes that it is in compliance with the TCFAPA
and the regulations promulgated pursuant to the TCFAPA.
Violation of the rules and regulations applicable to telemarketing practices may
result in injunctions against certain operations, in monetary penalties or
disgorgement of profits; moreover, such violations may give rise to private
actions for damages.
From time to time, bills are introduced in Congress which, if enacted, would
regulate the use of credit information. There can be no assurance that any such
legislation, if enacted, will not have an adverse effect on the telemarketing
industry generally or the Company's operations specifically.
Most states have enacted statutes similar to the FTC Act prohibiting unfair or
deceptive acts and practices. A number of states have enacted legislation and
other states are considering enacting legislation to regulate telemarketing. For
example, telephone sales in certain states are not final until a written
contract is delivered to and signed by the buyer, and such a contract often may
be canceled within three business days. At least one state also prohibits
telemarketers from requiring credit card payment, and several other states
require certain telemarketers to obtain licenses, post bonds or submit sales
scripts to the state's attorney general.
The industries served by the Company are also subject to government regulation.
Company employees who complete the sale of insurance products are required to be
licensed by various state insurance commissions and to participate in regular
continuing education programs, which currently are provided by the Company.
7
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ITEM 2. PROPERTIES
The Company's corporate headquarters are located in 21,000 square feet of
rentable office space in King of Prussia, Pennsylvania, which it subleases from
CRW Financial, Inc.(see Note 15 to the Consolidated Financial Statements), an
affiliate of the Company. As of December 31, 1997, the Company maintained the
following material facilities:
NUMBER OF
Location WORKSTATIONS
-------- ------------
TELEMARKETING CENTERS
- ---------------------
Salisbury, NC 120
Fayetteville, NC 119
Toronto, Ontario* 240
Asheville, NC* 90
Huntington, WV I 119
Huntington, WV II 119
Winnipeg, Manitoba * 300
Beckley, WV 180
Wheeling, WV 240
Charleston, WV 240
Steubenville, OH 120
Endicott, PA 240
Scranton, PA 240
Phoenix I, AZ* 120
Phoenix II, AZ* 56
King of Prussia, PA* 120
Cambridge, MA* 119
Andover, MA* 48
Westborough, MA* 48
---
2,878
CUSTOMER CARE CENTERS
- ---------------------
Annapolis, MD 123
Arlington, VA N/A
London, U.K. N/A
Linthicum, MD 108
Baltimore, MD 301
Exton, PA* 120
---
652
DISCONTINUED OPERATIONS CENTERS
- -------------------------------
Upper Darby, PA* 130
Philadelphia, PA* 50
---
180
3,710
=====
* The Company anticipates that these facilitates will be closed or sold in the
first and second quarters of 1998. See Note 2 to the Consolidated Financial
Statements.
8
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ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation incidental to its
business. The Company does not believe that the resolution of any existing
litigation will result in a material adverse effect on the business, results of
operations, or financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders during the
fourth quarter of 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common stock trades on the NASDAQ National Market under the symbol
"TLSP." The following table sets forth, for the periods indicated, the high and
low closing sales price per share of the Common stock, as reported on the NASDAQ
National Market, since the Company's initial public offering in August 1996.
HIGH LOW
------- -------
1996
Third Quarter (from August 8, 1996) $22.125 $15.000
Fourth Quarter 20.875 11.125
1997
First Quarter 17.875 11.875
Second Quarter 16.750 6.781
Third Quarter 9.000 4.250
Fourth Quarter 6.500 2.969
1998
First Quarter 7.250 2.750
Second Quarter (through April 13 1998) 7.125 6.063
On April 13, 1998, the closing price for a share of Common Stock as reported by
The NASDAQ Stock Market was $6.063. The Company has not paid any dividends since
its inception. The declaration and payment of dividends in the future will be
determined by the Board of Directors in light of conditions then existing,
including the Company's earnings, financial condition, capital requirements and
other factors.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Company, the Telemarketing and
Customer Care Segments, and the discontinued operations of the Company's Market
Research Segment and Direct Mail and Fulfillment Segment are derived in part
from the consolidated financial statements and notes thereto of the Company, as
well as the predecessor financial information of the Initial Operating
Businesses, Somar, Inc. ("SOMAR"), NBG Services, Inc. ("NBG"), Harris Direct
Marketing, Inc. and Harris Fulfillment, Inc. (together, "Harris"), The Reich
Group Companies ("Reich"), The Response Center, Inc. and The Tab House, Inc.
(together, "The Response Center") and TeleSpectrum Inc. and TeleSpectrum
Training Services Inc. (together, "TeleSpectrum Maryland"), included elsewhere
in this Form 10-K.
In the opinion of the Company, the financial statements of the Initial Operating
Businesses reflect all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the financial position and
results of operations in accordance with Generally Accepted Accounting
Principles ("GAAP"). Selected Financial Data of the Initial Operating Businesses
should be read in conjunction with the financial statements and notes thereto
included elsewhere in this Form 10-K. All Initial Operating Businesses had
fiscal years ending December 31 with the exceptions of The Response Center,
whose year end was September 30, and NBG, which operated on a fifty-two, fifty-
three week fiscal year ending on the last Friday of the calendar year.
9
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SELECTED FINANCIAL DATA (CONTINUED)
TELESPECTRUM WORLDWIDE INC. (1)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
PERIOD FROM
APRIL 26, 1996
(INCEPTION) TO YEAR ENDED
12/31/96 12/31/97
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STATEMENTS OF OPERATIONS:
REVENUES $53,154 $178,922
------ --------
OPERATING EXPENSES:
Cost of services 36,626 155,902
Selling, general and administrative 10,442 40,737
Amortization of goodwill (includes goodwill
impairment charge of $139,072 in 1997) (2) 2,147 146,321
------ --------
Total operating expenses 49,215 342,960
Operating income (loss) 3,939 (164,038)
Interest (expense) income, net 433 (1,876)
Gain on investment --- 1,760
------ --------
Income (loss) from continuing operations before taxes 4,372 (164,154)
Income tax benefit (expense) (1,693) 2,310
------ --------
Income (loss) from continuing operations 2,679 (161,844)
Income from discontinued operations 971 1,369
------ --------
Net income (loss) $3,650 $(160,475)
====== ==========
Basic and diluted earnings (loss) per share:
Continuing operations $ 0.15 $ (6.42)
Discontinued operations $ 0.05 $ 0.06
------ ----------
Net (loss) income $ 0.20 $ (6.36)
====== ==========
Weighted average number of common and
common equivalent shares outstanding 17,898 25,213
====== ======
12/31/96 12/31/97
-------- --------
BALANCE SHEET DATA:
Cash and cash equivalents $ 28,171 $ 774
Working capital, including net assets of
discontinued operations 49,373 20,655
Total assets 296,539 144,721
Long-term debt, including capital lease obligations,
less current portion 4,199 3,800
Stockholders' equity 240,511 80,377
(1) TeleSpectrum Worldwide Inc. was incorporated on April 26, 1996;
accordingly, there were no historical results prior to that date.
(2) See Note 2 to the Consolidated Financial Statements.
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TELESPECTRUM WORLDWIDE INC.
PREDECESSOR COMPANY (INITIAL OPERATING BUSINESSES)
SELECTED FINANCIAL DATA
(CONTINUED)
(DOLLARS IN THOUSANDS) PERIOD
FROM
January 1,
1996
TO
FISCAL YEAR ENDED AUGUST 12,
-----------------
1993 1994 1995 1996
---- ---- ---- ----
STATEMENTS OF OPERATIONS:
CONTINUING OPERATIONS:
SOMAR
-----
Revenues $10,703 $20,785 $31,900 $26,421
Cost of services 7,731 15,623 25,048 21,406
Selling, general and
administrative expenses 2,787 4,115 5,162 3,817
Operating income 185 1,047 1,690 1,198
Net income 96 627 979 637
NBG
---
Revenues 4,849 5,778 12,829 11,311
Cost of services 3,200 4,259 8,572 7,686
Selling, general and
administrative expenses 1,289 1,443 2,115 1,645
Operating income 360 76 2,142 1,980
Net income 285 33 2,106 1,868
Reich
-----
Revenues 4,375 5,424 12,253 14,558
Cost of services 3,172 4,225 7,836 8,550
Selling, general and
administrative expenses 1,111 976 2,534 1,466
Operating income 92 223 1,883 4,542
Net income 71 199 1,840 4,511
TeleSpectrum Maryland
---------------------
Revenues 9,916 9,386 11,854 10,529
Cost of services 7,429 6,754 8,338 6,974
Selling, general and
administrative expenses 2,628 2,636 3,072 2,929
Operating income (loss) (141) (4) 444 626
Net income (loss) (240) (154) 278 497
DISCONTINUED OPERATIONS (1):
Harris
------
Revenues $ 7,018 $10,115 $12,690 $ 6,304
Cost of services 3,834 5,530 6,402 3,140
Selling, general and
administrative expenses 2,473 2,680 2,986 1,986
Operating income 711 1,905 3,302 1,178
Net income 569 1,719 3,158 1,134
The Response Center
-------------------
Revenues 6,061 6,183 6,719 5,279
Cost of services 2,911 3,426 3,583 2,849
Selling, general and
administrative expenses 2,806 2,800 2,717 1,954
Operating income (loss) 344 (43) 419 476
Net income (loss) 356 (37) 429 496
(1) See Note 5 to the Consolidated Financial Statements.
11
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TELESPECTRUM WORLDWIDE INC.
PREDECESSOR COMPANY (INITIAL OPERATING BUSINESSES)
SELECTED FINANCIAL DATA
(CONTINUED)
At Fiscal Year End
-----------------------------
1993 1994 1995
------ ------ -------
Dollars in Thousands
BALANCE SHEET DATA:
CONTINUING OPERATIONS:
SOMAR
-----
Cash and cash equivalents $ 16 $ 2 $ 25
Working capital (deficit) (149) (242) (1,990)
Total assets 2,014 5,526 10,792
Long-term debt, including capital lease
obligations, less current portion 755 1,145 1,639
Stockholders' equity (deficit) (391) 478 771
NBG
---
Cash and cash equivalents 9 -- 700
Working capital (deficit) (102) (238) 1,270
Total assets 1,162 1,483 4,234
Long-term debt, including capital lease
obligations, less current portion 265 277 454
Stockholders' equity 363 396 2,254
Reich
-----
Cash and cash equivalents 28 31 220
Working capital (deficit) (243) (59) 821
Total assets 827 1,111 4,318
Long-term debt, including capital lease
obligations, less current portion 226 273 371
Stockholders' equity (deficit) (470) (272) 1,668
TeleSpectrum Maryland
---------------------
Cash and cash equivalents 28 163 15
Working capital (deficit) (85) (241) 37
Total assets 3,224 3,182 3,549
Long-term debt, including capital lease
obligations, less current portion 470 217 57
Stockholders' equity 481 409 687
DISCONTINUED OPERATIONS(1):
Harris
------
Cash and cash equivalents $ 334 $ 975 $ 2,919
Working capital 931 2,260 3,741
Total assets 7,101 8,773 10,803
Long-term debt, less current portion 1,818 1,863 1,530
Stockholders' equity 3,007 4,580 6,375
The Response Center
-------------------
Cash and cash equivalents 213 72 282
Working capital 1,179 1,111 1,665
Total assets 2,034 1,863 2,298
Long-term debt, less current portion --- --- ---
Stockholders' equity 1,353 1,283 1,812
(1) See Note 5 to the Consolidated Financial Statements.
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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. Mr. Alessi also
purchased shares of the Company's Common Stock for an aggregate purchase price
of $500,000, or $2.19 per share. The Company also granted Mr. Alessi options
exercisable for an aggregate of 2,000,000 shares of Common Stock (500,000 of
which were granted under the Company's 1996 Equity Compensation Plan)
exercisable at a price of $3.29 per share (see Note 12 to the Consolidated
Financial Statements).
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. Since Mr. Alessi has only recently been employed by the
Company, he has only had a very limited time period to assess the Company's
operating and financial position, review the Company's strategic plan and meet
with the Company's other senior managers.
OPERATIONAL LOSSES
The Company's operating results have deteriorated significantly 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 expects that it will continue to realize significant
operating losses during the first two quarters 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. 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 significant 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 implement its
call center closings and achieve additional operating efficiencies, while
maintaining or expanding its customer base. There can be no assurance that the
Company will accomplish these objectives.
CALL CENTER CLOSINGS
In the third and fourth quarters of 1997, the Company recorded pre-tax charges
totaling $11,568,000 in connection with Company's decision to close seventeen
call centers (fifteen in the Telemarketing Segment and two in the Customer Care
Segment). The 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
noncancellable lease commitments at closed call centers, and a $1,293,000
provision relating to severance and termination benefits for certain employees.
The Company has commenced activities necessary to implement the closing of the
call centers and 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 being completed by June 30, 1998. The Company
anticipates recording an additional provision relating to non-cancellable lease
commitments and for severance and termination benefits in the first quarter of
1998 related to call center closings (see Note 2 to the Consolidated Financial
Statements).
DISCONTINUED OPERATIONS
The Company has determined to provide greater focus on its two business
segments, Telemarketing and Customer Care, and to raise funds to retire its bank
debt. In furtherance of these objectives, the Company has recently consummated
the sale of its two other principal business segments.
In February 1998, the Company consummated the sale of its Market Research
Segment to NCO Group, Inc. for $15 million cash and a contingent payment based
on the future operating performance of this business. The results of operations
for The Market Research Segment have been reported separately as discontinued
operations for the year ended December 31, 1997 and for the period from April
26, 1996 (Inception) to December 31, 1996, respectively. The Company used the
net proceeds from this sale to reduce short-term debt.
On March 31, 1998 the Company consummated the sale of its Direct Mail and
Fulfillment Segment for $23 million cash and a contingent payment based on the
future operating performance of this business. The results of operations for The
Direct Mail and Fulfillment Segment have been reported separately as
discontinued operations for the year ended December 31, 1997 and for the period
from April 26, 1996 (Inception) to December 31, 1996, respectively. The Company
received the net proceeds from this sale on April 1, 1998 and applied
the proceeds to fully pay off existing borrowings under its credit
facility (see Note 10 to the Consolidated Financial Statements).
DEFAULT UNDER PRIOR CREDIT FACILITY; NEW CREDIT FACILITY
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 under its Loan and Security Agreement (the "Credit Facility") dated
January 24, 1997, as amended. The Company repaid the entire outstanding balance
under this facility on April 1, 1998 with the proceeds from the sale of its
Direct Marketing and Fulfillment Segment. On April 14, 1998, the Company
entered into a new Credit Facility with Mellon which provides
for an initial $10 million credit facility that expires in April 2002. The
Credit Facilty may be increased to $20 million based upon satisfactory
completion of certain due diligence procedures by Mellon. Under the terms of the
Credit Facility, the Company can initially borrow up to the lesser of $10
million or an amount that is determined as 80% of the net accounts receivable
aged 90 days or less. The Company can draw down on the Credit Facility in
increments of $500,000 or more. The Company can elect at the time of the draw
down 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.
GOODWILL IMPAIRMENT
In the fourth quarter of 1997, the Company recorded a goodwill impairment
charge of $139,072,000, which represented the goodwill associated with the
Telemarketing Segment. As of December 31, 1997, the remaining goodwill of
$27,964,000 relates exclusively to the Customer Care Segment.
The Company has continually evaluated whether later events and circumstances
have occurred that indicate the remaining balance of goodwill may not be
recoverable. Recently, 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. The Company has
concluded that due to the significant decline in the growth in the telemarketing
industry and the reduced growth prospects of the Company, that a permanent
impairment of goodwill has occurred.
In connection with this evaluation, the Company elected to change its method
of measuring goodwill impairment under APB Opinion No. 17 "Intangible Assets,"
from an undiscounted cash flow approach to a discounted cash flow approach
effective December 31, 1997. The Company believes the change to the fair value
method based on a discounted cash flow approach is preferable in that such
method most closely approximates the fair value of goodwill and the related
measurement of goodwill impairment (see Note 2 to the Consolidated Financial
Statements).
13
<PAGE>
Background
- ----------
The Company was formed in April 1996, and did not commence operations within
the teleservices industry until August 1996, when it acquired the businesses and
the net assets of the Initial Operating Businesses. Accordingly, no historical
comparison for the twelve months ended December 31, 1997 to the twelve months
ended December 31, 1996 is available.
Based upon the unique means of entry into the teleservices industry, and to
properly understand its operations and their relation to those of the Initial
Operating Businesses, management is presenting the following "Results of
Operations". The Company's results of operations classify its Market Research
Segment and Direct Mail and Fulfillment Segment separately as discontinued
operations.
- - Comparison of actual results of operations for the year ended December 31,
1997 to the Supplemental Pro Forma results of operations for the year ended
December 31, 1996.
- - Comparison of supplemental pro forma results of operations for the year ended
December 31, 1996 to the supplemental pro forma results of operations for the
year end December 31, 1995.
- - Actual results of operations for the period from April 26, 1996 (Inception) to
December 31, 1996.
The following discussions should be read in conjunction with the Consolidated
Financial Statements contained within this report on Form 10-K.
14
<PAGE>
Comparison of the Actual results of operations for the year ended December 31,
1997 to the Supplemental Pro Forma results of operations for the full year ended
December 31, 1996.
<TABLE>
<CAPTION>
ACTUAL AND SUPPLEMENTAL PRO FORMA 1
RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
-----------------------------------------------------------------
SUPPLEMENTAL
ACTUAL PRO FORMA
YEAR ENDED AS A YEAR ENDED AS A
DECEMBER 31, PERCENTAGE OF DECEMBER 31, PERCENTAGE OF
1997 REVENUES 1996 REVENUES
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Revenues:
- ---------
Telemarketing $144.2 81% $92.6 80%
Customer care 34.7 19% 23.4 20%
------------ ------------- ------------ -------------
Total revenue 178.9 100% 116.0 100%
Cost of services:
Telemarketing 129.9 73% 66.3 57%
Customer care 26.0 14% 14.9 13%
------------ ------------- ------------ -------------
Total cost of services 155.9 87% 81.2 70%
Total selling, general and
administrative 40.8 23% 20.1 17%
Amortization of goodwill 146.3/2/ 82% 5.3 5%
------------ ------------- ------------ -------------
Total operating expenses 343.0 192% 106.6 92%
Operating income (loss) (164.1) (92)% 9.4 8%
Investment gain 1.8 0.1% -- --
Interest (expense) income, net (1.9) (0.1)% 0.4 0%
------------ ------------- ------------ -------------
Income (loss) before taxes (164.2) (92)% 9.8 8%
Income tax benefit (expense) 2.3 1% (4.1) (3)%
------------ ------------- ------------ -------------
Income (loss) from continuing
operations (161.9) (91)% 5.7 5%
Income from discontinued operations
(net of tax) 1.4 1% 1.4 1%
------------ ------------- ------------ -------------
Net income (loss) $(160.5) (90)% $7.1 6%
------------ ------------- ------------ -------------
</TABLE>
/1/ The Supplemental Pro Forma results of operations include the results for
the Initial Operating Businesses for all of 1996, and the results of
operations for the Fourth Quarter Acquisitions as of their respective dates
of acquisitions.
/2/ Reflects goodwill impairment charge of $139.1 million in 1997 (see Note 2
to the Consolidated Financial Statements).
15
<PAGE>
RESULTS OF OPERATIONS
The Company's results of operations classify its Market Research Segment and
Direct Mail and Fulfillment Segment as discontinued operations.
REVENUE
Total revenue for the year ended December 31, 1997 amounted to $178.9 million,
an increase of $62.9 million or 54% from the Supplemental Pro Forma revenue of
$116.0 million for the year ended December 31, 1996. This increase in aggregate
revenue was driven by increased calling hours.
Telemarketing Segment
Telemarketing revenue of $144.2 million for the year ended December 31, 1997
accounted for 81% of the Company's total revenue for the year ended December 31,
1997 and represents an increase of $51.6 million or 56% from $92.6 million for
the prior year. The increase in Telemarketing revenues is principally
attributable to increased calling hours. Of his increase, 19% was attributable
to services initiated for new clients, 76% was attributable to services
initiated for existing clients and 5% was attributable to acquired businesses.
Approximately 19% of telemarketing revenue was generated by services provided on
behalf of MBNA and the Company's expects.
Customer Care Segment
Customer Care revenue of $34.7 million for the year ended December 31, 1997
accounted for 19% of total revenue for the year ended December 31, 1997 and
represents an increase of $11.3 million or 48% from $23.4 million for the prior
year. Of this increase, 16% was attributable to services initiated for new
clients, 21% was attributable to services initiated for existing clients and 63%
was attributable to revenues generated by the TARP business. The Company
acquired the TARP business in October 1996 and the Supplemental Pro Forma
results of operations includes TARP related revenue only for the last quarter of
1996.
COST OF SERVICES
Cost of services amounted to $155.9 million for the year ended December 31,
1997, an increase of $74.7 million or 92% from $81.2 million for the prior year.
As a percentage of total revenues, cost of services were 87% and 70% for the
years ended December 31, 1997 and 1996, respectively.
Telemarketing Segment
Cost of services for the year ended December 31, 1997 accounted for 83% of the
Company's total cost of services from continuing operations for the year ended
December 31, 1997 and represents an increase of $63.6 million or 96% when
compared to Telemarketing cost of services of $66.3 million for the prior year.
Cost of services for the year ended December 31, 1997 includes $9.3 million
related to the cost of service component of call center closing charges,
including $8.7 million for the write-down of certain property and equipment to
fair value and the provision for future payments under non-cancelable lease
contracts related to the closing of fifteen call centers and certain regional
operations centers; and $0.6 million related to employee severance agreements.
Cost of services, excluding the $9.3 million of call center closing charges,
would have increased $54.3 million or 82% for the year ended December 31, 1997
when compared to the prior year, and as a percentage of revenue, cost of
services would have been 67%. The Company attributes this increase in cost of
services as a percentage of revenue primarily to the expansion of the Company's
productive capacity, 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.
Customer Care Segment
Cost of services for the year ended December 31, 1997 accounted for 17% of the
Company's total cost of services from continuing operations for the year ended
December 31, 1997 and represents an increase of $11.1 million or 75% when
compared to Customer Care cost of services of $14.9 million for the prior year.
Cost of Services for the year ended December 31, 1997 includes $1.0 million
related to the cost of service component for the write-down of certain property
and equipment to fair value related to the closing of two call centers. Cost of
services, excluding the $1.0 million of call center closing charges would have
increased $10.1 million or 68% for the year ended December 31, 1997 when
compared to the prior year, and as a percentage of revenue, cost of services
would have been 14%.
16
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses amounted to $40.8 million,
an increase of $20.7 million or 103% when compared to SG&A expenses of $20.1
million for the prior year. As a percentage of total revenue, SG&A expenses
were 23% and 17% for the years ended December 31, 1997 and 1996, respectively.
Selling, general and administrative expenses for the year ended December 31,
1997 include a $1.3 million charge related to corporate overhead reduction,
including $0.6 million for the write-down of certain property and equipment and
$0.7 million related to employee severance agreements. SG&A expenses, without
the charges of $1.3 million, would have increased $19.4 million or 97% for the
year ended December 31, 1997 when compared to the prior year. As a percentage of
revenue, SG&A expenses, without the charges of $1.3 million, would have been
22%. The increase in SG&A expenses for the year ended December 31, 1997, as a
percentage of revenue, as compared to the prior year, 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.
AMORTIZATION OF GOODWILL (INCLUDING GOODWILL IMPAIRMENT CHARGE OF $139.1 MILLION
IN 1997)
In the fourth quarter of 1997 the Company recorded a goodwill impairment charge
of $139.1 million, which represented the goodwill associated with the
Telemarketing Segment. (See Note 2 to the Consolidated Financial Statements). As
of December 31, 1997, the remaining net goodwill of $28.0 million relates
exclusively to the Customer Care Segment.
INVESTMENT GAIN
In June 1997, the Company purchased substantially all of the assets and assumed
certain liabilities of a product sampling company, FX Direct, Inc. The Company
realized a pre-tax gain of approximately $1.8 million when it sold this business
in October 1997 for $6.3 million (see Note 6 to the Consolidated Financial
Statements).
INTEREST (EXPENSE) INCOME
Interest expense for the year ended December 31, 1997 amounted to $1.9 million
an increase of $2.3 million when compared to interest income of $0.4
million from the prior year. The increase in net interest expense arose from
borrowings under the credit facility during 1997.
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 (1.4)% and 38.7% for the years ended December 31, 1997 and 1996,
respectively. Income tax benefit for the year ended December 31, 1997 amounted
to $2.3 million a difference of $6.4 million when compared to income tax
expense of $4.1 million for the prior year. The 1997 income tax benefit is a
result of a tax refund expected, for federal income taxes paid in 1996,
resulting from 1997 operating losses. As of December 31, 1997, the Company has a
net operating loss carryforward has approximately $9.0 million. Also, as of
December 31, 1997, the Company has approximately $125.0 million of future income
tax deductible amounts (to be amortized principally over 15 years) related to
the 1999 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 December 31, 1997.
INCOME FROM DISCONTINUED OPERATIONS
In December 1997, the Company committed to a plan to dispose of its Market
Research Segment and Direct Mail and Fulfillment Segment. For the years ended
December 31, 1997 and 1996, 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
years ended December 31, 1997 and 1996 amounted to $1.4 million (net of tax).
Revenues for the year ended December 31, 1997 amounted to $21.3 million an
increase of $2.7 million or 15% when compared to revenues of $18.6 million for
the prior year. Operating expenses for the year ended December 31, 1997 amounted
to $19.0 million an increase of $2.8 million or 17% when compared to operating
expenses of $16.2 million for the prior year.
17
<PAGE>
Comparison of the Supplemental Pro Forma results of operations for the full year
ended December 31, 1996 to the Supplemental Pro Forma results of operations for
the full year ended December 31, 1995.
For purposes of this discussion, the following table presents Supplemental Pro
Forma results of operations as if the acquisition of the Initial Operating
Businesses occurred on January 1, 1995, and include the acquisitions of TARP and
PR Response as of October 1, 1996 and November 1, 1996 respectively. (These
fourth quarter acquisitions are not in the Supplemental Pro Forma results until
their actual acquisition date in the fourth quarter of 1996). The Company
believes the following presentation is informative in analyzing its business.
18
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTAL PRO FORMA 1
RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
---------------------------------------------------------------------------------------
SUPPLEMENTAL SUPPLEMENTAL
PRO FORMA PRO FORMA
YEAR ENDED AS A YEAR ENDED AS A
DECEMBER 31, PERCENTAGE OF DECEMBER 31, PERCENTAGE OF
1996 REVENUES 1995 REVENUES
<S> <C> <C> <C> <C>
---------------------------------------------------------------------------------------
Revenues:
- ---------
Telemarketing $92.6 80% $57.0 83%
Customer care 23.4 20% 11.9 17%
---------------------------------------------------------------------------------------
Total revenue 116.0 100% 68.9 100%
Cost of services:
- -----------------
Telemarketing 66.3 57% 41.5 60%
Customer care 14.9 13% 8.3 12%
---------------------------------------------------------------------------------------
Total cost of services 81.2 70% 49.8 72%
Total selling, general and 20.1 17% 11.8 17%
administrative
Amortization of goodwill 5.3 5% 4.8 7%
---------------------------------------------------------------------------------------
Total operating expenses 106.6 92% 66.4 96%
Operating income 9.4 8% 2.5 4%
Interest (expense) income, net 0.4 0% (0.1) 0%
---------------------------------------------------------------------------------------
Income before taxes 9.8 8% 2.4 4%
Income tax (expense) benefit (4.1) (3)% (1.2) (2)%
---------------------------------------------------------------------------------------
Income from continuing operations 5.7 5% 1.2 2%
Income from discontinued operations
(net of tax) 1.4 1% 1.4 2%
---------------------------------------------------------------------------------------
Net income $7.1 6% $2.6 4%
=======================================================================================
</TABLE>
1 For 1995, the Supplemental Pro Forma results of operations only include
the results of the Initial Operating Businesses. For 1996, the Supplemental
Pro Forma results of operations include the results for the Initial
Operating Businesses for all of 1996, and the results of operations for the
Fourth Quarter Acquisitions as of their respective dates of acquisition.
19
<PAGE>
REVENUES
Telemarketing Segment
Telemarketing revenue of $92.6 million for the year ended December 31, 1996
accounted for 80% of the Company's total revenue for the year ended December 31,
1996 and represented an increase of $35.6 million or 62% when compared to
telemarketing revenue of $57.0 million for the prior year. The increase in
telemarketing revenues was principally attributable to increased telemarketing
hours, both from existing clients and the addition of new clients.
Telemarketing teleservice capabilities went from 975 workstations in 12 call
centers at December 31, 1995 to 2,490 workstations in 26 calls center at
December 31, 1996.
Customer Care Segment
Customer care revenue of $23.4 million for the year ended December 31, 1996
accounted for 20% of total revenue for the year ended December 31, 1996 and
represents an increase of $11.5 million or 97% as compared to customer care
revenue of $11.9 million for the prior year. The increase in telemarketing
revenues is principally attributable to increased business, both from existing
clients and the addition of new clients.
COST OF SERVICES
Telemarketing Segment
Cost of service for the year ended December 31, 1996 accounted for 82% of the
Company's total cost of services for the year ended December 31, 1996 and
represents an increase of $24.8 million or 60% when compared to telemarketing
cost of services of $41.5 million for the prior year. This increase is
principally attributable to the costs associated with the expansion of the
Company's revenues and the increased number of workstations. Included within the
1996 results are certain start-up costs associated with the additional capacity.
Customer Care Segment
Cost of service for the year ended December 31, 1996 accounted for 18% of the
Company's total cost of services for the year ended December 31, 1996 and
represents an increase of $6.6 million or 80% when compared to customer care
cost of services of $8.3 million for the prior year. This increase is
attributable to the costs associated with the expansion of the Company's
revenues and the increased number of workstations.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") amounted to $20.1 million for the
year ended December 31, 1996, an increase of $8.3 million or 70% when compared
to SG&A expenses of $11.8 million for the prior year. As a percentage of total
revenues, SG&A expenses were 17% for the years ended December 31, 1996 and 1995,
respectively. Included in the supplemental pro forma SG&A expenses in 1996 are
Fourth Quarter Acquisition SG&A expenses of $1.2 million.
AMORTIZATION OF GOODWILL
Amortization of goodwill amounted to $5.3 million for the year ended December
31, 1996, an increase of $0.5 million or 10% when compared to amortization of
goodwill expense of $4.8 million for the prior year. As a percentage of total
revenues, amortization of goodwill was 5% and 7% for the years ended December
31, 1996 and 1995, respectively. Supplemental Pro Forma amortization expense for
the year ended December 31, 1996 includes the amortization of the excess of the
aggregate purchase price over the assets acquired of the Initial Operating
Businesses for the full year of 1996 as well as the amortization of the excess
of the aggregate purchase price over the assets acquired of the Fourth Quarter
Acquisitions from their respective dates of acquisition. For the year ended
December 31, 1995, amortization expense relates solely to the amortization of
the excess of the aggregate purchase price over the assets acquired of the
Initial Operating Businesses for the full year of 1995 and excludes the Fourth
Quarter Acquisitions.
20
<PAGE>
INTEREST (EXPENSE) INCOME
Interest income for the year ended December 31, 1996 amounted to $0.4 million an
increase of $0.5 million when compared to interest expense of $0.1 million from
the prior year. The increase arose from income recognized from cash and cash and
equivalents held during 1996.
INCOME TAX EXPENSE
Income tax expense is a function of pretax income and the combined effective tax
rate of federal and state income taxes. This combined rate was 42% and 50% for
the years ended December 31, 1996 and 1995, respectively. Income tax expense for
the year ended December 31, 1996 amounted to $4.1 million a difference of $2.9
million when compared to income tax expense of $1.2 million for the prior year.
INCOME FROM DISCONTINUED OPERATIONS
In December 1997, the Company committed to a plan to dispose of its Market
Research Segment and Direct Mail and Fulfillment Segment. For the years ended
December 31, 1996 and 1995, respectively 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 both the years ended December 31, 1996 and 1995 amounted to $1.4
million (net of tax). Revenues for the year ended December 31, 1996 amounted to
$18.6 million an decrease of $0.5 million or 3% when compared to revenues of
$19.1 million for the prior year. Operating expenses for the year ended December
31, 1996 amounted to $16.2 million an decrease of $0.4 million or 2% when
compared to operating expenses of $16.6 million for the prior year.
21
<PAGE>
Actual results of operations for the period from April 26, 1996 (Inception) to
December 31, 1996
The Company was incorporated on April 26, 1996, but did not commence operations
within the teleservices industry until August 13, 1996. The results of
operations from April 26, 1996 through December 31, 1996 include the revenues,
cost of services, selling, general and administrative expenses, and interest
income for the Initial Operating Businesses only from August 13, 1996 and for
TARP from October 1, 1996. 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 to the Consolidated Financial Statements).
Actual results, as a percentage of revenues were as follows (dollars in
millions):
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM APRIL 26,
1996 (INCEPTION)
TO DECEMBER 31, AS A PERCENTAGE
1996 of Revenues
------------------------------------------------
<S> <C> <C>
Total revenue $53.2 100%
------------------------------------------------
Total cost of service 36.6 69%
Total selling, general and administrative 10.4 20%
Amortization of goodwill 2.2 4%
------------------------------------------------
Total operating expenses 49.2 93%
Operating income (loss) 4.0 7%
Interest income 0.4 1%
------------------------------------------------
Income before taxes 4.4 8%
Income tax (expense) (1.7) (3)%
-------------------------------------------------
Income from continuing operations 2.7 5%
Income from discontinued operations (net of tax) 1.0 2%
------------------------------------------------
Net income $3.7 7%
------------------------------------------------
</TABLE>
REVENUES
Revenues are related to the operations of the Initial Operating Business from
August 13, 1996 through December 31, 1996 as well as the operations of the
Fourth Quarter Acquisitions from their respective dates of Acquisition.
Revenues have been steadily increasing from the Acquisition dates for
the Initial Operating Businesses due to the addition of new call centers and as
other new business is generated.
COST OF SERVICES
Cost of services are related to the operations of the Initial Operating Business
from August 13, 1996 through December 31, 1996 as well as the operations of the
Fourth Quarter Acquisitions from their respective dates of Acquisition. Cost of
services have been decreasing as a percentage of revenues due to certain
operating efficiencies, among other factors, however, the favorable effects of
these cost savings have been offset by additional start-up costs of the new
centers. Overall margins have been consistent throughout the period.
22
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses are related to the operations of
the Initial Operating Business from August 13, 1996 through December 31, 1996 as
well as the operations of the Fourth Quarter Acquisitions from their respective
dates of acquisition. As a percentage of revenues, selling, general and
administrative expenses have been decreasing since the inception of the Company
due to the Company's increasing revenues from the Initial Operating Businesses
and the Fourth Quarter Acquisitions. Included in results for the period
presented are certain overhead costs incurred prior to the acquisitions of the
Initial Operating Businesses. These costs were approximately $0.6 million.
23
<PAGE>
Liquidity and Capital Resources
For the
Period From
April 26, 1996
Dollars in Millions Year Ended (Inception) to
Cash Flows Provided By (Used In): December 31, 1997 December 31, 1996
- ----------------------------------- ------------------ ------------------
Operating Activities $ 4.8 $ (4.7)
Investing Activities (60.1) (117.6)
Financing Activities 28.0 150.4
FOR THE PERIOD FROM APRIL 26, 1996 (INCEPTION) TO DECEMBER 31, 1996
At December 31, 1996 the Company had cash of $28.2 million. This cash was
primarily generated through financing activities which generated $150.4
million. The Company raised $162.0 million related to its August 1996 initial
public offering and $2.1 million related to proceeds of the initial
capitalization. During this period the Company used $13.7 million to repay other
debt and capital lease obligations.
During this period the Company used $117.6 million for investing activities. The
Company used $94.4 million to fund the cash portion of its acquisition of the
Initial Operating Businesses and $12.6 million to fund the cash portion of its
acquisition of TARP and PR Response. The Company also used $10.6 million for the
purchase of property and equipment associated with the commencement of the
Company's call center expansion and centralization initiatives.
During this period the Company used $4.7 for operating activities, primarily to
fund its working capital requirements during this period of high growth.
YEAR ENDED DECEMBER 31, 1997
At December 31, 1997, the Company had cash of $0.8 million. During the year
ended December 31, 1997, the Company used $27.4 million in cash which consisted
of $4.8 million in net cash provided by operating activities, $60.1 million net
cash used in investing activities and $28 million of net cash provided by
financing activities.
The $4.8 million of cash provided by operating activities consisted of $.1
million generated from continuing operations and $4.7 million generated from
discontinued operations. The Company's net loss of $160.5 million was offset by
significant non-cash items including amortization of good will (including $139.1
million good will impairment charge in 1997, a provision for call center
closings and depreciation and amortization (see Note 2 to the Consolidated
Financial Statements).
The $60.1 million of cash used in investing activities primarily consisted of
$26.3 million of purchase of property and equipment and $29.1 million used to
repay notes payable to sellers and other acquisition related liabilities. The
purchase of property and equipment included $10.6 million associated with the
development of six new call centers, $13.8 million related to capital
investments in technology upgrades and capital enhancements to existing call
centers, $1.9 million related to capital investments associated with development
and enhancement of production and administrative infrastructure projects. In
addition, the Company used $1.2 million related to capital investments for
discontinued operations. As a result of the call center closings and
consolidation of facilities discussed above, as of December 31, 1997, the
Company recorded an impairment charge of $11.6 million of which $5.0 million
related to these 1997 additions. Given the consolidation of facilities, the
Company does not expect to make any significant investment in telemarketing call
center expansion in 1998. In 1998, the Company intends to continue to invest in
maintaining and enhancing its technology platforms. Other investing activities
included $5.3 million for the acquisition of its interactive voice response
center. In addition, in June 1997 the Company used $4.5 million to invest in an
ownership of the sampling business, which we sold in October 1997 for $6.3
million resulting in a pre-tax gain of approximately $1.8 million.
The net cash provided by financing activities primarily consisted of $29 million
of net proceeds from borrowing under the Company's Credit Facility dated January
24, 1997, as amended. In addition, the Company received $0.7 million of proceeds
from other long term debt and made payments on debt and capital lease
obligations totaling approximately $1.8 million.
Throughout 1997, the Company amended the Credit Facility several times as a
result of non-compliance due to its 1997 operating performance. 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 an initial $10 million Credit Facility that expires in April 2002. The
Credit Facility may be increased to $20 million based upon satisfactory
completion of certain due diligence procedures by Mellon. Under the terms of the
Credit Facility, the Company can initially borrow up to the lesser of $10
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 3.75% or 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 that its existing cash balances, reflecting the sale of the
two discontinued operations, and borrowings available under its April 1998
Credit Facility will be sufficient to meet its operating and capital needs into
1999. The amount of future capital expenditures will be highly dependent on
future revenue growth. The Company currently anticipates that 1998 capital
expenditures will be substantially less than 1997 expenditures.
24
<PAGE>
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 out-
source 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
Approximately 19% of the Company's revenues in 1997 were generated from one
client, MBNA. Substantially all of these revenues were generated in the first
and second quarters of 1997. The significant reduction in the amount of
business provided by MBNA was a significant factor in the Company's lower
capacity utilization and operating performance during the last two fiscal
quarters in 1997. Although no current customer of the Company represents 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.
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.
NEED FOR ADDITIONAL FINANCING
The Company currently estimates that its existing cash after the sale of
discontinued operations together with 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.
25
<PAGE>
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.
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-K, 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
26
<PAGE>
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.
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND THE RESULTS OF OPERATIONS FOR THE INITIAL OPERATING BUSINESSES
(THE "PREDECESSOR COMPANIES")
Following this introduction are the management's discussion and analysis of
financial condition and the results of operations for the Initial Operating
Businesses. These commentaries should be read in conjunction with their
historical financial statements contained within this annual report on
Form 10-K. The results of operations of The Response Center Inc. and The Tab
House, Inc. (Market Research Segment) and Harris Direct Marketing, Inc. and
Harris Fulfillment, Inc. (Direct Mail and Fulfillment Segment) have been
accounted for as discontinued operations (see Note 5 to the Consolidated
Financial Statements).
28
<PAGE>
SOMAR
Prior to its acquisition by TeleSpectrum Worldwide Inc. ("TeleSpectrum"), SOMAR,
Inc. ("SOMAR"), founded in 1982, was one of the nation's largest providers of
outsourced telephone-based sales, marketing and customer management services,
principally to clients in the insurance industry and also to clients in the
financial services, telecommunications and consumer products industries.
On August 12, 1996, SOMAR sold substantially all of its assets and liabilities
to TeleSpectrum and is a predecessor company to TeleSpectrum.
RESULTS OF OPERATIONS
The following table sets forth selected financial data and data as a percentage
of revenues for the periods indicated (dollars in thousands).
FOR THE PERIOD
FOR THE YEAR ENDED DECEMBER 31, FROM JANUARY 1,
------------------------------- 1996 TO
1994 1995 AUGUST 12, 1996
---- ---- ---------------
Revenues.................. $20,785 100.0% $31,900 100.0% $26,421 100.0%
Cost of services.......... 15,623 75.2 25,048 78.5 21,406 81.0
Selling, general and
administrative expenses.. 4,115 19.8 5,162 16.2 3,817 14.5
----- ----- -----
Total operating
expenses.............. 19,738 95.0 30,210 94.7 25,223 95.5
------ ------ ------
Operating income.......... 1,047 5.0 1,690 5.3 1,198 4.5
Interest expense, net. 420 2.0 711 2.2 561 2.1
--- --- ---
Pre-tax income $627 3.0 $979 3.1 $637 2.4
==== ==== ====
FOR THE PERIOD FROM JANUARY 1, 1996 THROUGH AUGUST 12, 1996 (THE "STUB PERIOD"):
Revenues--If the Stub Period revenues were annualized and compared to 1995, the
revenue comparison would show a significant increase period over period;
revenues per day increased from $87,000 per day in 1995 to $118,000 per day in
the Stub Period.
The increase in revenues resulted primarily from increased call volume from
existing insurance clients and the addition of new telecommunications clients.
Cost of Services--Cost of services primarily consists of labor, telephone and
other call center-related operating and support expenses. As a percentage of
revenues, cost of services increased to 81.0% during the Stub Period, primarily
the result of a temporary shift to lower margin services to fill capacity
resulting from an unexpected reduction in demand from SOMAR's largest client,
costs associated with revenues lost due to inclement weather and start-up costs
associated with the opening of the Beckley, West Virginia call center on March
1, 1996. Start-up costs included recruiting and education of new call center
management and staff.
Selling, General and Administrative--Selling general and administrative, as a
percentage of revenue, decreased to 14.5% of revenues in the Stub Period as
compared to 1995, primarily as a result of the spreading of expenses over
increasing revenues.
29
<PAGE>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenues--Revenues increased to $31.9 million in 1995 from $20.8 million in
1994, an increase of $11.1 million, or 53.4%. This increase primarily resulted
from increased call volume from existing insurance clients and the addition of
new insurance clients.
Cost of Services--Cost of services increased to $25.0 million in 1995 from $15.6
million in 1994, an increase of $9.4 million, or 60.3%. As a percentage of
revenues, cost of services increased to 78.5% in 1995 from 75.2% in 1994. This
increase resulted primarily from start-up costs related to the opening of two
new call centers in Huntington, West Virginia in March and August 1995, and a
delay in anticipated new business. The start-up costs included new management
and staff training, insurance licensing and education.
Selling General and Administrative--Selling, general and administrative expense
increased to $5.2 million in 1995 from $4.1 million in 1994, an increase of $1.1
million, or 25.4%. This increase primarily resulted from additional
administrative, personnel and corporate expenses associated with the growth in
existing facilities. As a percentage of revenues, selling, general and
administrative expenses decreased to 16.2% in 1995 from 19.8% in 1994, primarily
as a result of the spreading of expenses over increasing revenues.
Interest Expense, net--Interest expense, net, increased to $0.7 million in 1995
from $0.4 million in 1994, an increase of $0.3 million, or 69.3%. This increase
resulted from higher average borrowings outstanding during 1995 compared to
1994. The borrowed funds were used primarily to finance working capital
requirements, to open the Huntington, West Virginia call centers and to purchase
new equipment. As a percentage of revenues, interest expense, net, increased to
2.2% in 1995 from 2.0% in 1994.
LIQUIDITY AND CAPITAL RESOURCES
SOMAR's principal source of liquidity was borrowings under credit facilities.
The following table sets forth selected information from SOMAR's statements of
cash flows for the periods indicated (dollars in thousands):
FOR THE PERIOD
JANUARY 1, 1996
FOR THE YEAR ENDED TO
DECEMBER 31, AUGUST 12,
1994 1995 1996
------- --------- ---------------
Net cash provided by operating
activities...................... $ 57 $ 441 $ 2,124
Net cash provided by (used in)
investment activities........... 346 (2,870) (1,923)
Net cash provided by (used in)
financing activities............ (417) 2,452 (221)
During the Stub Period, SOMAR generated $2.1 million in net cash from
operations, primarily as a result of increased pre-tax income, the growth in its
accounts payable in anticipation of the purchase by TeleSpectrum, partially
offset by the growth in accounts receivable.
During the Stub Period, SOMAR also used $1.9 million of cash to purchase
additional call center capital items, and to provide certain advances to certain
stockholders and affiliates.
From 1994 through the end of 1995 SOMAR generated $0.4 million in net cash from
operating activities. During this period, $2.9 million of cash was generated
primarily from pre-tax income plus non-cash charges, and was reduced by $2.5
million of cash used to fund increases in working capital resulting from the
increase in revenues over the same period.
Cash used in investment activities was attributable to equipment purchases to
support additional call centers, including expenditures for information
technology equipment, investments in database management, telephone systems and
other management information systems.
Financing activities have included distributions to shareholders and borrowing
activity. Dividends paid to shareholders were payments to cover shareholder
taxes related to SOMAR's S-Corporation status.
30
<PAGE>
NBG
Founded in 1991, and prior to its acquisition by TeleSpectrum, NBG Services,
Inc. ("NBG") provided outbound telemarketing services to clients in the
financial services, telecommunications and high technology industries. NBG's
revenues are derived primarily from service fees charged to clients on a
performance/results basis, rather than on an hourly basis.
On August 12, 1996, NBG sold substantially all of its assets and liabilities to
TeleSpectrum, and is a predecessor company to TeleSpectrum.
RESULTS OF OPERATIONS
The following table sets forth selected financial data and data as a percentage
of revenues for the periods indicated (dollars in thousands).
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED FOR THE PERIOD FROM
DECEMBER 30, DECEMBER 29, DECEMBER 30, 1995 TO
1994 1995 AUGUST 12, 1996
-------------- ------------ ----------------
<S> <C> <C> <C>
Revenues.................... $5,778 100.0% $12,829 100.0% $11,311 100.0%
Cost of services............ 4,259 73.7 8,572 66.8 7,686 68.0
Selling, general and
administrative expenses... 1,443 25.0 2,115 16.5 1,645 14.5
----- ------ -----
Total operating
expenses................ 5,702 98.7 10,687 83.3 9,331 82.5
----- ------ -----
Operating income............ 76 1.3 2,142 16.7 1,980 17.5
Interest expense, net....... 43 0.7 36 0.3 33 0.3
----- ------ -----
Pre-tax income.............. $33 0.6 $2,106 16.4 $1,947 17.2
===== ====== =====
</TABLE>
FOR THE PERIOD FROM DECEMBER 30, 1995 THROUGH AUGUST 12, 1996 (THE "STUB
PERIOD")
Revenues--If the Stub Period revenues were annualized and compared to 1995, the
revenue comparison would show a significant increase period over period;
revenues per day increased from $35,000 per day in 1995 to $50,000 per day in
the stub period. This increase was primarily a result of an increases in
revenues from two of NBG's most significant clients.
Cost of Services--Cost of services, which primarily consists of labor, telephone
and other call center-related operating and support expenses, increased as a
percentage of revenues, from 66.8% in 1995 to 68.0% in the stub period. This
increase primarily resulted from higher performance-based revenue per unit of
cost.
Selling, General, and Administrative--Selling, general, and administrative
expenses decreased as a percentage of revenues, from 16.5% in 1995 to 14.5% in
the Stub Period, primarily as a result of the spreading of expenses over
increased revenues.
YEAR ENDED DECEMBER 29, 1995 COMPARED TO YEAR ENDED DECEMBER 30, 1994:
Revenues--Revenues increased to $12.8 million in 1995 from $5.8 million in 1994,
an increase of $7.0 million, or 121.0%. This
31
<PAGE>
increase was primarily a result of an increase in revenues from two of NBG's
most significant clients. Revenues from these clients increased primarily as a
result of increased telemarketing call volume and in particular, a full year of
revenues in 1995 from one of these clients, compared to approximately four
months of revenues in 1994. The remaining increase was due to the addition of
several clients in the high technology and financial services industries.
Cost of Services--Cost of services increased to $8.6 million in 1995 from $4.3
million in 1994, an increase of $4.3 million, or 101.3%. As a percentage of
revenues, cost of services decreased to 66.8% in 1995 from 73.7% in 1994. This
decrease primarily resulted from the spreading of certain fixed costs over
increased revenues.
Selling, General and Administrative--Selling, general and administrative
expenses increased to $2.1 million in 1995 from $1.4 million in 1994, an
increase of $0.7 million, or 46.6%. This increase primarily resulted from
additional administrative, personnel and related corporate expenses associated
with NBG's growth. As a percentage of revenues, selling, general and
administrative expenses decreased to 16.5% in 1995 from 25.0% in 1994, primarily
as a result of the spreading of expenses over increased revenues.
LIQUIDITY AND CAPITAL RESOURCES
NBG's primary sources of liquidity were cash flows from operating activities and
available borrowing capacity under credit facilities. The following table sets
forth selected information from NBG's statements of cash flows for the periods
indicated (dollars in thousands).
FOR THE PERIOD
YEAR ENDED YEAR ENDED FROM DECEMBER 30,
DECEMBER 30, DECEMBER 29, 1995 TO AUGUST 12,
1994 1995 1996
-------------- ------------ ------------
Net cash provided by operating
activities.................. $ 215 $1,383 $1,334
Net cash used in investment
activities.................. (42) (594) (81)
Net cash used in financing
activities.................. (182) (89) (880)
Net cash used in investing activities were generally expended for equipment and
other capital to support expansion of NBG's call center operations, including
additions to NBG's data management, telephone and management information
systems.
Financing activities have included limited borrowings and distributions to
stockholders. NBG financed the majority of its equipment purchases with capital
leases.
32
<PAGE>
HARRIS
Prior to the acquisition by TeleSpectrum, Harris Direct Marketing, Inc. ("HDM"),
founded in 1931, and Harris Fulfillment, Inc. ("HFI" and with HDM, "Harris") was
a vertically-integrated direct mail and fulfillment organization that provided
services primarily to companies in the pharmaceuticals and health care,
financial services and insurance industries. HDM clients and certain of HFI
clients compensate Harris on a per project basis.
On August 12, 1996, Harris sold substantially all its assets and liabilities to
TeleSpectrum, and is a predecessor company to TeleSpectrum.
RESULTS OF OPERATIONS
The following table sets forth selected financial data and data as a percentage
of revenues for the periods indicated (dollars in thousands).
FOR THE PERIOD
FROM
JANUARY 1,
1996 TO
YEAR ENDED DECEMBER 31, AUGUST 12,
--------------------------- ----------
1994 1995 1996
---- ---- ----
Revenues.................. $10,115 100.0% $12,690 100.0% $6,304 100.0%
Cost of services.......... 5,530 54.7 6,402 50.5 3,140 49.8
Selling, general and ad-
ministrative expenses... 2,680 26.5 2,986 23.5 1,986 31.5
----- ----- -----
Total operating ex-
penses................ 8,210 81.2 9,388 74.0 5,126 81.3
----- ----- -----
Operating income.......... 1,905 18.8 3,302 26.0 1,178 18.7
Interest expense, net..... 186 1.8 144 1.1 44 0.7
--- --- --
Pre-tax income............ $1,719 17.0 $3,158 24.9 $1,134 18.0
====== ====== ======
FOR THE PERIOD FROM JANUARY 1, 1996 THROUGH AUGUST 12, 1996, (THE "STUB PERIOD")
Revenues--If the Stub Period revenues were annualized and compared to 1995, the
revenue comparison would show a decrease from 1995 to the stub period. This
decrease is due to lower volume from two significant customers partially offset
by revenue growth from existing and incremental customers.
Cost of Services--Cost of services which primarily consists of labor and other
direct mail and fulfillment-related operating and support expenses as a
percentage of revenues remained comparable between 1995 and the 1996 Stub
Period.
Selling, General and Administrative--Selling, general and administrative
expenses as a percentage of revenues increased to 31.5% in the Stub Period from
23.5% in 1995, primarily a result of a decrease in revenues at HFI.
33
<PAGE>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenues--Revenues increased to $12.7 million in 1995 from $10.1 million in
1994, an increase of $2.6 million, or 25.5%. This increase primarily resulted
from an increase in HFI revenues to $8.3 million in 1995 from $5.4 million in
1994. The increase in HFI revenues reflected a $2.4 million increase generated
from a single pharmaceuticals client and a 23.5% increase from the remaining HFI
client base. The increase in HFI revenues was partly offset by a decrease in HDM
revenues to $4.6 million in 1995 from $5.0 million in 1994, primarily as a
result of the loss of two significant direct mail clients, partially offset by
revenues from several new clients.
Cost of Services--Cost of services increased to $6.4 million in 1995 from $5.5
million in 1994, an increase of $0.9 million, or 15.8%. As a percentage of
revenues, cost of services decreased to 50.5% in 1995 from 54.7% in 1994. This
decrease primarily resulted from the spreading of certain fixed costs of HFI's
operations over increased revenues. HDM's cost of services as a percentage of
revenues in 1995 remained consistent with that of 1994.
Selling, General and Administrative--Selling, general and administrative
expenses increased to $3.0 million in 1995 from $2.7 million in 1994, an
increase of $0.3 million, or 11.4%. This increase primarily resulted from
additional infrastructure needed to support Harris' growth. As a percentage of
revenues, selling, general and administrative expenses decreased to 23.5% in
1995 from 26.5% in 1994. This decrease was primarily a result of the spreading
of expenses over increased revenues.
LIQUIDITY AND CAPITAL RESOURCES
Harris' primary sources of liquidity were cash flows from operating activities,
availability of borrowings on its lines of credit, and bank financing for
equipment purchases. The following table sets forth selected information from
Harris' statements of cash flows for the periods indicated (dollars in
thousands).
YEAR ENDED FOR THE PERIOD
DECEMBER 31, JANUARY 1, 1996
--------------- TO
1994 1995 AUGUST 12, 1996
------ ------- ---------------
Net cash provided by operating activities.. $1,883 $ 4,149 $ 802
Net cash used in investment activities..... (903) (460) (289)
Net cash used in financing activities...... (339) (1,745) (1,729)
Harris historically generated cash flow from operations, generating $6.8 million
from 1994 through August 12, 1996.
Net cash used in investing activities supported HDM equipment purchases and
growth of HFI. Harris incurred significant capital equipment expenditures in its
HDM operations, including expenditures for printing, insertion and commingled
equipment.
Financing activities included payments on HDM's facility mortgage and
distributions to stockholders. Harris' two lines of credit expired in April 1996
and were not renewed.
34
<PAGE>
REICH
Prior to the acquisition of substantially all of its assets and liabilities by
TeleSpectrum, the Reich Group Companies ("Reich"), founded in 1978, offered
telemarketing services to clients in the financial services, telecommunications
and insurance industries. Reich also offered additional value-added services to
its clients, such as marketing planning, database marketing, creative
development, situation analysis, in-house copy and art services and production
management. Reich earned revenue for telemarketing services on an hourly basis
and is compensated for planning and marketing services on a fee-for-service
basis.
On August 12, 1996, Reich sold substantially all of its assets and liabilities
to TeleSpectrum, and is a predecessor company to TeleSpectrum.
RESULTS OF OPERATIONS
The following table sets forth selected financial data and data as a percentage
of revenues for the periods indicated (dollars in thousands).
FOR THE PERIOD
FROM JANUARY 1,
1996 TO
YEAR ENDED DECEMBER 31, AUGUST 12,
----------------------- ----------
1994 1995 1996
---- ---- ----
Revenues. $5,424 100.0% $12,253 100.0% $14,558 100.0%
Cost of services. 4,225 77.9 7,836 63.9 8,550 58.7
Selling, general and ad-
ministrative expenses... 976 18.0 2,534 20.7 1,466 10.1
--- ----- -----
Total operating ex-
penses. 5,201 95.9 10,370 84.6 10,016 68.8
----- ------ ------
Operating income. 223 4.1 1,883 15.4 4,542 31.2
Interest expense, net 24 0.4 43 0.4 31 0.2
-- -- --
Pre-tax income. $199 3.7 $1,840 15.0 $4,511 31.0
---- ------ ------
FOR THE PERIOD FROM JANUARY 1, 1996 THROUGH AUGUST 12, 1996 (THE "STUB PERIOD")
Revenues--If the Stub Period revenues were annualized and compared to 1995, the
revenue per day would show a significant increase period over period. This
increase primarily resulted from increased telemarketing call volume from two
existing clients in the financial services industry and one existing client in
the telecommunications industry. Reich's call center in West Virginia, which
opened in May 1995, and the relocation and expansion of its Delaware and West
Virginia call centers provided additional capacity for the increased call
volume.
Cost of Services--Cost of services, as a percentage of revenues, decreased to
58.7% in the Stub Period from 63.9% in 1995. This decrease primarily resulted
from lower long-distance service rates and a lower average cost of labor.
Selling, General and Administrative--Selling, general and administrative costs,
as a percentage of revenues, decreased to 10.1% for the Stub Period compared to
20.7% in 1995, primarily as a result of the spreading of expenses over increased
revenues.
35
<PAGE>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenues--Revenues increased to $12.3 million in 1995 from $5.4 million in 1994,
an increase of $6.9 million, or 125.9%. This increase primarily resulted from
increased telemarketing call volume from a financial services client and the
addition of new clients in the telecommunications and financial services
industries. The opening of Reich's call center in West Virginia in May 1995
provided the capacity for the increased call volume. Revenues from non-
telemarketing-related services decreased to $0.9 million in 1995 from $1.3
million in 1994, as Reich focused its attention on telemarketing activities.
Cost of Services--Cost of services increased to $7.8 million in 1995 from $4.2
million in 1994, an increase of $3.6 million, or 85.5%. As a percentage of
revenues, however, cost of services decreased to 63.9% in 1995 from 77.9% in
1994. This decrease primarily resulted from the increased utilization of
existing capacity.
Selling, General and Administrative--Selling, general and administrative
expenses increased to $2.5 million in 1995 from $1.0 million in 1994, an
increase of $1.5 million, or 159.6%. The majority of this increase was due to a
one-time $0.8 million increase in compensation to Reich's president and sole
shareholder to $0.9 million in 1995 from $0.1 million in 1994. The remaining
increase was primarily due to salaries and related expenses attributable to
personnel added to the executive management team in 1995, as well as additional
general and administrative costs associated with the increase in business
activity.
LIQUIDITY AND CAPITAL RESOURCES
Reich's principal sources of liquidity were cash flows from operating activities
and available borrowing capacity under credit facilities and capital leases. The
following table sets forth selected information from Reich's statements of cash
flows for the periods indicated (dollars in thousands).
FOR THE PERIOD
YEAR ENDED JANUARY 1,
DECEMBER 31, 1996 TO
------------ AUGUST 12,
1994 1995 1996
---- ---- ----
Net cash provided by (used in) operating
activities................................ $ 219 $ 745 $ 2,535
Net cash provided by (used in) investment
activities................................ (138) (1,212) (935)
Net cash provided by (used in) financing
activities................................ (78) 656 (1,703)
Reich's net cash provided by operating activities were primarily generated from
pre-tax income. During the period, operating cash flow was negatively impacted
by demands on working capital (excluding cash and current maturities on long-
term debt). The additional working capital was principally related to the
increase in accounts receivable that resulted from the growth in the
telemarketing business over the same period.
Net cash used in investing activities was attributable to equipment and other
capital to support the opening of new call centers and relocation and expansion
of Reich's Delaware and West Virginia call center facilities.
Financing activities primarily included borrowing activities under various long-
term debt arrangements, capital leases and shareholder loans. In December 1995,
Reich received commitments for a low interest loan of up to $0.7 million from
the City of Wheeling, West Virginia and the West Virgina Economic Development
Authority ("WVEDA"). These loans were used to fund the cost associated with the
relocation and expansion of Reich's West Virginia call center which was
originally funded by operating cash flows.
36
<PAGE>
TELESPECTRUM, INC. AND TELESPECTRUM TRAINING SERVICES, INC.
Prior to the acquisition of substantially all of its assets by TeleSpectrum,
TeleSpectrum, Inc. and TeleSpectrum Training Services, Inc. (collectively,
"TeleSpectrum Maryland"), founded in 1984, specialized in providing both inbound
and outbound telemarketing services to the high technology, pharmaceuticals and
health care and consumer products industries. TeleSpectrum Maryland's revenues
primarily were derived from inbound teleservices and call center management
services. TeleSpectrum Maryland was typically paid on an hourly basis for
telemarketing services and on a negotiated, project-by-project basis for other
services.
On August 12, 1996, Telespectrum Maryland sold substantially all of its assets
and liabilities to Telespectrum, and is a predecessor company to Telespectrum.
RESULTS OF OPERATIONS
The following table sets forth selected financial data and data as a percentage
of revenues for the periods indicated (dollars in thousands).
FOR THE PERIOD
FROM JANUARY 1,
1996 TO
YEAR ENDED DECEMBER 31, AUGUST 12,
----------------------- ----------
1994 1995 1996
---- ---- ----
Revenues.................. $9,386 100.0% $11,854 100.0% $10,529 100.0%
Cost of services.......... 6,754 72.0 8,338 70.2 6,974 66.3
Selling, general and
administrative expenses.. 2,636 28.0 3,072 26.0 2,929 27.8
----- ------ -----
Total operating expenses.. 9,390 100.0 11,410 96.2 9,903 94.1
----- ------ -----
Operating income (loss) (4) -- 444 3.8 626 5.9
Interest expense, net..... 150 1.6 184 1.6 129 1.2
--- --- ---
Pre-tax income (loss)..... $(154) (1.6) $260 2.2 $497 4.7
====== ==== ====
FOR THE PERIOD FROM JANUARY 1, 1996 THROUGH AUGUST 12, 1996 (THE "STUB PERIOD")
Revenue--If the Stub Period revenues were annualized and compared to 1995, the
comparison would show a significant increase, period to period. This increase
primarily resulted from increased call volume from existing inbound clients and
the addition of new inbound clients, principally in the pharmaceuticals and
health care industry.
Cost of Services--As a percentage of revenues, cost of services decreased to
66.3% in the Stub Period from 70.2% in 1995, primarily as a result of the
spreading of fixed costs over increased revenues.
Selling, General and Administrative--Selling, general and administrative
expenses increased as a percentage of sales from 1995 to the Stub Period as
a result of additional administrative, personnel and related corporate expenses
associated with anticipated TeleSpectrum Maryland growth.
37
<PAGE>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenues--Revenues increased to $11.9 million in 1995 from $9.4 million in 1994,
on increase of $2.5 million, or 26.3%. This increase primarily resulted from
increased call volume from existing inbound clients and the addition of new
inbound clients, principally in the pharmaceuticals and health care industry.
Cost of Services--Cost of services increased to $8.3 million in 1995 from $6.8
million in 1994, an increase of $1.5 million, or 23.5%. As a percentage of
revenues, cost of services decreased to 70.2% in 1995 from 72.0% in 1994,
primarily as a result of the spreading of fixed costs over increased revenues.
Selling, General and Administrative--Selling, general and administrative
expenses increased to $3.1 million in 1995 from $2.6 million in 1994, an
increase of $0.5 million, or 16.5%. This increase primarily resulted from
additional administrative, personnel and corporate expenses associated with the
growth in revenues. As a percentage of revenues, selling, general and
administrative expenses decreased to 26.0% in 1995 from 28.0% in 1994, primarily
as a result of the spreading of expenses over increased revenues.
LIQUIDITY AND CAPITAL RESOURCES
TeleSpectrum Maryland's primary sources of liquidity were cash flows from
operating activities and available borrowing capacity under credit facilities.
The following sets forth selected information from TeleSpectrum Maryland's
statement of cash flows for the periods indicated (dollars in thousands):
FOR THE PERIOD
YEAR ENDED JANUARY 1,
DECEMBER 31, 1996 TO
------------ AUGUST 12,
1994 1995 1996
---- ---- ----
Net cash provided by (used in) operating
activities.................................... $(260) $ (4) $ 969
Net cash provided by (used in) investment
activities.................................... 37 (99) (2,044)
Net cash provided by (used in) financing
activities.................................... 359 (45) 1,716
Net cash used in operating activities in 1994 and 1995 resulted principally from
increases in working capital to support increases in revenue, offset by net
income. The net cash flow from operations in 1996 resulted from higher operating
income.
Net cash used in investing activities was expended primarily for the purchase of
telecommunications and computer equipment. Net cash provided by financing
activities included borrowings under TeleSpectrum Maryland's line of credit
facility and payments of debt and capital lease obligations.
In May 1996, TeleSpectrum Maryland obtained a $4.0 million revolving line of
credit. This revolving credit facility was used for refinancing of existing
debt, working capital purposes and capital expenditures.
Prior to consummation of the acquisition of TeleSpectrum Maryland by
TeleSpectrum, CRW Financial (a TeleSpectrum related party), advanced
TeleSpectrum Maryland $0.5 million, evidenced by a promissory note due one year
from the date the proceeds were received with interest at 9.0%. The note was
contributed by CRW Financial to TeleSpectrum Worldwide as part of the Initial
Capitalization. Upon the closing of the Acquisition, TeleSpectrum paid a portion
of the purchase price by cancellation of this promissory note.
38
<PAGE>
THE RESPONSE CENTER
Prior to the acquisition of substantially all of its assets by TeleSpectrum, The
Response Center, Inc. and The Tab House, Inc., founded in 1987 (collectively,
"The Response Center"), was a full service custom market research firm primarily
serving clients in the telecommunications, financial services, utilities,
pharmaceuticals and health care industries, deriving its revenues from the
provision of market research services.
On August 12, 1996, The Response Center sold substantially all its assets and
liabilities to TeleSpectrum, and is a predecessor company to TeleSpectrum.
RESULTS OF OPERATIONS
The following table sets forth selected financial data and data as a percentage
of revenues for the periods indicated (dollars in thousands).
FOR THE PERIOD
YEAR ENDED SEPTEMBER 30 FROM OCTOBER 1
----------------------- 1995 TO
1994 1995 AUGUST 12 1996
---- ---- --------------
Revenues $6,183 100.0% $6,719 100.0% $5,279 100.0%
Cost of services 3,426 55.4 3,583 53.3 2,849 54.0
Selling, general and
administrative expenses 2,800 45.3 2,717 40.5 1,954 37.0
---- ----- -----
Total operating expenses 6,226 100.7 6,300 93.8 4,803 91.0
Operating income (loss) (43) (0.7) 419 6.2 476 9.0
---- --- ---
Interest expense (income),
net (6) (0.1) (10) (0.2) (20) (0.4)
---- ---- ----
Pre-tax income (loss) $(37) (0.6) $429 6.4 $496 9.4
===== ==== ====
FOR THE PERIOD FROM OCTOBER 1, 1995 THROUGH AUGUST 12, 1996 (THE "STUB PERIOD")
Revenues--If the Stub Period revenues were annualized and compared to 1995, the
revenue comparisons would show a decrease from period to period. This decrease
was the result of reduced revenues from The Response Center's largest client and
revenues from federal elections tracking surveys performed in 1995, which were
not repeated in the Stub Period.
Cost of Services--Cost of services, which primarily consists of labor, telephone
and other call center-related operating and support expenses, as a percentage of
revenues increased to 54.0% in the Stub Period from 53.3% in 1995 as a result of
the spreading of relatively fixed call center-related operating and support
expenses over reduced revenues.
Selling, General and Administrative--Selling, general and administrative
expenses decreased as a percentage of revenues to 37.0% in the Stub Period from
40.5% in 1995 as a result of lower executive compensation.
YEAR ENDED SEPTEMBER 30, 1995 COMPARED TO YEAR ENDED SEPTEMBER 30, 1994
Revenues--Revenues increased to $6.7 million in 1995 from $6.2 million in 1994,
an increase of $0.5 million, or 8.7%. The Response Center generated
approximately 20.0% of 1995 revenues from new clients. This increase in revenues
was partially offset by a decrease in revenues from an existing client.
39
<PAGE>
Cost of Services--Cost of services increased to $3.6 million in 1995 from $3.4
million in 1994, an increase of $0.2 million, or 4.6%. As a percentage of
revenues, cost of services decreased to 53.3% in 1995 from 55.4% in 1994. This
decrease primarily resulted from reduced recruitment cost due to more cost
effective agreements with temporary agencies, and reduced telephone expense as a
percentage of revenues, partially offset by increased interviewer payroll costs
as a percentage of revenues. Reduced telephone expense resulted from lower rates
negotiated in a new long distance contract.
Selling, General and Administrative--Selling, general and administrative
expenses decreased to $2.7 million in 1995 from $2.8 million in 1994, a decrease
of $0.1 million, or 3.0%. As a percentage of revenues, selling, general and
administrative expenses decreased to 40.5% in 1995 from 45.3% in 1994, primarily
as a result of economies of scale related to increased revenues. Selling,
general and administrative expenses include compensation paid to The Response
Center's officers totaling $1.5 million in 1994 and 1995, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Response Center's principal source of liquidity was historically cash flows
from operating activities and loans from shareholders. The following table sets
forth selected information from The Response Center's statements of cash flows
for the periods indicated (dollars in thousands).
YEAR ENDED FOR THE PERIOD
SEPTEMBER 30, FROM OCTOBER 1,
------------- 1995 TO
1994 1995 AUGUST 12, 1996
---- ---- ---------------
Net cash provided by operating
activities................................ $ 111 $188 $ 799
Net cash provided by (used in) investment
activities................................ (59) 44 (151)
Net cash used in financing
activities................................ (193) (22) (820)
For the Stub Period, net cash flows from operations were $799 reflecting the
increase in net income and accelerated collection of accounts receivable.
Investing activities have included distributions to and borrowing activity from
shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference to pages F-1
through F-87 and page S-2 of this document.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Information required by this item is incorporated by reference from the
Company's Proxy Statement for the 1998 Annual Meeting.
40
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning each of the
executive officers and directors of the Company.
<TABLE>
<CAPTION>
Name Age Position with the Company
- ------------------------- --- ------------------------------------------------------------
<S> <C> <C>
Keith E. Alessi 43 Chairman of the Board, Chief Executive Officer and President
Jonathan P. Robinson 34 Chief Operating Officer*
Richard C. Schwenk, Jr. 47 Executive Vice President and Chief Financial Officer
Kenneth Cranston 35 Senior Vice President of Sales
James Carroll 54 Senior Vice President of Operations
J. Brian O'Neill 38 Director
William F. Rhatigan. 53 Director
Richard W. Virtue. 53 Director
Kevin W. Walsh 43 Director
Joseph V. Del Raso 45 Director
</TABLE>
______________________________
* Mr. Robinson has resigned from his position effective April 30, 1998
41
<PAGE>
Keith E. Alessi has been Chairman of the Board, Chief Executive Officer and
President since March 1998. Mr. Alessi had been Chairman, President and CEO of
Jackson Hewitt, Inc., the nation's second largest tax preparation service
company since 1995. From 1988 to 1994 Mr. Alessi served in several executive
positions with Farm Fresh, Inc. and was Vice Chairman upon his departure.
Jonathan P. Robinson has been Chief Operating Officer since September 1997.
Since May 1995, Mr. Robinson has also served as Vice President, Treasurer,
Secretary and Chief Financial Officer of CRW Financial, Inc., the Company's
founding stockholder, from April 1993 to May 1995. Mr. Robinson held the same
positions with CRW Financial's predecessor Company, Casino & Credit Services,
Inc. From June 1986 to April 1993, Mr. Robinson was employed by Arthur Andersen
& Co., certified public accountants, where he last served as an Audit Manager.
Mr. Robinson is a Certified Public Accountant.
Richard C. Schwenk, Jr. has served as Executive Vice President and Chief
Financial Officer of TeleSpectrum Worldwide since May 1996. Mr. Schwenk served
as Chief Financial Officer and Executive Vice President of Electronic Payment
Services, Inc., a provider of automated teller machine and point-of-sale
transaction processing services, from November 1992 to January 1996.
Kenneth Cranston has served as Senior Vice President of Sales since January
1997. Mr. Cranston served as National Sales Director for Western Union for which
he worked for since 1991.
James Carroll has served as Senior Vice Presidnet of Operations since September
1997. Mr. Carroll served as Executive President of Operations of SOMAR Inc. from
1991 to 1996.
J. Brian O'Neill was Chairman of the Board, and Chief Executive Officer and
President of the Company from April 1996 to March 1998. Mr. O'Neill is the
Chairman of the Board of Directors and Chief Executive Officer of CRW Financial,
Inc. From July 1992 to May 1995, Mr. O'Neill was Chairman and Chief Executive
Officer of Casino and Credit Services, Inc.
William F. Rhatigan has served as a director of the Company since August 1996.
From August 1996 to March 1997, Mr. Rhatigan served as the President of the
Company's Direct Marketing Group. Mr. Rhatigan was Chairman and Chief Executive
Officer of NBG Services, Inc. from 1991 until August 1996.
Richard W. Virtue has served as a director of the Company since August 1996. Mr.
Virtue served as Chief Executive Officer of SOMAR, Inc. from 1982 until August
1996.
Kevin W. Walsh has been a director of the Company since August 1996. Mr. Walsh
has been a partner of the law firm Adelman Lavine Gold and Levin, a professional
corporation, since 1988.
Joseph V. Del Raso has been a director of the Company since February 1997. Mr.
Del Raso has been a partner of the law firm of Pepper Hamilton LLP since
January, 1998. From 1992 to January 1998, Mr. Del Raso was a partner of the law
firm of Stradley, Ronon, Stevens & Young.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated herein by reference from the
Registrant's Definitive Proxy Statement for the 1998 Annual Meeting of
Stockholders. The Definitive Proxy Statement will be filed with the Securities
and Exchange Commission not later than 120 days after the end of the year
covered by this Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated herein by reference from the
Registrant's Definitive Proxy Statement for the 1998 Annual Meeting of
Stockholders. The Definitive Proxy Statement will be filed with the Securities
and Exchange Commission not later than 120 days after the end of the year
covered by this Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated herein by reference from the
Registrant's Definitive Proxy Statement for the 1998 Annual Meeting of
Stockholders. The Definitive Proxy Statement will be filed with the Securities
and Exchange Commission not later than 120 days after the end of the year
covered by this Form 10-K.
42
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Report on Form 8-K
(a) 1. Financial Statements.
The financial statements listed in the accompanying Index to Financial
Statements and Financial Statement Schedules at page F-1 are filed as part of
this Form 10-K.
2. Financial Statement Schedule.
The financial statement schedule listed in the accompanying Index to Financial
Statements and Financial Statement Schedule at page F-1 is filed as part of
this Form 10-K.
All other schedules have been omitted because they are not applicable, or not
required, or the information is shown in the Financial Statements or notes
thereto.
3. Exhibits. (See (c) below)
(b) Report on Form 8-K
The Company filed a Current Report on Form 8-K with the Commission on March 24,
1998.
(c) Exhibits.
The following is a list of exhibits filed as part of this annual report on Form
10-K. 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.
EXHIBIT
Number DESCRIPTION
- ------ -----------
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 Asset Purchase Agreement, dated as of April 5, 1996 and amended and
restated as of May 22, 1996, by and among CRW Financial, Inc.,
TeleSpectrum Worldwide Inc., DialDirect, Inc., InsureDirect, Inc.,
DialDirect Telemarketing, Ltd., TRG/Communications, Inc., The Reich
Group, Inc. and Morton A. Reich incorporated by reference to exhibit
10.02 of the Company's Registration Statement on Form S-1 (File No. 333-
04349).
10.02 Asset Purchase Agreement, dated as of April 10, 1996 and amended and
restated as of May 22, 1996, by and among CRW Financial, Inc.,
TeleSpectrum Worldwide Inc., TeleSpectrum, Inc., TeleSpectrum Training
Services, Inc., Karen Schweitzer and Sherry Paterra incorporated by
reference to exhibit 10.03 of the Company's Registration Statement on
Form S-1 (File No. 333-04349).
10.03 Asset Purchase Agreement, dated as of April 26, 1996 and amended and
restated as of May 22, 1996, by and among SOMAR, Inc., Richard W. Virtue,
CRW Financial, Inc. and TeleSpectrum Worldwide Inc. is incorporated by
reference to exhibit 10.04 of the Company's Registration Statement on
Form S-1 (File No. 333-04349).
43
<PAGE>
10.04 Asset Purchase Agreement, dated as of May 3, 1996 and amended and
restated as of May 22, 1996, by and among TeleSpectrum Worldwide Inc.,
CRW Financial, Inc., NBG Services, Inc., William F. Rhatigan and
Michael J. Gallant is incorporated by reference to exhibit 10.06 of
the Company's Registration Statement on Form S-1 (File No. 333-04349).
10.05 Asset Purchase Agreement, dated as of October 1, 1996, by and among
TeleSpectrum Worldwide Inc., Technical Research Assistance Research
Programs, Inc., TARP Information Systems, Inc., John Goodman and Mark
Grainer is incorporated by reference to the current report on Form 8-K
(file No. 000-21107).
10.06 Exchange Agreement, dated as of October 1, 1996, by and among
TeleSpectrum Worldwide Inc., John Goodman and Mark Grainer is
incorporated by reference to the current report on Form 8-K (file No.
000-21107).
10.07 Consulting Agreement between TeleSpectrum Worldwide Inc. and Richard
W. Virtue incorporated by reference to exhibit 10.14 of the Company's
Registration Statement on Form S-1 (File No. 333-04349).
10.08 Employment Agreement, dated as of March 18, 1998 , between
TeleSpectrum Worldwide Inc. and Keith E. Alessi. *
10.09 Subscription Agreement dated as of March 18, 1998 between TeleSpectrum
Worldwide Inc. and Keith E. Alessi. *
10.10(a) Stock Option Agreement dated as of March 18, 1998 between TeleSpectrum
Worldwide Inc. and Keith E. Alessi. *
10.10(b) Stock Option Agreement dated as of March 18, 1998 between TeleSpectrum
Worldwide Inc. and Keith E. Alessi. *
10.11 Amended and Restated Employment Agreement, dated as of February 25,
1998 between TeleSpectrum Worldwide Inc. and Brian J. O'Neill. *
10.12 Employment Agreement, dated as of August 28, 1997 , between
TeleSpectrum Worldwide Inc. and Jonathan Robinson. *
10.13 Employment Agreement, dated as of May 6, 1996, between TeleSpectrum
Worldwide Inc. and Richard S. Schwenk, Jr. is incorporated by
reference to exhibit 10.17 of the Company's Registration Statement on
Form S-1 (File No. 333-04349).
10.14 TeleSpectrum Worldwide Inc. 1996 Equity Compensation Plan is
incorporated by reference to exhibit 10.18 of the Company's
Registration Statement on Form S-1 (File No. 333-04349).
10.15 Amendment No. 1 to 1996 Equity Compensation Plan. *
10.16 Consulting Agreement dated as of February 20, 1997 between
TeleSpectrum Worldwide Inc. and Mr. William F. Rhatigan is
incorporated by reference to the Company 1997 Form 10-K filed on
March 31, 1997.
10.17 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. *
10.18 Asset Acquisition Agreement dated as of January 16, 1998 by and among
TeleSpectrum Worldwide, Inc., NCO Group, Inc. and NCO Teleservices,
Inc.
18.01 Preferability Letter of Arthur Andersen LLP, dated March 23, 1998.*
23.01 Consent of Arthur Andersen LLP.*
24.01 Power of Attorney (included as part of the Signature Page).
27.01 Financial Data Schedule.*
99.01 Financial Data Schedule.*
* Filed herewith.
44
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Telespectrum Worldwide Inc.
By:/s/ Richard C. Schwenk, Jr.
---------------------------
Richard C. Schwenk, Jr.
Executive Vice President and
Chief Financial Officer
Date: April 14, 1998
--------------------
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT
HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND
IN THE CAPACITIES AND ON THE DATES INDICATED.
EACH PERSON, IN SO SIGNING ALSO MAKES, CONSTITUTES AND APPOINTS KEITH E. ALESSI
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER OF TELESPECTRUM WORLDWIDE
INC., AND RICHARD C. SCHWENK, JR., SENIOR VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER OF TELESPECTRUM WORLDWIDE INC. AND EACH OF THEM ACTING ALONE, AS HIS
TRUE AND LAWFUL ATTORNEYS-IN-FACT, IN HIS NAME, PLACE AND STEAD, TO EXECUTE AND
CAUSE TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ANY OR ALL
AMENDMENTS TO THIS REPORT.
NAME CAPACITY DATE
---- -------- ----
/s/ Keith E. Alessi Chairman of the April 14, 1998
- ------------------- Board, Chief
KEITH E. ALESSI Executive Officer, President
and Director
(Principal
Executive Officer)
/s/ Richard C. Schwenk, Jr. Executive Vice President April 14, 1998
- --------------------------- President and Chief
RICHARD C. SCHWENK, JR. Financial Officer
(Principal
Financial and
Accounting Officer)
/s/J. Brian O'Neill Director April 14, 1998
- --------------------
J. BRIAN O'NEILL
/s/ William F. Rhatigan Director April 14, 1998
- ------------------------
WILLIAM F. RHATIGAN
45
<PAGE>
/s/ Richard W. Virtue Director April 14, 1998
- ----------------------
RICHARD W. VIRTUE
/s/ Kevin W. Walsh Director April 14, 1998
- -------------------
KEVIN W. WALSH
/s/ Joseph V. Del Raso Director April 14, 1998
- -----------------------
JOSEPH V. DEL RASO
46
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To TeleSpectrum Worldwide Inc.:
We have audited the accompanying consolidated balance sheets of TeleSpectrum
Worldwide Inc. (a Delaware corporation) and subsidiaries as of December 31, 1997
and 1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for the year ended December 31, 1997 and for the period
from April 26, 1996 (Inception) to December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of TeleSpectrum Worldwide Inc. and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for the year ended December 31, 1997 and for the
period from April 26, 1996 (Inception) to December 31, 1996, in conformity with
generally accepted accounting principles.
As explained in Note 2 to the consolidated financial statements, effective
December 31, 1997, the Company changed its method of measuring goodwill
impairment from an undiscounted cash flow approach to a fair value method based
on a discounted cash flow approach.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
March 23, 1998
(except with respect to the
matter discussed in Note 10,
as to which the date is
April 14, 1998)
F-1
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands--except share amounts)
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------ ------------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 774 $ 28,171
Accounts receivable, net of allowance for doubtful accounts
of $969 and $519, respectively 37,360 28,764
Income tax refund receivable 2,912 ---
Prepaid expenses and other 1,539 2,153
Net assets of discontinued operations (see Note 5) 36,399 36,362
--------- --------
Total current assets 78,984 95,450
PROPERTY AND EQUIPMENT, net 36,731 26,082
GOODWILL, net of accumulated amortization of $1,525 and $2,147, 27,964 173,231
respectively (see Note 2)
OTHER ASSETS 1,042 1,776
--------- --------
Total assets $ 144,721 $296,539
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Secured credit facility $ 29,000 $ ---
Current maturities of long-term debt 1,160 1,768
Accounts payable 4,718 5,863
Accrued expenses 9,125 4,577
Accrued compensation 7,638 3,579
Notes payable to sellers of businesses 990 27,005
Other current liabilities 5,698 3,285
--------- --------
Total current liabilities 58,329 46,077
--------- --------
LONG-TERM DEBT 3,800 4,199
--------- --------
OTHER NONCURRENT LIABILITIES 2,215 5,752
--------- --------
COMMITMENTS AND CONTINGENCIES (see Note 12)
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,
25,213,074 shares issued and outstanding 252 252
Additional paid-in capital 237,186 236,678
(Accumulated deficit) retained earnings (156,825) 3,650
Cumulative currency translation adjustment (236) (69)
--------- --------
Total stockholders' equity 80,377 240,511
--------- --------
Total liabilities and stockholders' equity $ 144,721 $296,539
========= ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS -- EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR FROM APRIL 26, 1996
ENDED (INCEPTION) TO
DECEMBER 31, 1997 DECEMBER 31, 1996
---------------------- ----------------------
<S> <C> <C>
REVENUES $ 178,922 $53,154
--------- -------
OPERATING EXPENSES:
Cost of services 155,902 36,626
Selling, general and administrative 40,737 10,442
Amortization of goodwill (includes goodwill
impairment charge of $139,072 in 1997 - see Note 2) 146,321 2,147
--------- -------
Total operating expenses 342,960 49,215
--------- -------
Operating income (loss) (164,038) 3,939
INTEREST INCOME 414 877
INTEREST EXPENSE (2,290) (444)
INVESTMENT GAIN (see Note 6) 1,760 ---
--------- -------
Income (loss) from continuing operations before
income taxes (164,154) 4,372
INCOME TAX BENEFIT (EXPENSE) 2,310 (1,693)
--------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS (161,844) 2,679
--------- -------
INCOME FROM DISCONTINUED OPERATIONS
(net of income taxes of $910 and $613, respectively
see Note 5) 1,369 971
--------- -------
NET INCOME (LOSS) $(160,475) $ 3,650
========= =======
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
CONTINUING OPERATIONS $ (6.42) $ 0.15
DISCONTINUED OPERATIONS 0.06 0.05
--------- -------
NET INCOME (LOSS) $ (6.36) $ 0.20
========= =======
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 25,213 17,898
========= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE PERIOD FROM APRIL 26,
ENDED 1996 (INCEPTION) TO
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------ -----------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $(160,475) $ 3,650
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 8,183 1,667
Amortization of goodwill (includes impairment charge of
$139,072 in 1997 - see Note 2) 146,321 2,147
Provision for call center closings 10,275 ---
Investment gain (1,760) ---
Provision for bad debts 881 542
Provision for deferred taxes (benefit) (2,268) 220
Issuance of options to purchase common stock 508 ---
Other Items, net 529 ---
Changes in operating assets and liabilities-
Accounts receivable (9,976) (9,262)
Income tax receivable 532 ---
Prepaid expenses and other 1,371 1,081
Accounts payable (1,829) (789)
Accrued compensation 4,264 3,579
Other accrued expenses 3,778 (1,726)
Deferred revenue (638) 1,680
Other liabilities 371 (5,878)
Net operating activities of discontinued operations 4,702 (1,591)
--------- ---------
Net cash provided by (used in) operating activities 4,769 (4,680)
--------- ---------
INVESTING ACTIVITIES:
Purchases of property and equipment (26,297) (10,558)
Business acquisitions (5,327) (106,993)
Payments of notes payable to sellers and acquisition liabilities (29,100) --
Proceeds from sale of investment 6,262 --
Purchase of investment (4,502) --
Net investing activities of discontinued operations (1,165) (9)
--------- ---------
Net cash used in investing activities (60,129) (117,560)
--------- ---------
FINANCING ACTIVITIES:
Capital contribution received --- 2,110
Proceeds of public offering, net of offering costs --- 162,016
Borrowings from credit facility 29,000 ---
Borrowings from debt 720 ---
Payments of debt (445) (9,403)
Payments of capital lease obligations (1,312) (2,637)
Net financing activities of discontinued operations --- (1,675)
--------- ---------
Net cash provided by financing activities 27,963 150,411
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (27,397) 28,171
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 28,171 ---
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 774 $ 28,171
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS -- EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ACCUMULATED CUMULATIVE
COMMON STOCK ADDITIONAL DEFICIT CURRENCY TOTAL
-------------------- PAID-IN RETAINED TRANSLATION STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT EQUITY
-------- -------- --------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Incorporation on April 26, 1996 8,510,137 $ 85 $ (75) $ -- $ -- $ 10
Capital contribution -- -- 2,100 -- -- 2,100
Issuance of equity owned by CRW -- -- 18,749 -- -- 18,749
Issuance of common stock upon public offering,
net of offering costs 11,879,000 119 161,847 -- -- 161,966
Issuance of common stock to the sellers of the
Initial Operating Businesses 4,403,863 44 44,647 -- -- 44,691
Issuance of options and warrants to purchase
common stock to the sellers of the Initial
Operating Businesses -- -- 4,827 -- -- 4,827
Issuance of common stock to the sellers of
Fourth Quarter Acquisitions 420,074 4 4,583 -- -- 4,587
Net income -- -- -- 3,650 -- 3,650
Cumulative currency translation adjustment -- -- -- -- (69) (69)
---------- ---- -------- --------- ----- ---------
BALANCE, DECEMBER 31, 1996 25,213,074 252 236,678 3,650 (69) 240,511
Issuance of options to purchase common stock -- -- 508 -- -- 508
Net loss -- -- -- (160,475) -- (160,475)
Cumulative currency translation adjustment -- -- -- -- (167) (167)
---------- ---- -------- --------- ----- ---------
BALANCE, DECEMBER 31, 1997 25,213,074 $252 $237,186 $(156,825) $(236) $ 80,377
========== ==== ======== ========= ===== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. NATURE OF BUSINESS
Telespectrum Worldwide Inc. and subsidiaries (the "Company") was
incorporated in Delaware on April 26, 1996 (see Note 15) 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 (see Note 4). 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).
2. RECENT DEVELOPMENTS
Operating Results
The Company's operating results have deteriorated significantly since the
first quarter of 1997. The Company recorded operating losses in the second,
third and fourth quarters of 1997. The Company expects that it will continue to
realize significant operating losses during the first two 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 in the third and fourth quarters of 1997 and in the first two
quarters of 1998. The Company also attributes these losses to decreased
telemarketing rates resulting from industry pricing pressures and its acceptence
of lower-margin business in an effort to fill its capacity. The Company believes
that a significant decline in the growth of outsourcing of telemarketing has
occurred, which has reduced the Company's future growth expectations. In
addition, for 1998 the Company expects to receive significantly lower revenues
from its largest customer (see Note 16). Beginning in the third quarter of 1997
and continuing in the fourth quarter of 1997 and the first quarter of 1998, the
Company took actions to restructure its Telemarketing Segment. In connection
with the restructuring, the Company closed or plans to close 15 of its 25
outbound call centers and the Company's workforce is planned to be significantly
reduced.
Goodwill Impairment Charge
In the fourth quarter of 1997, the Company recorded a goodwill impairment
charge of $139,072,000, which represented the goodwill associated with the
Telemarketing Segment. As of December 31, 1997, the remaining goodwill of
$27,964,000 relates exclusively to the Customer Care Segment.
The Company has continually evaluated whether later events and
circumstances have occurred that indicate the remaining balance of goodwill may
not be recoverable. Recently, 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. The Company has
concluded that due to the significant decline in the growth in the telemarketing
industry and the reduced growth prospects of the Company, a permanent impairment
of goodwill has occurred.
In connection with this evaluation, the Company elected to change its
method of measuring goodwill impairment under APB Opinion No. 17 "Intangible
Assets," from an undiscounted cash flow approach to a fair value method based on
a discounted cash flow approach effective December 31, 1997. The Company
believes the change to the fair value method based on a discounted cash flow
approach is preferable in that such method most closely approximates the fair
value of goodwill and the related measurement of goodwill impairment.
F-6
<PAGE>
As a result of this change, 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. The Company will continually evaluate whether later events and
circumstances have occurred which may indicate whether the remaining goodwill of
$27,964,000 associated with the Customer Care Segment may not be recoverable.
Call Center Closing Charges
In the third and fourth quarters of 1997, the Company recorded pre-tax
charges totaling $11,568,000 in connection with the Company's decision to close
seventeen call centers (fifteen in the Telemarketing Segment and two in the
Customer Care Segment). The charges include a non-cash write-down of $8,336,000
related to certain call center property and equipment as required by SFAS No.
121 "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," a $1,939,000 provision for non-cancelable lease commitments at
closed call centers and a $1,293,000 provision relating to severance and
termination benefits for certain employees.
The property and equipment charges are included in the results of
operations for the year ended December 31, 1997, with $7,673,000 as a component
of cost of services and $663,000 as a component of selling, general and
administrative expense and are included as a reduction of the carrying value of
property and equipment in the accompanying consolidated balance sheet. The
impaired assets include telemarketing equipment, furniture and office equipment
and leasehold improvements.
The provisions for non-cancelable lease commitments and severance and
termination benefits were determined in accordance with EITF 94-3, "Liability
Recognition for Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring)." The lease provision relates to call centers identified by the
Company to be closed, and for which the Company has committed to an exit plan,
as of December 31, 1997. The $1,939,000 lease provision represents the liability
for non-cancelable lease commitments in excess of estimated sublease income. In
connection with these call center closings, the Company provided $1,293,000 for
severance and termination benefits for certain employees, all of which were
severed as of December 31, 1997. These provisions are included in the results of
operations for the year ended December 31, 1997, with $2,586,000 as a component
of cost of services and $646,000 as a component of selling, general and
administrative expense.
The Company has commenced activities necessary to implement the closing of
the call centers and 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 being completed by June 30, 1998. The Company
anticipates recording an additional provision relating to non-cancelable lease
commitments and for severance and termination benefits in the first quarter of
1998 related to call center closings to be initiated.
F-7
<PAGE>
3. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying financial statements include the accounts of Telespectrum
Worldwide Inc. and its wholly-owned subsidiaries. All material intercompany
balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Company recognizes revenues as services are performed for its clients.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. At December
31, 1996, cash and cash equivalents consisted primarily of investments in money
market accounts and certificates of deposit. At December 31, 1997, cash and
cash equivalents consisted primarily of investments in money market accounts.
Property and Equipment
Property and equipment are recorded at cost. Property and equipment
capitalized under capital leases are recorded at the present value of the
minimum lease payments due over the term of the lease. Depreciation and
amortization are provided using the straight-line method over the estimated
useful lives or the lease term, whichever is shorter.
Expenditures for maintenance, repairs and betterments that do not prolong
the useful life of an asset have been charged to operations as incurred.
Additions and betterments that substantially extend the useful life of the asset
are capitalized. Upon sale or other disposition of assets, the cost and related
accumulated depreciation and amortization are removed from the respective
accounts, and the resulting gain or loss, if any, is included in income.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under SFAS No. 109, deferred income tax assets
and liabilities are determined based on differences between the financial
reporting and income tax basis of assets and liabilities measured using enacted
income tax rates and laws that are expected to be in effect when the differences
reverse.
Currency Translation
The accounts of the international subsidiaries are translated in accordance
with SFAS No. 52, "Foreign Currency Translation," which requires that assets and
liabilities of international operations be translated using the exchange rate in
effect at the balance sheet date. The results of operations are translated at
average exchange rates during the year. The effects of exchange rate
fluctuations in translating assets and liabilities of international operations
into U.S. dollars are accumulated and reflected as a cumulative currency
translation adjustment in the consolidated statements of stockholders' equity.
Transaction gains or losses are included in net income. There was no material
transaction gains or losses for the periods presented.
F-8
<PAGE>
Goodwill Impairment
The Company changed its method of measuring goodwill impairment, under APB
Opinion No. 17 "Intangible Assets" from an undiscounted cash flow approach to
a fair value method based on a discounted cash flow approach (See Note 2).
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.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income." This statement, which establishes
standards for reporting and disclosure of comprehensive income, is effective for
interim and annual periods beginning after December 15, 1997. Reclassification
of financial information for earlier periods presented for comparative purposes
is required under SFAS No. 130. As this statement only requires additional
disclosures in the Company's consolidated financial statements, its adoption
will not have any impact on the Company's financial position or consolidated
results of operations. The Company will adopt SFAS No. 130 in 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement, which establishes
standards for reporting of information about operating segments and requires the
reporting of selected information about operating segments in interim financial
statements, is effective for fiscal years beginning after December 15, 1997.
Adoption of the statement will have no effect on the Company's financial
position or consolidated results of operations. The Company is presently
studying the future effects of SFAS No. 131 on the presentation of its segment
information, and based on current circumstances, does not believe the effect of
the adoption will be material.
Reclassifications
Certain prior period amounts have been reclassified to conform with the
current year presentation.
F-9
<PAGE>
4. INITIAL PUBLIC OFFERING AND ACQUISITIONS
Initial Public Offering
In August 1996, the Company sold 11,879,000 shares of its stock in a public
offering (the "Offering") at $15 per share which raised net proceeds to the
Company of $161,966,000 net of offering costs of $3,746,000.
Initial Operating Businesses and Fourth Quarter 1996 Acquisitions
In May 1996, CRW Financial, Inc. ("CRW") assigned to the Company its rights
to acquire substantially all of the net assets of SOMAR, Inc., NBG Services,
Inc., Harris Direct Marketing, Inc. and Harris Fulfillment, Inc., The Reich
Group Companies, The Response Center, Inc. and The Tab House, Inc., and
TeleSpectrum, Inc. and TeleSpectrum Training Services, Inc.; (together, the
"Initial Operating Businesses"). These acquisitions occurred contemporaneously
with the closing of the Offering on August 12, 1996, and were accounted for
using the purchase method. The total purchase price of the Initial Operating
Businesses was $199.9 million, which consisted of (i) $90.9 million in cash paid
to the sellers; (ii) forgiveness of a $0.5 million promissory note; (iii) $44.7
million estimated fair value of 4,403,863 shares of the Company's Common Stock
issued to the Sellers; (iv) $2.1 million estimated fair value of warrants to
purchase 593,400 shares of Common Stock at the Offering price of $15 per share;
(v) $18.7 million deemed value for accounting purposes of the CRW Lender
Warrants and CRW Management Warrants to purchase 2,272,562 shares of Common
Stock (owned by CRW) at $1.50 per share (see Note 15); (vi) $28.4 million in the
form of a note payable and options to settle certain earnout provisions with two
of the sellers of the Initial Operating Businesses (see Notes 7 and 13); (vii)
$5.7 million relating to accrued separation costs for certain former owners of
the Initial Operating Businesses; (viii) $4.0 million of additional purchase
price payable to the Sellers under the purchase agreements; and (ix) transaction
costs of $4.9 million. The $181.8 million excess of the total purchase price
over the estimated fair value of net assets acquired was recorded as goodwill
(see Note 2).
On October 1, 1996, the Company acquired substantially all of the assets
(and assumed substantially all of the liabilities) of Technical Assistance
Research Programs, Inc. and Tarp Information Systems, Inc. and acquired all of
the outstanding stock of Tarp (Europe) Limited (together, "TARP"). In addition,
on November 1, 1996 the Company acquired all of the outstanding stock of 1095404
Ontario, Inc., PR Response, Inc. and PR Response West, Inc. (together, "PR
Response"). The combined purchase price for TARP and PR Response consisted of
$17.25 million in cash, $4.6 million of estimated fair value of the Company's
Common Stock and $0.9 million in transaction costs. The purchase price was
reduced by approximately $0.8 million due from the sellers. The $20.9 million
excess of the total purchase price of TARP and PR Response over the estimated
fair value of net assets acquired was recorded as goodwill (see Note 2). The
TARP purchase agreement also contains certain earn-out provisions. In addition,
the Company entered into employment agreements with the selling shareholders.
1997 Acquisition
In March 1997, the Company completed its acquisition of the interactive
voice response division of Voice FX Corporation for $5,327,000 in cash,
including transaction costs. The division, renamed TeleSpectrum FX ("FX (IVR)"),
provides interactive voice response solutions within the interactive promotion
and direct response marketplace. The effective date of the FX (IVR) acquisition
was March 1, 1997.
The following table summarizes the unaudited pro forma consolidated results
of continuing operations for the years ended December 31, 1996 and 1995,
assuming that the Initial Operating Businesses and the acquisition of TARP had
occurred on January 1, 1995 (for purposes of this disclosure the acquisition of
PR Response and FX (IVR) are not deemed material - in thousands):
F-10
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
------------
1996 1995
---- ----
<S> <C> <C>
Revenue $124,257 $79,822
Operating income 11,430 5,319
Net income 5,976 1,807
Basic and diluted earnings per share $ 0.26 $ 0.08
</TABLE>
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
period from April 26, 1996 (Inception) to December 31, 1996 and the net assets
at December 31, 1996 have been restated to reflect discontinued operations.
In February 1998, the Company sold substantially all of the assets and
liabilities of the Market Research Segment for approximately $15,000,000, which
resulted in a loss of approximately $907,000, which was recorded as of December
31, 1997. The proceeds from this sale were used to repay borrowings on the
secured credit facility (see Note 10).
In March 1998, the Company sold substantially all of the assets and
liabilities of the Direct Mail and Fulfillment Segment for approximately
$23,000,000 in cash and up to $4,000,000 in contingent payments based on future
performance of the segment. The sale of this segment will not result in a
significant gain or loss. The proceeds from this sale were used to repay
borrowings on the secured credit facility. (see Note 10).
The following table summarizes the operating results of the discontinued
operations (in thousands):
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
APRIL 26, 1996
FOR THE YEAR ENDED (INCEPTION) TO
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
Revenues $ 21,304 $ 8,320
Operating expenses 19,025 6,736
-------- --------
Income before income taxes 2,279 1,584
Income tax provision 910 613
-------- --------
Income from discontinued operations $ 1,369 $ 971
======== ========
</TABLE>
6. INVESTMENT GAIN
On June 30, 1997, the Company purchased substantially all of the assets and
assumed certain liabilities of FX Direct, Inc. ("FX Direct"). On October 3,
1997, the Company sold its investment in FX Direct for $6,262,000 in cash. The
Company applied the proceeds from the sale to repay borrowings on the secured
credit facility and recorded a pre-tax gain of $1,760,000.
F-11
<PAGE>
7. SUPPLEMENTAL CASH FLOW INFORMATION
For year ended December 31, 1997 and the period from April 26, 1996
(Inception) to December 31, 1996, the Company paid $1,933,000 (net of
capitalized interest expense of $107,000) and $188,000 of interest expense,
$1,180,000 and $2,447,000 of income taxes and financed equipment purchases with
capital leases of zero and $1,917,000, respectively.
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 $200,000 through December 31,
1997.
The following table displays the net noncash assets that were acquired for
the year ended December 31, 1997 and for the period from April 26, 1996
(Inception) to December 31, 1996, as a result of the business acquisitions
described in Note 4 (in thousands):
<TABLE>
<CAPTION>
INITIAL OPERATING
BUSINESSES AND
1997 FOURTH QUARTER
ACQUISITION 1996 ACQUISITIONS
----------- -----------------
<S> <C> <C>
Noncash assets (liabilities):
Accounts receivable $ 321 $ 23,916
Prepaid expenses and other --- 5,139
Property and equipment 176 19,587
Other assets 6 634
Goodwill 5,256 202,755
Accounts payable (364) (7,169)
Other accrued expenses (68) (6,323)
Deferred revenue --- (305)
Other current liabilities --- (6,631)
Debt --- (17,765)
Other noncurrent liabilities --- (480)
------ --------
Net noncash assets acquired 5,327 213,358
Less: Common stock issued --- (49,278)
Options and warrants issued to sellers --- (4,827)
CRW Warrants --- (18,749)
Notes payable to sellers of businesses --- (27,005)
Acquisition related liabilities --- (6,506)
------ --------
Cash paid for business acquisitions, net $5,327 $106,993
====== ========
</TABLE>
F-12
<PAGE>
8. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
------------
USEFUL LIVES 1997 1996
------------ ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Telemarketing equipment 5 years $23,762 $15,222
Furniture and office equipment 5-7 years 17,435 8,762
Building 40 years 2,402 2,396
Leasehold improvements 3-7 years 2,574 963
Land 406 406
------- -------
46,579 27,749
Less--Accumulated depreciation and amortization (9,848) (1,667)
------- -------
$36,731 $26,082
======= =======
</TABLE>
Depreciation and amortization expense for the year ended December 31, 1997
and for the period from April 26, 1996 (Inception) to December 31, 1996, was
$8,183,000 and $1,667,000, respectively.
The carrying value of property and equipment under capital lease
obligations included above, amounted to $4,160,000 and $5,079,000 at
December 31, 1997 and 1996, respectively.
9. INCOME TAXES
The components of income (loss) from continuing operations before income
taxes are as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
APRIL 26, 1996
FOR THE YEAR ENDED (INCEPTION) TO
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
Domestic $(157,385) $3,840
Foreign (6,769) 532
--------- ------
$(164,154) $4,372
========= ======
</TABLE>
The components of the income tax benefit (provision) are as follows (in
thousands):
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
APRIL 26, 1996 TO
FOR THE YEAR ENDED (INCEPTION) TO
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
Current:
Federal $1,600 $(1,736)
State -- (130)
Foreign (200) (220)
------ -------
1,400 (2,086)
------ -------
Deferred:
Federal -- (209)
</TABLE>
F-13
<PAGE>
<TABLE>
<S> <C> <C>
State -- (11)
Foreign -- --
------ -------
-- 220
------ -------
Total benefit (provision) $1,400 $(2,306)
====== =======
</TABLE>
The 1997 income tax benefit is a result of a tax refund expected, for
federal income taxes paid in 1996, resulting from 1997 operating losses (see
deferred tax asset valuation allowance, below).
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
APRIL 26, 1996 TO
FOR THE YEAR ENDED (INCEPTION) TO
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
Continuing Operations $ 2,310 $ (1,693)
Discontinued Operations (910) (613)
------- --------
$1,400 $ (2,306)
======= ========
</TABLE>
The reconciliation of the statutory federal income tax rate to the
Company's effective income tax rate is as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
APRIL 26, 1996 TO
FOR THE YEAR ENDED (INCEPTION) TO
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
Statutory federal income tax rate (benefit) (34.0)% 34.0%
State income taxes, net of federal tax benefit -- 1.7
Impact of foreign subsidiaries subject
to higher tax rates 0.1 0.6
Operating loss, including other items not currently
deductible, not tax benefited 28.0 --
Nondeductible expenses 4.5 2.4
------ ----
(1.4)% 38.7%
====== ====
</TABLE>
Deferred taxes are determined based upon the estimated future tax effects
of differences between the financial statements and income tax basis of assets
and liabilities given the provisions of the enacted tax laws. The tax effect of
temporary differences as established in accordance with SFAS No. 109 that give
rise to deferred taxes at December 31, 1997 and 1996 are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 3,086 $ ---
Goodwill impairment 38,064 ---
Accruals and reserves not currently deductible 5,184 592
Book/tax difference of recorded assets 288 201
-------- --------
46,622 793
-------- --------
Deferred tax liabilities:
Goodwill amortization (532) (889)
Other (246) (124)
-------- --------
(778) (1,013)
-------- -------
45,844 (220)
Less valuation allowance (45,844) ---
-------- -------
</TABLE>
F-14
<PAGE>
<TABLE>
<S> <C> <C>
Net deferred tax asset $-- $(220)
=== ======
</TABLE>
Due to the uncertain realization of the deferred tax asset (see Note 2),
the Company has provided a full valuation allowance at December 31, 1997. The
Company has a net operating loss carryforward of $9,076,000, which expires in
2012.
10. SECURED CREDIT FACILITY
At December 31, 1997, the Company had outstanding borrowings of $29,000,000
on its secured credit facility ("credit facility"). Throughout 1997, the Company
amended the credit facility several times as a result of non-compliance due to
its 1997 operating performance. 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 covenants of its credit facility. The Company used the
proceeds from the sale of its Market Research Segment to partially repay
borrowings under the credit facility. On April 1, 1998, the Company used the
proceeds from the sale of its Direct Mail and Fulfillment Segment to repay all
outstanding borrowings under the credit facility.
On April 14, 1998, the Company entered into a new Loan and Security
Agreement with Mellon which provides for an initial $10 million credit facility
(the "Credit Facility") to be repaid in April 2002. The Credit Facility may be
increased to $20 million based upon satisfactory completion of certain due
diligence procedures by Mellon. Under the terms of the Credit Facility, the
Company can initially borrow up to the lesser of $10 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.
In order to satisfy the financial covenants under this Credit Facility on a
continuing basis management believes that the Company must successfully complete
its current restructuring plan in order to achieve compliance into 1999.
11. LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1997 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
The West Virginia Economic Development Authority; the notes
are secured by assets of the Company and are payable in
monthly installments of $21,250 including interest, through
July 1999, at an interest rate of 4% $ 391 $ 625
Note payable to lessor in monthly installments of $8,533
including interest, through March 2008, at an interest rate
of 8.50% 695 ---
Other notes payable 119 319
Capital lease obligations (see Note 12) 3,755 5,023
------ ------
4,960 5,967
Less--current maturities 1,160 1,768
------ ------
$3,800 $4,199
====== ======
</TABLE>
F-15
<PAGE>
Minimum principal repayments of long-term debt as of December 31, 1997,
excluding capitalized lease obligations (see Note 12), are as follows (in
thousands):
<TABLE>
<S> <C>
1998 $ 344
1999 230
2000 77
2001 58
2002 63
Thereafter 432
------
$1,204
======
</TABLE>
12. COMMITMENTS AND CONTINGENCIES
The Company leases facilities and equipment under capital and
non-cancellable operating leases through October 1, 2006. Interest rates on the
capital leases range from 4% to 20%. Rent expense under operating leases for
the year ended December 31, 1997 and for the period from April 26, 1996
(Inception) through December 31, 1996 was $4,835,000 and $1,161,000,
respectively.
Future minimum lease payments as of December 31, 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
OPERATING LEASES CAPITAL LEASES
---------------- --------------
<S> <C> <C>
1998 $ 5,060 $1,084
1999 4,598 784
2000 4,216 710
2001 3,761 416
2002 3,310 375
Thereafter 4,793 1,229
------- ------
Total minimum lease payments $25,738 4,598
=======
Less--amount representing interest 842
------
Present value of future minimum lease payments 3,756
Less--current portion of principal payments 816
------
$2,940
======
</TABLE>
The Company has entered into an employment contract with one of its senior
executives which expires in May 2000. The contract provides for annual minimum
compensation of $200,000 plus bonuses. Additionally, the Company has agreed to
grant options in future years to this senior executive (see Note 13).
On March 18, 1998, the Company entered into an employment contract with its
new Chairman of the Board, CEO and President which expires in March 2001. The
contract provides for annual compensation of $200,000 per year, plus bonuses.
The Company entered into a subscription agreement whereby this executive
acquired 227,964 shares of the Company's Common stock for $500,000 and was
granted options to purchase 2,000,000 shares of Common stock at $3.29 per
share. The options will vest over three to four years with accelerated vesting
for 500,000 options based on the achievement of certain performance objectives,
as defined. The purchase price per share under the stock subscription agreement
is $2.19. In March 1998, the Company will record compensation expense of
$327,000, which represents the difference between the stock purchase price and
the fair market value of the stock on the effective date of the stock
subscription agreement. In addition, the Company will record compensation
expense of $670,000 over the options vesting period, relating to the options to
purchase 2,000,000 shares of Common stock which represents the difference
between the fair market value of the stock on the grant date and the option
exercise price of $3.29.
The Company is party to various claims and other matters arising in the
ordinary course of business. In the opinion of management, the outcome of these
matters will not have a material adverse effect on the Company's financial
position or results of operations.
F-16
<PAGE>
13. OPTIONS AND WARRANTS
On May 17, 1996, the Company adopted The 1996 Equity Compensation Plan (the
"Plan"). The Plan was subsequently amended on May 28, 1997 to increase the
number of shares available for grant. A committee of the Board of Directors
administers and awards grants under the Plan at its sole discretion. The Plan
reserves up to 5,000,000 shares of Common Stock for issuance in connection with
the exercise and/or grant of incentive stock options, and nonqualified stock
options, restricted stock, stock appreciation rights and performance units to
key employees, officers, directors, independent contractors and consultants. In
addition, the Plan provides for grants of formula stock options to non-employee
directors.
The following table summarizes the activity under the Plan:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE PRICE EXERCISE PRICE
SHARES PER SHARE PER SHARE
------ --------- ---------
<S> <C> <C> <C>
Balance outstanding at Inception --- $ --- $ ---
Granted 1,447,600 15.00 15.00
Cancelled (38,110) 15.00 15.00
---------- ----------- ------
Balance outstanding, December 31, 1996 1,409,490 15.00 15.00
Granted 4,361,000 4.25-14.38 7.40
Cancelled (2,582,657) 4.25-14.38 13.84
---------- ----------- ------
Balance outstanding, December 31, 1997 3,187,833 $ 4.25-6.25 $ 5.55
========== =========== ======
Balance exercisable, December 31, 1997 1,042,347 $ 4.25-6.25 $ 5.94
========== =========== ======
</TABLE>
In February 1998, the Company granted options to purchase 637,000 shares of
the Company's Common Stock at prices ranging from $3.31 to $6.25 per share to
certain officers and employees of the Company.
In the first quarter of 1998, the vesting of 1,168,699 options was
accelerated based on the occurrence of certain events.
The remaining unvested options will vest over two to three years and the
weighted average remaining contractual life of options outstanding at December
31, 1997, was approximately 9 years. No options were exercised as of December
31, 1997.
In September 1997, the Company repriced options, which were previously
granted in August 1996 and February 1997. The exercise price for the repriced
options was $6.25 per share, which exceeded the market price of the stock. All
other options granted during 1997 had exercise prices equal to the market price
of the stock on the grant dates with a weighted average exercise price of $8.76
per share.
In September 1997, the Company granted options to purchase 150,000 shares
of the Company's Common stock at $6.25 per share to an independent contractor.
The options become fully exercisable over a two year period and expire in August
2006. The Company recorded the $508,000 fair value of these options as a charge
to operations in 1997.
In December 1996, the Company granted options to purchase 1,500,000 shares
of the Company's Common Stock at a price of $14.13 per share in lieu of a
certain earnout agreement with one of the Initial Operating Businesses.
Effective December 31, 1997, 1,000,000 of these options were cancelled as
certain vesting criteria, as defined, were not met.
In addition, 75,000 shares are issuable upon the exercise of options that
the Company has committed to grant over the next three years pursuant to an
employment agreement with one of its senior executives.
F-17
<PAGE>
The Company issued warrants to purchase 593,400 shares of Common Stock to
the former principals of the Initial Operating Businesses at $15 per share.
These warrants were valued at their estimated fair value of $2,077,000 and were
included in the purchase price of the Initial Operating Business. The warrants
are exercisable for ten years. No warrants were exercised as of December 31,
1997.
The Company has elected to follow APB Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB No. 25") and related Interpretations in accounting
for its employee stock options because, as discussed below, the alternative fair
value accounting provided for under SFAS No. 123, "Accounting for Stock-Based
Compensation," requires use of option valuation models that were not developed
for use in valuing employee stock options. Under APB No. 25, because the
exercise price of the Company's employee stock options equals or exceeds the
market price of the underlying stock on the date of the grant, no compensation
expense is recognized.
Pro forma information regarding net income and earnings per share required
by SFAS No. 123 has been determined as if the Company had accounted for its
employee stock options under the fair value method of that statement. The
determination of the fair value of the options noted above was estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for the year ended December 31, 1997 and for the
period from April 26, 1996 (Inception) to December 31, 1996: risk free interest
rate of 6.3% and 6.7%, respectively, dividend yield of 0%, volatility factor of
the expected market price of the Company's common stock of 75% and 65%,
respectively, and an expected life of the options of six years. The weighted
average fair value of the options granted in 1997 was $2.77 per option for
grants with exercise prices above the market price of the stock on the grant
date and $3.00 per option for grants with exercise prices that equaled the
market price of the stock on the grant date. The weighted average fair value of
the options granted in 1996 was $9.84 per option.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option's vesting period. The Company's
pro forma information is as follows (in thousands except for earnings per
share):
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
APRIL 26, 1996
FOR THE YEAR ENDED (INCEPTION) TO
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------ -----------------
<S> <C> <C>
Pro forma net income (loss) $(162,021) $2,237
Pro forma basic and diluted earnings (loss) per share $(6.43) $0.12
</TABLE>
14. EMPLOYEE RETIREMENT SAVINGS PLAN
On January 1, 1997, the Company adopted a defined contribution 401(k)
Savings Plan (the "Plan"). Employees who have met certain eligibility
requirements, as defined, may contribute up to 15% of their pre-tax gross wages,
subject to certain restrictions. The Plan provides for Company matching
contributions of 25% of the first 6% of employee contributions to the Plan,
which vest 25% per year over a four year period. The expense for the year ended
December 31, 1997 under the Plan was $290,000.
F-18
<PAGE>
15. RELATED-PARTY TRANSACTIONS
On May 22, 1996, CRW Financial, Inc. ("CRW"), made an initial capital
contribution of $2.1 million representing the proceeds of borrowings by CRW
under subordinated notes issued to certain officers and directors of CRW and the
Company, CRW consultants and CRW outside investors. As additional consideration,
the lenders to CRW received warrants from CRW to purchase 1,433,454 shares of
the Company's Common Stock owned by CRW at $1.50 per share ("CRW Lender
Warrants"). In addition, CRW issued to its bank, warrants to purchase 75,445
shares of the Company's Common Stock owned by CRW at $1.50 per share. These
warrants were issued as consideration for CRW's Bank issuing a waiver under its
loan facility with CRW, permitting the May 22, 1996 capital contribution to the
Company.
CRW also issued warrants to purchase 839,108 shares of the Company's Common
Stock owned by CRW at $1.50 per share to certain officers of CRW and the Company
("CRW Management Warrants"). The warrants were granted by CRW to these
individuals for services provided to CRW. In June 1997 certain officers of CRW
and the Company exercised the CRW Management Warrants to purchase 228,948 shares
of the Company's Common Stock.
The deemed value for accounting purposes of the CRW Lender Warrants and the
CRW Management Warrants is based upon the difference between $9.75 (35% discount
to the initial public offering price) and the $1.50 warrant exercise price. The
deemed value for accounting purposes of $18.7 million is treated as additional
purchase price consideration of the acquisitions of the Initial Operating
Businesses (see Note 4).
The Company subleases a 21,000 square foot office building in King of
Prussia, Pennsylvania, from CRW. The sublease commenced on May 9, 1996, and
requires monthly base rent payments through September 30, 2004, of approximately
$35,000. Total rent expense for the year ended December 31, 1997 and for the
period April 26, 1996 (Inception) to December 31, 1996 was $444,000 and
$106,000, respectively.
16. CONCENTRATIONS OF CREDIT
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 receivables.
The Company performs periodic reviews of its clients' financial condition to
reduce collection risk.
The Company does not believe significant credit risk exists at December 31,
1997. The Company had one client in the financial services industry, which
accounted for approximately 19% of total revenues for the year ended December
31, 1997 (see Note 2). No other client accounted for more than 10% of the
Company's revenues or accounts receivable. For the year ended December 31, 1997,
40% and 29% of the Company's revenues were from customers in the financial
services and telecommunications industries, respectively. For the period from
April 26, 1996 (Inception) to December 31, 1996 no individual customers
accounted for more than 10% of the Company's consolidated revenues, while 38%
and 11% of the Company's revenues during this period were from customers in the
financial services and insurance industries, respectively.
F-19
<PAGE>
17. BUSINESS SEGMENTS
The Company classifies its continuing operations into two segments:
Telemarketing and Customer Care. The business segments are described in further
detail below.
The Telemarketing Segment provides both business-to-consumer and business-
to-business outbound telemarketing services- primarily direct sales initiated by
the Company on behalf of its clients.
The Customer Care Segment provides customer service expertise to its
clients. The Company's customer service expertise includes inbound teleservices
support, typically through toll-free telephone numbers, for activities such as
responses to clients' customer service inquiries, catalogue sales and electronic
order processing and consulting services to a wide range of clients.
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).
Business segment information is as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
APRIL 26, 1996
FOR THE YEAR ENDED (INCEPTION) TO
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
REVENUES
Telemarketing $ 144,245 $ 40,321
Customer Care 34,677 12,833
Discontinued Operations 21,304 8,320
OPERATING INCOME (LOSS)
Telemarketing (includes goodwill impairment
charge of $139,072 in 1997) $(145,890) $ 5,541
Customer Care (1,481) 1,061
Corporate (16,667) (2,663)
Discontinued Operations 2,279 1,577
IDENTIFIABLE ASSETS
Telemarketing $ 55,560 $179,508
Customer Care 45,937 40,104
Corporate 6,825 40,565
Discontinued Operations 36,399 36,362
CAPITAL EXPENDITURES
Telemarketing $ 19,659 $ 7,446
Customer Care 4,604 2,246
Corporate 2,034 866
Discontinued Operations 1,165 9
DEPRECIATION AND AMORTIZATION
Telemarketing (includes goodwill impairment
charge of $139,072 in 1997) $ 150,972 $ 2,990
Customer Care 2,951 807
Corporate 581 17
Discontinued Operations 2,743 684
</TABLE>
F-20
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
INITIAL OPERATING BUSINESSES
PREDECESSOR COMPANIES' HISTORICAL FINANCIAL STATEMENTS
INTRODUCTION
In connection with the initial public offering, the Initial Operating Businesses
were deemed to be predecessor companies to TeleSpectrum Worldwide Inc.
Accordingly, the following historical financial statements are presented to
comply with the historical financial statement requirements in a Form 10-K. The
results of operations of The Response Center Inc. and The Tab House, Inc.
(Market Research Segment) and Harris Direct Marketing, Inc. and Harris
Fulfillment, Inc. (Direct Mail and Fulfillment Segment) have been accounted for
as discontinued operations (see Note 5 to the Consolidated Financial
Statements).
F-21
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To SOMAR, Inc.:
We have audited the accompanying balance sheet of SOMAR, Inc. (a North Carolina
corporation) as of December 31, 1995, and the related statements of income,
stockholders' equity (deficit) and cash flows for each of the two years in the
period ended December 31, 1995, and for the period from January 1, 1996 to
August 12, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SOMAR, Inc. as of December 31,
1995, and the results of its operations and its cash flows for each of the two
years in the period ended December 31, 1995, and for the period from January 1,
1996 to August 12, 1996, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Charlotte, N.C.,
September 30, 1996
F-22
<PAGE>
SOMAR, INC.
BALANCE SHEET
AS OF DECEMBER 31, 1995
(IN THOUSANDS--EXCEPT SHARE DATA)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash......................................................... $ 25
Accounts receivable net of reserve of $40.................... 4,825
Amounts due from Stockholders................................ 881
Affiliates.................................................. 210
Prepaid expenses and other................................... 451
-------
Total current assets....................................... 6,392
PROPERTY AND EQUIPMENT, net................................... 4,400
-------
Total assets............................................... $10,792
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit............................................... $ 1,182
Note payable--Bank........................................... 1,000
Current portion of long-term debt............................ 2,182
Current portion of capital lease obligations................. 852
Accounts payable............................................. 1,959
Accrued compensation......................................... 523
Other accrued expenses....................................... 122
Amounts due to an affiliate.................................. 562
------
Total current liabilities.................................. 8,382
------
LONG-TERM DEBT................................................ 767
------
CAPITAL LEASE OBLIGATIONS..................................... 872
------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY:
Common stock, $1 par value; 100,000 shares
authorized; 11,765 shares issued and outstanding............ 12
Additional paid-in capital................................... 789
Accumulated deficit.......................................... (30)
------
Total stockholders' equity............................... 771
-------
Total liabilities and stockholders' equity............... $10,792
=======
</TABLE>
The accompanying notes are an integral part of this statement.
F-23
<PAGE>
SOMAR, INC.
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
JANUARY 1,
FOR THE YEAR ENDED 1996 TO
DECEMBER 31 AUGUST 12,
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
REVENUES........................................... $20,785 $31,900 $26,421
------- ------- -------
OPERATING EXPENSES:
Cost of services................................. 15,623 25,048 21,406
Selling, general and administrative expenses... 4,115 5,162 3,817
Total operating expenses. 19,738 30,210 25,223
------ ------ ------
Operating income............................... 1,047 1,690 1,198
------ ------ ------
INTEREST INCOME................................... 12 45 11
INTEREST EXPENSE.................................. (432) (756) (572)
------ ------ ------
NET INCOME........................................ $ 627 $ 979 $ 637
====== ====== ======
PRO FORMA DATA (UNAUDITED):
Historical net income............................ $ 627 $ 979 $ 637
Pro forma provision for income taxes............. 261 414 237
------ ------ ------
Pro forma net income............................. $ 366 $ 565 $ 400
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-24
<PAGE>
SOMAR, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL RETAINED STOCKHOLDERS'
COMMON PAID-IN STOCKHOLDER EARNINGS EQUITY
STOCK CAPITAL LOAN (DEFICIT) (DEFICIT)
----- ------- ----------- ------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1,
1994................... $12 $474 $(612) $(265) $(391)
Net income............. -- -- -- 627 627
Distributions.......... -- -- -- (668) (668)
Repayments of stock-
holder loan........... -- -- 612 -- 612
Stock options.......... -- 298 -- -- 298
--- ---- ----- ----- -----
BALANCE, DECEMBER 31,
1994.................. 12 772 -- (306) 478
Net income............. -- -- -- 979 979
Distributions.......... -- -- -- (703) (703)
Stock options.......... -- 17 -- -- 17
--- ---- ----- ----- -----
BALANCE, DECEMBER 31,
1995................... 12 789 -- (30) 771
Net income............. -- -- -- 637 637
Distributions.......... -- -- -- (535) (535)
--- ---- ----- ----- -----
BALANCE, AUGUST 12,
1996.................. $12 $789 $ -- $72 $873
=== ==== ===== === ====
</TABLE>
The accompanying notes are an integral part of these statements.
F-25
<PAGE>
SOMAR, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
FOR THE YEAR ENDED JANUARY 1,
DECEMBER 31 1996 TO
----------- AUGUST 12,
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income................................... $627 $979 $637
Adjustments to reconcile net income to net
cash provided by operating activities--
Depreciation and amortization............... 288 775 749
Stock option compensation expense........... 298 17 --
Changes in operating assets and
liabilities--
Accounts receivable........................ (1,987) (2,003) (1,705)
Prepaid expenses and other................. (123) (144) (85)
Accounts payable........................... 559 614 1,706
Accrued expenses........................... 395 203 822
------- ------- -------
Net cash provided by operating
activities.............................. 57 441 2,124
------- ------- -------
INVESTING ACTIVITIES:
Purchases of property and equipment..... (174) (2,309) (828)
Advances to stockholder................. (103) (352) (847)
Advances to affiliates.................. (2) (209) (248)
Repayments of advances to affiliates.... 13 -- --
Repayment of stockholder loan........... 612 -- --
------- ------- -------
Net cash (used in) provided by
investing activities............... 346 (2,870) (1,923)
------- ------- -------
FINANCING ACTIVITIES:
Borrowings on long-term debt................... 25 2,824 1,286
Repayments on long-term debt................... (31) (257) (1,498)
Borrowings (repayments) on note payable--
Bank.......................................... -- 1,000 (1,000)
Borrowings (repayments) from affiliates........ (491) 458 (102)
Distributions paid to shareholders............. (669) (703) (535)
Payments on capital lease obligations.......... (297) (623) (641)
Net (repayments) borrowings on line of
credit agreement.............................. 1,046 (247) 2,269
------- ------- -------
Net cash provided by (used in) financing
activities................................ (417) 2,452 (221)
------- ------- -------
NET INCREASE (DECREASE) IN CASH................. (14) 23 (20)
CASH, BEGINNING OF PERIOD....................... 16 2 25
------- ------- -------
CASH, END OF PERIOD............................. $2 $25 $5
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-26
<PAGE>
SOMAR, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
Industry Information
SOMAR, Inc. (the "Company") is a provider of outsourced telephone-based sales,
marketing and customer management services, to clients principally in the
insurance industry and also to clients in the financial services,
telecommunications and consumer products industries.
On August 12, 1996, the Company sold substantially all of its assets and
liabilities to TeleSpectrum Worldwide Inc. SOMAR is a predecessor company to
TeleSpectrum Worldwide Inc.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition and Concentration of Credit Risk
The Company recognizes revenues on programs as services are performed for its
clients, generally based upon hours incurred.
The nature of the industry is such that the Company is dependent on several
large clients for a significant portion of its annual revenues. For the years
ended December 31, 1994 and 1995, and for the period from January 1, 1996 to
August 12, 1996, the Company had four, three and two clients, respectively, that
each accounted for more than 10% of the Company's revenues. For the period ended
December 31, 1994, the four clients accounted for 20%, 17%, 16% and 13% of the
Company's revenues, respectively. For the period ended December 31, 1995, the
three clients accounted for 33%, 16% and 15% of the Company's revenues,
respectively. For the period from January 1, 1996 to August 12, 1996, the two
clients accounted for 19% and 12% of the Company's revenues, respectively. The
loss of one or more of these major clients could have a materially adverse
effect on the Company's business.
Concentration of credit risk is limited to trade accounts receivable and is
subject to the financial conditions of certain major clients described above.
Two of these clients are engaged in transactions with each other and represent a
single credit risk to the Company. The Company does not require collateral to
secure clients' receivables. The Company performs periodic reviews of its
clients' financial condition to reduce collection risk on trade accounts
receivable.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided using the
straight-line method for financial reporting purposes and accelerated methods
for income tax reporting purposes over the estimated useful lives of the
respective assets. Assets recorded under capital leases are amortized using the
straight-line method over the estimated useful lives of the leased assets. Upon
sale or retirement, the related cost and accumulated depreciation are removed
from the accounts, and any gain or loss is recognized in the statement of
income.
Major improvements are capitalized and charged to expense through depreciation.
Repairs and maintenance are charged to expense as incurred. Certain general and
administrative expenses associated with the opening of new call centers are
expensed prior to the opening of the call center.
F-27
<PAGE>
SOMAR, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Statement of Cash Flows
For the years ended December 31, 1994 and 1995, and for the period from January
1, 1996 to August 12, 1996, the Company paid interest of $366,000, $750,000 and
$552,000, respectively.
Income Taxes
The Company had elected to be taxed as an S Corporation under the provisions of
the Internal Revenue Code and North Carolina General Statutes. As a result, the
Company was not subject to federal income taxes, and the taxable income of the
Company was included in the individual tax returns of the Company's
stockholders. Accordingly, no provision for federal or state income taxes has
been recorded in the accompanying financial statements.
The Company reported certain income and expense items for income tax purposes on
a basis different from that reflected in the accompanying statements. The
principal differences relate to the timing of the recognition of accrued
expenses that are not deductible for federal income tax purposes until paid and
the use of accelerated methods of depreciation for income tax purposes. At
December 31, 1995, the financial reporting basis of the Company's net assets
exceeds the tax basis of the net assets by approximately $580,000.
Fair Value of Financial Instruments
Cash, accounts receivable, accounts payable and accrued liabilities are
reflected in the financial statements at fair value due to the short-term nature
of those instruments. The carrying amounts of the line of credit, note payable
and long-term debt approximate fair value on the balance sheet dates.
Prepaid Agent License Fees
The Company capitalizes the cost of licensing its agents and amortizes license
fees over a 12-month period. Prepaid agent license fees amounted to $172,000 at
December 31, 1995.
Accounting of Stock-Based Compensation
The Company currently utilizes Accounting Principles Board Opinion No. 25 in its
accounting for stock options. In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation." The accounting method as
provided in the pronouncement is not required to be adopted; however, it is
encouraged. The Company does not anticipate adopting the accounting provisions
of the statement but will include in the footnotes to the financial statements
the disclosures required by SFAS No. 123 in fiscal 1996.
Training Costs
The Company maintains ongoing training programs for its employees. The cost of
this training is charged to expense when incurred. As of December 31, 1995, the
Company recorded a $407,000 receivable from a State Economic Development Agency
for certain educational and training costs that are to be reimbursed.
Pro Forma Data (Unaudited)
Given the sale of the business, for informational purposes, the accompanying
statements of income include an unaudited pro forma adjustment for income taxes
that would have been recorded if the Company had not been an S Corporation,
based on the tax laws in effect during the respective periods. The differences
between the federal statutory income tax rate and the pro forma income tax rate
primarily relate to state and local income taxes and expenses not deductible for
tax purposes.
F-28
<PAGE>
SOMAR, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
USEFUL DECEMBER 31,
LIVES 1995
----- ----
(IN THOUSANDS)
<S> <C> <C>
Furniture and fixtures..................... 5-7 years $2,265
Telemarketing equipment.................... 5 years 3,263
Leasehold improvements..................... 5-6 years 359
------
5,887
Less--Accumulated depreciation and amortiza-
tion...................................... (1,487)
-------
$4,400
======
</TABLE>
The gross cost of equipment under capital lease obligations included above
amounted to $2,547,000 at December 31, 1995.
Depreciation and amortization expense for the years ended December 31, 1994 and
1995, and for the period from January 1, 1996 to August 12, 1996, was $288,000,
$775,000 and $749,000, respectively.
3. LINE OF CREDIT AND NOTE PAYABLE--BANK:
At December 31, 1995, the Company had a line of credit with Fremont Financial
Corporation ("Fremont"). The Company has entered into an agreement with
NationsBank of Georgia ("NationsBank") for a revolving line of credit with a
maximum borrowing limit of $6,500,000 and bears interest at the bank's prime
rate (8.5% at December 31, 1995) plus 1%.
The Company's borrowing base under the NationsBank revolver is limited to 85% of
eligible receivables as defined by the agreement. The line is secured by trade
accounts receivable, equipment and other assets of the Company. At July 12,
1996, the Company's availability under the NationsBank revolver was
approximately $780,000.
The agreement terminates on January 1, 1997, and contains certain restrictive
covenants that, among other things, require the maintenance of certain financial
ratios, limitations and capital expenditures and bonuses, and restrictions on
future indebtedness. As of March 31, 1996, the Company was in violation of
certain loan covenants for which it has obtained a waiver letter from the bank.
This waiver letter modified the loan covenants related to certain required
financial ratios. As of June 30, 1996, the Company is in compliance with these
revised loan covenants.
At December 31, 1995, the Company was transitioning its line of credit
arrangement from Fremont to NationsBank. In connection with the transition, the
Company borrowed $1,000,000 from NationsBank on a short-term basis at an
interest rate equal to the bank's prime rate (8.5%) plus 1%. This note was
repaid on January 3, 1996, with the proceeds from the new revolving line of
credit arrangement.
F-29
<PAGE>
SOMAR, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
----
(IN THOUSANDS)
<S> <C>
Note payable to MCI Telecommunications Corporation,
unsecured, payable in monthly installments of $128,300
through July 1996, and remaining payment of $118,700 due in
August 1996, interest at 9.75% (on June 15, 1996, this note
was refinanced; the refinanced note is payable in monthly
installments of $128,300 through March 1997 and $43,400 in
April 1997, at an interest rate of 9.75%)......................... $981
Notes payable to a bank, secured by related equipment,
payable on July 1, 1996, interest payable monthly at the
bank's prime rate plus 150 basis points (10% at December
31, 1995), guaranteed by the Company's two principal
stockholders and two affiliated companies (on July 5, 1996,
these notes were refinanced by the West Virginia Economic
Development Authority; the refinanced notes are secured by
assets of the Company and are payable in monthly
installments of $21,250 including interest, through July
1999, at an interest rate of 4%).................................. 720
Installment note payable to a bank, secured by related
equipment, payable in monthly installments of $11,900
including interest, through August 1998, at the bank's
prime interest rate plus 150 basis points (10% at December
31, 1995), guaranteed by the Company's two principal
stockholders and two affiliated companies......................... 331
Note payable to Network Sampling Services, balance due July
1, 1997, including interest at 10%, guaranteed by one of
the Company's principal stockholders.............................. 300
Installment note payable to a bank, secured by related
equipment, payable in monthly installments of $11,957
including interest, through April 1998, at the bank's prime
interest rate plus 150 basis points (10% at December 31,
1995), guaranteed by the Company's two principal
stockholders and two affiliated companies......................... 288
Installment note payable to a bank, secured by related
equipment, payable in monthly installments of $21,774
including interest, through October 1996, at the bank's
prime rate plus 150 basis points (10% at December 31,
1995), guaranteed by the Company's two principal
stockholders and two affiliated companies......................... 226
Installment note payable to a finance company, unsecured,
payable in monthly installments of $3,800 including
interest, through August 1998 at an interest rate of 9%........... 103
------
2,949
Less--Current portion.............................................. (2,182)
------
$767
======
</TABLE>
Minimum principal repayments of long-term debt
as of December 31, 1995, are as follows (in thousands):
<TABLE>
<S> <C>
1996............................................... $2,182
1997............................................... 602
1998............................................... 165
------
$2,949
======
</TABLE>
The notes payable to a bank contain certain restrictive covenants. As of June
30, 1996, the Company was in violation of one of the loan covenants for which it
has obtained a waiver from the bank.
F-30
<PAGE>
SOMAR, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. COMMITMENTS AND CONTINGENCIES:
The Company is party to various claims and other matters arising in the normal
course of business. In the opinion of management, the outcome of these matters
will not have a material adverse effect on the Company's financial position or
results of operations.
Leases
The Company leases administrative offices, telephone call centers and equipment
under noncancelable operating leases. In addition, the Company has capital
leases covering certain operating equipment. Future minimum lease payments at
December 31, 1995, are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
------ ------
<S> <C> <C>
1996............................................... $673 $989
1997............................................... 549 647
1998............................................... 449 280
1999............................................... 221 16
2000............................................... 179 --
Thereafter......................................... 503 --
---- ----
Total.............................................. $2,574 1,932
======
Less- Amount representing interest................. (208)
-----
Present value of future minimum lease payments..... 1,724
Less- Current portion.............................. (852)
-----
$872
=====
</TABLE>
Rent expense under operating leases was approximately $599,000, $673,000 and
$479,000 for the years ended December 31, 1994 and 1995, and for the period from
January 1, 1996 to August 12, 1996 (including amounts paid to related parties),
respectively (see Note 7).
The Company financed purchases of approximately $1,488,000, $1,000,000 and
$1,948,000 through capital leases in 1994 and 1995 and for the period from
January 1, 1996 to August 12, 1996, respectively.
Employee Benefit Plan
The Company sponsors a defined contribution 401(k) profit sharing plan for
eligible employees. Company
F-31
<PAGE>
contributions to the plan, which are based on a company match percentage,
amounted to $21,000, $30,000 and $28,000 for the years ended December 31, 1994
and 1995, and for the period from January 1, 1996 to August 12, 1996,
respectively.
6. STOCK OPTIONS:
In December 1991, the Company's two principal stockholders granted stock options
to three key employees for the purchase of up to 2,588 shares of their common
stock at an exercise price of $10 per share. The options vested immediately and
were exercisable through December 31, 1994. The deemed value of the options for
accounting purposes at the date of grant was less than the $10 exercise price.
Accordingly, no compensation expense was recorded at the date of these grants.
In December 1994, the principal stockholders extended all option exercise dates
from December 31, 1994 to March 31, 1996. All remaining option terms, including
the $10 per-share exercise price, remained unchanged.
F-32
<PAGE>
SOMAR, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The deemed value of the options for accounting purposes at the extension date
was $125 per share. Accordingly, $298,000 of compensation expense was recorded
at the date of extension.
In May 1995, the Company's two principal stockholders granted stock options to
another key employee for the purchase of up to 117 shares of their common stock
at an exercise price of $10 per share through March 31, 1996. The deemed value
of the options for accounting purposes at the date of grant was $156 per share.
Accordingly, $17,000 of compensation expense was recorded at the date of grant.
At December 31, 1994 and 1995, no options had been exercised and 2,588 and 2,705
options were outstanding, respectively.
In March 1996, all options were exercised and 2,705 shares were issued by the
Company's principal shareholders to the option holders.
7. RELATED-PARTY TRANSACTIONS:
Southern Investments (a partnership), The Development Group, Inc. ("DGI"),
Southern Alloy of America, Inc., SOMAR Telecommunications, Inc. ("STI") and
Engineered Machine Technologies, Inc. ("EMTI") are affiliated with the Company
through common ownership.
The Company leases residential real estate, automobiles, computer equipment, and
furniture and equipment from Southern Investments on a month-to-month basis.
Rent expense related to these operating leases totaled approximately $363,000,
$278,000 and $183,000 for the years ended December 31, 1994 and 1995, and for
the period from January 1, 1996 to August 12, 1996, respectively.
Following is a schedule of amounts due from stockholders and affiliates (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1995
----
<S> <C>
Stockholders.......................................... $ 881
Southern Investments.................................. 102
DGI................................................... 42
EMTI.................................................. 5
STI................................................... 61
------
$1,091
======
</TABLE>
At December 31, 1995, the Company had an amount due to an affiliate, Southern
Alloy of America, Inc., of $562,000.
Included in interest expense and interest income in the accompanying financial
statements is interest income (expense) from (to) related parties (including
allocated interest expense) as follows (in thousands):
F-33
<PAGE>
<TABLE>
<CAPTION>
FOR THE
FROM (TO) PERIOD FROM
DECEMBER 31, JANUARY 1, 1996
------------ TO AUGUST 12,
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Southern Alloy of America, Inc.... $(99) $(94) $(57)
Southern Investments.............. 12 -- --
----- ----- -----
$(87) $(94) $(57)
===== ===== =====
</TABLE>
F-34
<PAGE>
SOMAR, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In 1994 and 1995 and for the period from January 1, 1996 to August 12, 1996, the
Company was allocated interest expense from Southern Alloy of America, Inc.,
amounting to approximately $99,000, $94,000 and $57,000, respectively.
The Company's senior management are employees of DGI. DGI charges the Company
for services provided by these individuals. These expenses amounted to
approximately $1,132,000, $1,136,000 and $744,000 in 1994 and 1995 and for the
period from January 1, 1996 to August 12, 1996, respectively.
The Company has guaranteed a line of credit agreement for Southern Alloy of
America, Inc. The outstanding balance under this agreement amounted to
$1,424,000 at December 31, 1995. The guarantee related to this line of credit
agreement is not being assumed in connection with the sale of the business
discussed in Note 1.
F-35
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To NBG Services, Inc.:
We have audited the accompanying balance sheet of NBG Services, Inc. (a
Massachusetts corporation--see Note 1) as of December 29, 1995, and the related
statements of income, shareholders' equity and cash flows for each of the two
fiscal years in the period ended December 29, 1995 and for the period from
December 30, 1995 to August 12, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of NBG Services, Inc. as of
December 29, 1995, and the results of its operations and its cash flows for each
of the two fiscal years in the period ended December 29, 1995, and for the
period from December 30, 1995 to August 12, 1996, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Philadelphia, Pa.,
September 30, 1996
F-36
<PAGE>
NBG SERVICES, INC.
BALANCE SHEET
AS OF DECEMBER 29, 1995
(IN THOUSANDS--EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................................. $ 700
Short-term investments................................................................ 210
Accounts receivable, net of reserve of $90............................................ 1,757
Prepaid expenses and other............................................................. 129
------
Total current assets................................................................ 2,796
PROPERTY AND EQUIPMENT, net............................................................ 1,336
OTHER ASSETS........................................................................... 102
------
Total assets........................................................................ $4,234
======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of capital lease obligations......................................... $277
Demand note........................................................................... 500
Accounts payable...................................................................... 212
Accrued expenses...................................................................... 537
------
Total current liabilities........................................................... 1,526
======
CAPITAL LEASE OBLIGATIONS.............................................................. 454
------
COMMITMENTS AND CONTINGENCIES (Note 5)
SHAREHOLDERS' EQUITY:
Common stock, no par value; 10,000 shares authorized; 100 shares is-
sued and outstanding................................................................. --
Retained earnings..................................................................... 2,254
======
Total shareholders' equity.......................................................... 2,254
======
Total liabilities and shareholders' equity $4,234
======
</TABLE>
The accompanying notes are an integral part of this statement.
F-37
<PAGE>
NBG SERVICES, INC.
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
FOR THE FISCAL YEAR ENDED DECEMBER 30,
--------------------------------------
1995 TO
DECEMBER 30, DECEMBER 29, AUGUST 12,
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
REVENUES...................................................... $5,778 $12,829 $11,311
------ ------- -------
OPERATING EXPENSES:
Cost of services............................................. 4,259 8,572 7,686
Selling, general and administrative
expenses.................................................... 1,443 2,115 1,645
------ ------- -------
Total operating expenses................................... 5,702 10,687 9,331
------ ------- -------
Operating income........................................... 76 2,142 1,980
INTEREST INCOME............................................... 17 19 37
INTEREST EXPENSE.............................................. (60) (55) (70)
------ ------- -------
Income before income taxes................................. 33 2,106 1,947
INCOME TAXES.................................................. -- -- (79)
------ ------- -------
NET INCOME.................................................... $ 33 $ 2,106 $ 1,868
====== ======= =======
PRO FORMA DATA (unaudited):
Historical net income........................................ $ 33 $ 2,106 $ 1,868
Pro forma provision for income taxes......................... 25 864 765
------ ------- -------
Pro forma net income......................................... $ 8 $ 1,242 $ 1,103
====== ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-38
<PAGE>
NBG SERVICES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS--EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
TOTAL
RETAINED SHAREHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------ ------- ---------- -------------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994.............. 100 $-- $ 363 $ 363
Net income........................... -- -- 33 33
--- --- ------ ------
BALANCE, DECEMBER 30, 1994............ 100 -- 396 396
Net income........................... -- -- 2,106 2,106
Distributions........................ -- -- (248) (248)
--- --- ------ ------
BALANCE, DECEMBER 29, 1995............ 100 -- 2,254 2,254
Net income........................... -- -- 1,868 1,868
Distributions........................ -- -- (895) (895)
Net unrealized gain on short-term in-
vestments........................... -- -- 20 20
--- --- ------ ------
BALANCE, AUGUST 12, 1996.............. 100 $-- $3,247 $3,247
=== === ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-39
<PAGE>
NBG SERVICES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED FOR THE PERIOD FROM
-------------------------- DECEMBER 30, 1995
DECEMBER 30, DECEMBER 29, TO
1994 1995 AUGUST 12, 1996
------------ ------------ ---------------
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income............................... $ 33 $ 2,106 $1,868
Adjustments to reconcile net income to
net cash provided by operating
activities--
Depreciation and amortization........... 205 319 273
Provision for loss on accounts
receivable............................. 37 113 --
Changes in operating assets and
liabilities--
Accounts receivable..................... (182) (1,343) (952)
Due from TeleSpectrum Worldwide
Inc.................................... -- -- (62)
Prepaid expenses and other.............. (46) (106) (91)
Accounts payable........................ 93 16 184
Accrued expenses........................ 75 278 114
----- ------- ------
Net cash provided by operating
activities. 215 1,383 1,334
----- ------- ------
INVESTING ACTIVITIES:
Purchase of short-term investments....... (35) (205) --
Proceeds from short-term investments..... 62 9 45
Purchases of property and equipment...... (69) (398) (126)
----- ------- ------
Net cash used in investing
activities. (42) (594) (81)
----- ------- ------
FINANCING ACTIVITIES:
Bank overdraft........................... 82 (82) --
Repayment of capital lease
obligations............................. (264) (259) (260)
Proceeds from demand note................ -- 500 --
Repayment of demand note................. -- -- (500)
Distributions to shareholders............ -- (248) (120)
----- ------- ------
Net cash used in financing
activities............................ (182) (89) (880)
----- ------- ------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................. (9) 700 373
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD.................................. 9 -- 700
----- ------- ------
CASH AND CASH EQUIVALENTS, END OF
PERIOD.................................. $ -- $ 700 $1,073
===== ======= ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-40
<PAGE>
NBG SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
Industry Information
RG Associates, Inc., d/b/a NBG Services, Inc., was incorporated in June 1991. In
April 1996, RG Associates, Inc., d/b/a NBG Services, Inc., amended its Articles
of Incorporation to change the name of the corporation to NBG Services, Inc.
(the "Company"). The Company provides outbound telemarketing data processing and
fulfillment services in the financial services, telecommunications and high
technology industries.
On August 12, 1996, the Company sold substantially all of its assets and
liabilities to TeleSpectrum Worldwide Inc. NBG is a predecessor company to
TeleSpectrum Worldwide Inc.
The Company operates on a fifty-two, fifty-three week fiscal year ending on the
last Friday of the calendar year.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition and Concentration of Credit Risk
The Company recognizes revenues as services are performed for its clients. Cash
received in advance of services performed is deferred and recorded as deferred
revenue in the accompanying balance sheet. For the fiscal years ended December
30, 1994 and December 29, 1995, and for the period from December 30, 1995 to
August 12, 1996, the Company had two clients for each period, that accounted for
more than 10% of the Company's revenues. For the fiscal year ended December 30,
1994, the two clients accounted for 13% and 77% of the Company's revenues,
respectively. For the fiscal year ended December 29, 1995, the two clients
accounted for 40% and 53% of the Company's revenues, respectively. For the
period from December 30, 1995 to August 12, 1996, the two clients accounted for
30% and 64% of the Company's revenue, respectively. The loss of either of these
significant clients would have a material adverse effect on the Company's
business.
The concentration of credit risk is limited to trade accounts receivables and is
subject to the financial conditions of the Company's clients. The Company does
not require collateral or other securities to support customer receivables.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. At December 29, 1995,
cash equivalents consist of money market accounts.
Short-Term Investments
Investments are held at market value, and at December 29, 1995, were classified
as short-term. Short-term investments, at December 29, 1995 consisted of
$196,000 in common stocks and $14,000 of mutual funds.
Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," the Company
determines the appropriate classification of debt and equity securities at the
time of purchase and reevaluates such decision at each balance sheet date. At
December 29, 1995, all short-term investments were classified as available-for-
sale. Available-for-sale securities are carried
F-41
<PAGE>
NBG SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
at fair value, based on quoted market prices with unrealized gains or losses,
net of tax, reported as a separate component of shareholders' equity. At
December 29, 1995, there were no significant unrealized holding gains or losses.
Realized gains and losses, computed using specific identification, and declines
in value determined to be permanent are recognized in the statement of income.
Property and Equipment
Property and equipment are recorded at cost. Property and equipment capitalized
under capital leases are recorded at the present value of the minimum lease
payments due over the term of the lease. Depreciation and amortization are
provided using the straight-line method over the estimated useful lives or the
lease term, whichever is shorter.
Expenditures for maintenance, repairs and betterments that do not prolong the
useful life of an asset have been charged to operations as incurred. Additions
and betterments that substantially extend the useful life of the asset are
capitalized. Upon sale or other disposition of assets, the cost and related
accumulated depreciation and amortization are removed from the respective
accounts, and the resulting gain or loss, if any, is included in income.
Statement of Cash Flows
For the fiscal years ended December 30, 1994 and December 29, 1995, and for the
period from December 30, 1995 to August 12, 1996, the Company paid interest of
$60,000, $55,000 and $70,000, respectively.
For the fiscal years ended December 30, 1994 and December 29, 1995, and for the
period from December 30, 1995 to August 12, 1996, the Company financed equipment
purchases with capital leases of $302,000, $440,000 and $854,000, respectively.
Income Taxes
The Company had elected to be taxed under Subchapter S of the Internal Revenue
Code. As a result, the Company was not subject to federal income taxes, and the
taxable income of the Company was included in the shareholders' tax returns.
Therefore, no provision for federal taxes had been made for the fiscal years
ended December 30, 1994 and December 29, 1995, and for the period from December
30, 1995 to August 12, 1996. A provision of $79,000 for the period from December
30, 1995 to August 12, 1996 for state income taxes had been made in accordance
with a Massachusetts state tax for 4.5% of cash basis net income which is levied
on S Corporations with greater than $9 million of revenue.
The Company was on the cash basis of accounting for income tax reporting
purposes and on the accrual basis for financial reporting purposes. Therefore,
the Company reports certain income and expense items for income tax purposes on
a basis different from that reflected in the accompanying financial statements.
At December 29, 1995, the Company's financial reporting basis of the net assets
exceeded the tax basis of the net assets by approximately $1.5 million.
Fair Value of Financial Instruments
Cash, accounts receivable, accounts payable and accrued liabilities are
reflected in the financial statements at fair value due to the short-term nature
of those instruments. The carrying amount of the demand note and capital lease
obligations approximates fair value at December 29, 1995.
F-42
<PAGE>
NBG SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Pro Forma Data (Unaudited)
Given the sale of the business, for informational purposes, the accompanying
statements of income include an unaudited pro forma adjustment for income taxes
that would have been recorded if the Company had not been an S Corporation,
based on the tax laws in effect during the respective periods. The differences
between the federal statutory income tax rate and the pro forma income tax rate
primarily relates to state and local income taxes and expenses not deductible
for tax purposes.
2. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
USEFUL DECEMBER 29,
LIVES 1995
------ ----
(IN THOUSANDS)
<S> <C> <C>
Telemarketing equipment........... 5 $1,845
Furniture and office equipment.... 7 195
Leasehold improvements............ 7 50
-----
2,090
Less--Accumulated depreciation
and amortization................. (754)
-----
$1,336
======
</TABLE>
Depreciation and amortization expense for the fiscal years ended December 30,
1994 and December 29, 1995, and for the period from December 30, 1995 to August
12, 1996, was $205,000, $319,000 and $273,000, respectively.
3. ACCRUED EXPENSES:
<TABLE>
<CAPTION>
DECEMBER 29,
1995
----
(IN THOUSANDS)
<S> <C>
Accrued compensation..... $174
Accrued profit sharing... 139
Accrued telephone........ 77
Accrued other............ 147
----
$537
====
</TABLE>
F-43
<PAGE>
4. DEBT:
<TABLE>
<CAPTION>
DECEMBER 29,
1995
----
(IN THOUSANDS)
<S> <C>
Demand note...................................... $ 500
Capitalized lease obligations (Note 5)........... 731
------
1,231
Less--Current portion........................... (777)
------
$ 454
======
</TABLE>
On December 29, 1995, the Company borrowed $500,000 from a bank under a demand
note that bears interest at prime rate (8.5% at December 29, 1995). The note was
repaid on March 29, 1996. Interest expense on this note was $15,000 for the
period from December 30, 1995 to August 12, 1996.
F-44
<PAGE>
NBG SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company has a line of credit with a bank that provides for maximum
borrowings of $500,000. The line is collateralized by all of the assets of the
Company and is personally guaranteed by the shareholders. The line of credit
expires on May 31, 1997. At December 29, 1995, there was no outstanding balance
on this line of credit.
5. COMMITMENTS AND CONTINGENCIES:
The Company leases facilities and equipment under capital and noncancelable
operating leases through December 2002. Interest rates on the capital leases
range from 4% to 18%. Rent expense under operating leases for the fiscal years
ended December 30, 1994 and December 29, 1995, and the period from December 30,
1995 to August 12, 1996, was $213,000, $331,000 and $343,000, respectively.
Future minimum lease payments under the Company's leases as of December 29,
1995, are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
------ ------
(IN THOUSANDS)
<S> <C> <C>
1996.............................................. $ 747 $ 328
1997.............................................. 512 277
1998.............................................. 514 154
1999.............................................. 524 57
2000.............................................. 470 --
Thereafter........................................ 462 --
------ -----
Total minimum lease payments...................... $3,229 816
======
Less--Amount representing interest................ (85)
-----
Present value of future minimum lease payments.... 731
Less- Current portion of principal payments....... (277)
-----
$ 454
=====
</TABLE>
The Company subleases two of its facilities under noncancelable operating leases
through December 31, 1996. Total minimum lease payments have not been reduced by
the minimum sublease rentals of $90,000 due to the Company under these two
noncancelable subleases.
6. EMPLOYEE BENEFIT PLANS:
The Company sponsors a noncontributory profit sharing plan for employees. The
Company's contributions to the plan are at the discretion of the Board of
Directors. For the fiscal years ended December 30, 1994 and December 29, 1995,
the Company's discretionary contributions to the plan were $110,000 and
$139,000, respectively. There were
F-45
<PAGE>
no contributions to the plan for the period from December 30, 1995 to August 12,
1996.
On January 1, 1996, the Company adopted a defined contribution 401(k) savings
plan. The plan provides for a matching contribution by the Company based on
employee contributions. Additional Company contributions may be made at the
discretion of management. For the period from December 30, 1995 to August 12,
1996, the Company contributed $10,000 to the plan.
F-46
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Harris Direct Marketing, Inc. and Harris Fulfillment, Inc.:
We have audited the accompanying combined balance sheet of Harris Direct
Marketing, Inc. and Harris Fulfillment, Inc. (Pennsylvania corporations) as of
December 31, 1995, and the related combined statements of income, shareholders'
equity and cash flows for each of the two years in the period ended December 31,
1995, and for the period from January 1, 1996 to August 12, 1996. These
financial statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of Harris Direct
Marketing, Inc. and Harris Fulfillment, Inc. as of December 31, 1995, and the
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1995, and for the period from January 1, 1996 to
August 12, 1996, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Philadelphia, Pa.,
September 30, 1996
F-47
<PAGE>
HARRIS DIRECT MARKETING, INC. AND HARRIS FULFILLMENT, INC.
COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1995
(IN THOUSANDS--EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................... $ 2,919
Accounts receivable, net of reserve of $161.... 2,930
Prepaid expenses and other..................... 651
-------
Total current assets......................... 6,500
PROPERTY AND EQUIPMENT, net..................... 4,139
OTHER ASSETS.................................... 164
-------
Total assets................................ $10,803
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
<CAPTION>
CURRENT LIABILITIES:
<S> <C>
Current portion of long-term debt.............. $ 299
Accounts payable.............................. 362
Accrued expenses.............................. 635
Customer advances............................. 1,463
-------
Total current liabilities.................... 2,759
-------
LONG-TERM DEBT.................................. 1,530
-------
DEFERRED RENT................................... 120
-------
OTHER NONCURRENT LIABILITIES.................... 19
-------
COMMITMENTS AND CONTINGENCIES (Note 7)
SHAREHOLDERS' EQUITY:
Common stock (Harris Direct Marketing, Inc.),
no par value, 10,000 shares authorized,
99 shares issued.............................. 1
Common stock (Harris Fulfillment, Inc.), $1
par value, 1,000 shares authorized, 111-
1/9 shares issued and outstanding........... --
Additional paid-in capital.................... 45
Retained earnings............................. 6,454
Treasury stock, at cost....................... (125)
-------
(125)
-------
Total shareholders' equity.................. 6,375
-------
Total liabilities and shareholders' equity.. $10,803
=======
</TABLE>
The accompanying notes are an integral part of this statement.
F-48
<PAGE>
HARRIS DIRECT MARKETING, INC. AND HARRIS FULFILLMENT, INC.
COMBINED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
FOR THE PERIOD FROM
YEAR ENDED JANUARY 1,
DECEMBER 31 1996 TO
--------------- AUGUST 12,
1994 1995 1996
------- ------- ------
<S> <C> <C> <C>
REVENUES.................................... $10,115 $12,690 $6,304
------- ------- ------
OPERATING EXPENSES:
Cost of services........................... 5,530 6,402 3,140
Selling, general and administrative
expenses.................................. 2,680 2,986 1,986
------- ------- ------
Total operating expenses................. 8,210 9,388 5,126
------- ------- ------
Operating income......................... 1,905 3,302 1,178
INTEREST INCOME............................. 9 70 53
INTEREST EXPENSE............................ (195) (214) (97)
------- ------ ------
NET INCOME.................................. $1,719 $3,158 $1,134
======= ====== ======
PRO FORMA DATA (UNAUDITED):
Historical net income..................... $1,719 $3,158 $1,134
Pro forma provision for income taxes...... 784 1,425 511
------- ------ ------
Pro forma net income...................... $ 935 $1,733 $ 623
======= ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-49
<PAGE>
HARRIS DIRECT MARKETING, INC. AND HARRIS FULFILLMENT, INC.
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS--EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
HARRIS DIRECT HARRIS
MARKETING, INC. FULFILLMENT, INC.
COMMON STOCK COMMON STOCK ADDITIONAL TOTAL
----------------- ------------------ PAID-IN RETAINED TREASURY SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS STOCK EQUITY
-------- ------ ------- -------- ----------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1,
1994................... 99 $1 111-1/9 $-- $45 $ 3,086 $(125) $ 3,007
Net income............ -- -- -- -- -- 1,719 -- 1,719
Distributions......... -- -- -- -- -- (146) -- (146)
-- -- ------- --- --- ------- ----- -------
BALANCE, DECEMBER 31,
1994................... 99 1 111-1/9 -- 45 4,659 (125) 4,580
Net income............ -- -- -- -- -- 3,158 -- 3,158
Distributions......... -- -- -- -- -- (1,363) -- (1,363)
-- -- ------- --- --- ------- ----- -------
BALANCE, DECEMBER 31,
1995................... 99 1 111-1/9 -- 45 6,454 (125) 6,375
Net income............ -- -- -- -- -- 1,134 -- 1,134
Distributions......... -- -- -- -- -- (1,575) -- (1,575)
-- -- ------- --- --- ------- ----- -------
BALANCE, AUGUST 12,
1996................... 99 $1 111-1/9 $-- $45 $ 6,013 $(125) $ 5,934
== == ======= === === ======= ===== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-50
<PAGE>
HARRIS DIRECT MARKETING, INC. AND HARRIS FULFILLMENT, INC.
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
FOR THE PERIOD FROM
YEAR ENDED JANUARY 1,
DECEMBER 31 1996 TO
-------------- AUGUST 12,
1994 1995 1996
---- ---- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income............................................ $ 1,719 $ 3,158 $ 1,134
Adjustments to reconcile net income to net cash
provided by operating activities--
Depreciation and amortization....................... 527 591 347
Provision for loss on accounts receivable........... 25 136 36
Provision for deferred rent......................... 94 4 18
Changes in operating assets and liabilities--
Accounts receivable................................ (628) (195) 65
Prepaid expenses and other......................... (51) (159) 209
Accounts payable................................... (152) 24 (33)
Accrued expenses................................... 160 3 (164)
Customer advances.................................. 189 587 (810)
------- ------- -------
Net cash provided by operating activities......... 1,883 4,149 802
------- ------- -------
INVESTING ACTIVITIES:
Purchases of property and equipment................... (903) (460) (289)
------- ------- -------
Net cash used in investing activities............. (903) (460) (289)
------- ------- -------
FINANCING ACTIVITIES:
Repayments on lines of credit......................... (250) -- --
Repayment of long-term debt........................... (360) (382) (170)
Proceeds from long-term debt.......................... 417 -- 16
Shareholder distributions............................. (146) (1,363) (1,575)
------- ------- -------
Net cash used in financing activities............. (339) (1,745) (1,729)
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS..................................... 641 1,944 (1,216)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.... 334 975 2,919
------- ------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD.......... $ 975 $ 2,919 $ 1,703
======= ======= =======
</TABLE>
F-51
<PAGE>
HARRIS DIRECT MARKETING, INC. AND HARRIS FULFILLMENT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
Industry Information
Harris Direct Marketing, Inc. and Harris Fulfillment, Inc. (together, the
"Company") are a regional, vertically integrated direct mail and fulfillment
organization that provides its services primarily to companies in the
pharmaceutical, financial services and insurance industries.
On August 12, 1996, the Company sold substantially all of its assets and
liabilities to TeleSpectrum Worldwide Inc. Harris Direct Marketing, Inc. and
Harris Fulfillment, Inc. are predecessor companies to TeleSpectrum Worldwide
Inc.
The financial statements reflect the combined financial position, results of
operations and cash flows of Harris Direct Marketing, Inc. and Harris
Fulfillment, Inc. The Companies are engaged in related operations, and are owned
by the same shareholders who have identical ownership in each entity. The
financial statements reflect the elimination of all significant intercompany
accounts and transactions.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition and Concentration of Credit Risk
The Company recognizes revenues on programs as services are performed for its
clients based upon hours incurred. Cash received in advance of services
performed is deferred and recorded as customer advances in the accompanying
balance sheet. For the years ended December 31, 1994 and 1995, and for the
period from January 1, 1996 to August 12, 1996, the Company had one customer in
the pharmaceutical industry that accounted for 32.0%, 44.0% and 48.0%,
respectively, of the Company's revenues. The loss of this significant customer
would have a material adverse effect on the Company's business.
The concentration of credit risk is limited to trade accounts receivables and is
subject to the financial conditions of the Company's customers. The Company does
not require collateral or other securities to support customer receivables.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. At the balance sheet
date, cash equivalents were composed primarily of investments in money market
funds.
The Company maintains cash accounts that, at times, may exceed federally insured
limits. The Company has not experienced any losses from maintaining cash
accounts in excess of federally insured limits and believes that it is not
exposed to any significant risks on these cash accounts.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization are
provided using the straight-line method over the estimated useful lives.
F-52
<PAGE>
HARRIS DIRECT MARKETING, INC. AND HARRIS FULFILLMENT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Expenditures for maintenance, repairs and improvements that do not prolong the
useful life of an asset have been charged to operations as incurred. Additions
and betterments that substantially extend the useful life of the asset are
capitalized. Upon sale or other disposition of assets, the cost and related
accumulated depreciation and amortization are removed from the respective
accounts, and the resulting gain or loss, if any, is included in income.
Statement of Cash Flows
For the years ended December 31, 1994 and 1995, and for the period from January
1, 1996 to August 12, 1996, the Company paid interest of $197,000, $222,000 and
$88,000, respectively.
Income Taxes
The Company had elected to be taxed under Subchapter S of the Internal Revenue
Code. As a result, the Company was not subject to federal income taxes, and the
taxable income of the Company was included in the shareholders' tax returns. The
Company had also elected S Corporation status for state income tax purposes.
Therefore, no provision for federal and state income taxes had been made for the
years ended December 31, 1994 and 1995, and for the period from January 1, 1996
to August 12, 1996.
The Company reported certain income and expense items for income tax purposes on
a basis different from that reflected in the accompanying financial statements.
The principal differences relate to timing of the recognition of bad debt
expense, and the use of accelerated methods of depreciation for income tax
purposes. At December 31, 1995, the Company's financial reporting basis of the
net assets exceeds the tax basis of the net assets by approximately $300,000.
Fair Value of Financial Instruments
Cash, accounts receivable, accounts payable and accrued liabilities are
reflected in the financial statements at fair value due to the short-term nature
of those instruments. The carrying amount of long-term debt obligations
approximates fair value at the balance sheet date.
Pro Forma Data (Unaudited)
Given the sale of the business, for informational purposes, the accompanying
statements of income include an unaudited pro forma adjustment for income taxes
that would have been recorded if the Company had not been an S Corporation,
based on the tax laws in effect during the respective periods. The differences
between the federal statutory income tax rate and the pro forma income tax rate
primarily relates to state and local income taxes and expenses not deductible
for tax purposes.
2. PREPAID EXPENSES AND OTHER:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
----
(IN THOUSANDS)
<S> <C>
Prepaid postage..................................... $ 498
Other............................................... 153
-----
$ 651
=====
</TABLE>
F-53
<PAGE>
HARRIS DIRECT MARKETING, INC. AND HARRIS FULFILLMENT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
USEFUL DECEMBER 31,
LIVES 1995
----- ----
(IN THOUSANDS)
<S> <C> <C>
Machinery and equipment................................................ 5-10 $ 3,543
Furniture and office equipment......................................... 5-10 969
Building and building improvements..................................... 10-30 2,345
Leasehold improvements................................................. 15 41
Land................................................................... 80
-------
6,978
Less--Accumulated depreciation and amortization........................ (2,839)
-------
$ 4,139
=======
</TABLE>
Depreciation expense for the years ended December 31, 1994 and 1995, and for the
period from January 1, 1996 to August 12, 1996, was $527,000, $591,000 and
$347,000, respectively.
4. ACCRUED EXPENSES:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
----
(IN THOUSANDS)
<S> <C>
Accrued vacation....................................................... $ 210
Accrued compensation................................................... 161
Accrued other.......................................................... 264
-----
$ 635
=====
</TABLE>
5. LINES OF CREDIT:
The Company had two lines of credit with the same bank that expired in April
1996 and had a combined borrowing limit of $850,000. The lines bear interest at
the bank's prime rate (8.25% at December 31, 1995). The Company had no
outstanding balances on the lines of credit at December 31, 1995. The maximum
borrowed under the lines was $850,000 in 1995, and the average amount
outstanding was $212,000 in 1995. The weighted average interest rate during 1995
was approximately 9.0%.
F-54
<PAGE>
6. LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
----
(IN THOUSANDS)
<S> <C>
Mortgage payable to bank, payable in variable monthly
installments including interest at the bank's prime
rate plus .75% (10.25% at December 31, 1995) through
June 2005...................................................................................... $ 1,245
Note payable to bank, payable in monthly installments of
$17,000 plus interest at 8.25% through October 1998............................................ 584
-------
1,829
Less--Current portion........................................................................... 299
-------
$ 1,530
=======
</TABLE>
F-55
<PAGE>
HARRIS DIRECT MARKETING, INC. AND HARRIS FULFILLMENT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The mortgage and notes payable are with the same bank and are collateralized by
all of the Company's assets. Minimum principal repayments of long-term debt as
of December 31, 1995, are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1996....................................................... $ 299
1997....................................................... 298
1998....................................................... 273
1999....................................................... 112
2000....................................................... 124
Thereafter.................................................. 723
----
$ 1,829
=======
</TABLE>
7. COMMITMENTS AND CONTINGENCIES:
The Company leases facilities through August 31, 2002. Rent expense under
operating leases for the years ended December 31, 1994 and 1995 and for the
period from January 1, 1996 to August 12, 1996, was $568,000, $583,000 and
$351,000, respectively.
Future minimum lease payments under the Company's operating leases as of
December 31, 1995, are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING
LEASES
------
<S> <C>
1996........................................................ $ 567
1997........................................................ 357
1998........................................................ 388
1999........................................................ 433
2000........................................................ 464
Thereafter.................................................. 821
-------
Total minimum lease payments................................ $ 3,030
=======
</TABLE>
The Company is party to various claims and other matters arising in the normal
course of business. In the opinion of management, the outcome of these matters
will not have a material adverse effect on the Company's financial position or
results of operations.
8. PROFIT SHARING PLAN:
The Company has a noncontributory profit sharing plan to provide retirement
benefits to its eligible employees. The amount of the Company's contribution is
determined at the discretion of the Company's Board of Directors. For the years
ended December 31, 1994 and 1995, and for the period from January 1, 1996 to
August 12, 1996, the Company contributed $55,000, $49,000 and $0, respectively,
to the profit sharing plan.
F-56
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Reich Group Companies:
We have audited the accompanying combined balance sheet of The Reich Group
Companies identified in Note 1 as of December 31, 1995, and the related combined
statements of income, shareholder's equity (deficit) and cash flows for each of
the two years in the period ended December 31, 1995, and for the period from
January 1, 1996 to August 12, 1996. These financial statements are the
responsibility of the Companies' management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of The Reich Group
Companies as of December 31, 1995, and the results of their operations and their
cash flows for each of the two years in the period ended December 31, 1995, and
for the period from January 1, 1996 to August 12, 1996, in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Philadelphia, Pa.,
September 30, 1996
F-57
<PAGE>
THE REICH GROUP COMPANIES
COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1995
(IN THOUSANDS--EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
CURRENT ASSETS:
<S> <C>
Cash.................................................................................................. $ 220
Accounts receivable, net of reserve of $73........................................................... 2,544
Due from shareholder................................................................................. 132
Prepaid expenses and other........................................................................... 79
------
Total current assets............................................................................... 2,975
PROPERTY AND EQUIPMENT, net........................................................................... 1,328
OTHER ASSETS.......................................................................................... 15
------
Total assets....................................................................................... $4,318
======
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
<S>................................................................................................... <C>
Current portion of long-term debt.................................................................... $155
Current portion of deferred rent..................................................................... 68
Accounts payable..................................................................................... 930
Accrued salaries and wages........................................................................... 363
Notes payable to shareholder......................................................................... 570
Other current liabilities............................................................................ 68
------
Total current liabilities.......................................................................... 2,154
------
LONG-TERM DEBT........................................................................................ 371
------
DEFERRED RENT......................................................................................... 125
------
COMMITMENTS AND CONTINGENCIES (Note 6)
SHAREHOLDER'S EQUITY:
Common stock (see Note 8)............................................................................ 2
Additional paid-in capital........................................................................... 450
Retained earnings.................................................................................... 1,455
Treasury stock, at cost (TRG/Communications, Inc., 150 shares)....................................... (239)
------
Total shareholder's equity......................................................................... 1,668
------
Total liabilities and shareholder's equity......................................................... $4,318
======
</TABLE>
The accompanying notes are an integral part of this statement.
F-58
<PAGE>
THE REICH GROUP COMPANIES
COMBINED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
FOR THE JANUARY 1,
YEAR ENDED 1996 TO
DECEMBER 31 AUGUST 12,
----------- ----------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
REVENUES............................................................. $5,424 $12,253 $14,558
------ ------- -------
OPERATING EXPENSES:
Cost of services.................................................... 4,225 7,836 8,550
Selling, general and administrative expenses........................ 976 2,534 1,466
----- ----- -----
Total operating expenses.......................................... 5,201 10,370 10,016
----- ------ ------
Operating income.................................................. 223 1,883 4,542
INTEREST INCOME...................................................... 13 14 19
INTEREST EXPENSE..................................................... (37) (57) (50)
----- ------ ------
NET INCOME........................................................... $199 $1,840 $4,511
===== ====== ======
PRO FORMA DATA (UNAUDITED):
Historical net income............................................... $199 $1,840 $4,511
Pro forma provision for income taxes................................ 97 746 1,840
----- ------ ------
Pro forma net income................................................ $102 $1,094 $2,671
===== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-59
<PAGE>
THE REICH GROUP COMPANIES
COMBINED STATEMENTS OF SHAREHOLDER'S EQUITY (DEFICIT)
(IN THOUSANDS--EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THE REICH DIALDIRECT TELE- TRG/COMMUNI- INSUREDIRECT
GROUP, INC. DIALDIRECT, INC. MARKETING, LTD. CATIONS, INC. AGENCY INC.
COMMON STOCK COMMON STOCK COMMON STOCK COMMON STOCK COMMON STOCK
------------ ------------ ------------- ------------ ------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------- ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY
1, 1994.............. 100 $-- 100 $-- 100 $-- 150 $2 100 $--
Net income......... -- -- -- -- -- -- -- -- -- --
--- --- --- --- --- --- --- -- --- ---
BALANCE, DECEMBER
31, 1994............. 100 -- 100 -- 100 -- 150 2 100 --
Capital
contribution to
DialDirect
Telemarketing,
Ltd. by
shareholder........ -- -- -- -- -- -- -- -- -- --
Net income......... -- -- -- -- -- -- -- -- -- --
--- --- --- --- --- --- --- -- --- ---
BALANCE, DECEMBER
31, 1995............. 100 -- 100 -- 100 -- 150 2 100 --
Net income......... -- -- -- -- -- -- -- -- -- --
Distribution to
shareholder........ -- -- -- -- -- -- -- -- -- --
--- --- --- --- --- --- --- -- --- ---
BALANCE, AUGUST
12, 1996............. 100 $-- 100 $-- 100 $-- 150 $2 100 $--
--- --- --- --- --- --- --- -- --- ---
<CAPTION>
TOTAL
ADDITIONAL RETAINED SHAREHOLDER'S
PAID-IN EARNINGS TREASURY EQUITY
CAPITAL (DEFICIT) STOCK (DEFICIT)
--------- -------- -------- ---------
<S> <C> <C> <C> <C>
BALANCE, JANUARY
1, 1994.............. $350 $ (584) $(239) $ (471)
Net income......... -- 199 -- 199
---- ------ ----- ------
BALANCE, DECEMBER
31, 1994............. 350 (385) (239) (272)
Capital
contribution to
DialDirect
Telemarketing,
Ltd. by
shareholder........ 100 -- -- 100
Net income......... -- 1,840 -- 1,840
---- ------ ----- ------
BALANCE, DECEMBER
31, 1995............. 450 1,455 (239) 1,668
Net income......... -- 4,511 -- 4,511
Distribution to
shareholder........ -- (1,770) -- (1,770)
---- ------ ----- ------
BALANCE, AUGUST
12, 1996............. $450 $4,196 $(239) $4,409
---- ------ ----- ------
</TABLE>
The accompanying notes are an integral part of these statements.
F-60
<PAGE>
THE REICH GROUP COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
FOR THE PERIOD FROM
YEAR ENDED JANUARY 1, 1996
DECEMBER 31, TO AUGUST 12,
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income................................................ $199 $ 1,840 $ 4,511
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization.......................... 143 220 279
Amortization of deferred rent........................... (68) (68) (40)
Loss on disposal of property............................ 1 7 --
Changes in operating assets and liabilities--
Accounts receivable.................................... (193) (1,853) (2,025)
Due from shareholder.................................... (40) (83) (5)
Prepaid expenses and other assets....................... (33) (2) (81)
Accounts payable........................................ 88 560 (264)
Accrued salaries and wages.............................. 37 235 196
Other current liabilities............................... 85 (111) (36)
---- ----- ------
Net cash provided by operating activities.............. 219 745 2,535
---- ----- ------
INVESTING ACTIVITIES:
Purchase of property and equipment, net of capital
lease obligations of $95 in 1995 and $250 in 1996....... (138) (1,212) (935)
---- ----- ------
Net cash used in investing activities.................. (138) (1,212) (935)
---- ----- ------
FINANCING ACTIVITIES:
Net borrowings (repayments) on line of credit............. 10 (70) 700
Repayment of long-term debt............................... (88) (109) (133)
Proceeds from long-term debt.............................. -- 165 --
Capital contribution to DialDirect TeleMarketing,
Ltd. from shareholder.................................... -- 100 --
Proceeds from (repayment of) notes payable to
shareholder.............................................. -- 570 (500)
Distribution to shareholder............................... -- -- (1,770)
---- ----- ------
Net cash provided by (used in) financing activities.... (78) 656 (1,703)
---- ----- ------
NET INCREASE (DECREASE) IN CASH........................... 3 189 (103)
CASH, BEGINNING OF PERIOD................................. 28 31 220
---- ----- ------
CASH, END OF PERIOD....................................... $ 31 $ 220 $ 117
==== ===== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-61
<PAGE>
THE REICH GROUP COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
Industry Information
The Reich Group Companies (the "Company") offers telemarketing services to
clients in the financial services, insurance, telecommunications and publishing
industries. In 1995, the Company derived 93% of its revenue from telemarketing
activities.
On August 12, 1996, the Company sold substantially all of its assets and
liabilities to TeleSpectrum Worldwide Inc. The Reich Group Companies are
predecessor companies to TeleSpectrum Worldwide Inc.
The 1994 and 1995 financial statements reflect the combined financial position,
results of operations and cash flows of The Reich Group, Inc., DialDirect, Inc.,
DialDirect Telemarketing, LTD., TRG/Communications, Inc. and InsureDirect
Agency, Inc. The accompanying financial statements are presented on a combined
basis, as all companies are owned by the same shareholder. The financial
statements reflect the elimination of all significant intercompany accounts and
transactions.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition and Concentration of Credit Risk
The Company recognizes revenues on programs as services are performed for
customers, generally based upon hours incurred. For the years ended December 31,
1994 and 1995, and for the period from January 1, 1996 to August 12, 1996, the
Company had two, four and three clients, respectively, that each accounted for
more than 10% of the Company's revenues. For the year ended December 31, 1994,
the two clients accounted for 47% and 24% of the Company's revenues,
respectively. For the year ended December 31, 1995, the four clients accounted
for 46%, 12%, 15% and 15% of the Company's revenues, respectively. For the
period from January 1, 1996 to August 12, 1996, the three clients accounted for
45%, 11% and 34% of the Company's revenues, respectively. The loss of one or
more of these major clients could have a materially adverse effect on the
Company's business.
The concentration of credit risk is limited to trade accounts receivables and is
subject to the financial conditions of the Company's customers. The Company does
not require collateral or other securities to support customer receivables.
Cash
The Company maintains cash accounts that, at times, may exceed federally insured
limits. The Company has not experienced losses from maintaining cash accounts in
excess of federally insured limits. The Company believes that it is not exposed
to significant credit risk in relation to these cash accounts.
Property and Equipment
Property and equipment are recorded at cost. Property and equipment capitalized
under capital leases are recorded at the present value of the minimum lease
payments due over the term of the lease. Depreciation and amortization are
provided using the straight-line method over the estimated useful lives of five
to seven years.
F-62
<PAGE>
THE REICH GROUP COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Expenditures for maintenance, repairs and improvements that do not prolong the
useful life of an asset have been charged to expense as incurred. Additions and
betterments that extend the useful life of the properties are capitalized. Upon
sale or other disposition of assets, the cost and related accumulated
depreciation and amortization are removed from the respective accounts, and the
resulting gain or loss, if any, is included in income.
Profit Sharing Plan
The Company has a noncontributory profit sharing plan covering all eligible
employees. Contributions to the plan are at the sole discretion of the
management. Contributions of $62,000 were made for the year ended December 31,
1994. No contribution was made for the year ended December 31, 1995, or for the
period from January 1, 1996 to August 12, 1996.
Statement of Cash Flows
For the years ended December 31, 1994 and 1995, and for the period from January
1, 1996 to August 12, 1996, the Company paid interest of $37,000, $57,000 and
$50,000, respectively.
Income Taxes
The Company had elected to be taxed under Subchapter S of the Internal Revenue
Code. As a result, the Company was not subject to federal or state income taxes,
and the taxable income of the Company was included in the shareholder's tax
returns. Therefore, no provision for federal and state income taxes has been
made for the years ended December 31, 1994 and 1995, and for the period from
January 1, 1996 to August 12, 1996.
The Company was on the cash basis of accounting for income tax reporting
purposes and on the accrual basis for financial reporting purposes. Therefore,
the Company reported certain income and expense items for income tax purposes on
a basis different from that reflected in the accompanying financial statements.
At December 31, 1995, the Company's financial reporting basis of the net assets
exceeds the tax basis of the net assets by approximately $934,000.
Fair Value of Financial Instruments
Cash, accounts receivable, accounts payable and accrued liabilities are
reflected in the financial statements at fair value due to the short-term nature
of those instruments. The carrying amount of long-term debt obligations
approximates fair value at the balance sheet dates.
Pro Forma Data (Unaudited)
Given the sale of the business, for informational purposes, the accompanying
statements of income include an unaudited pro forma adjustment for income taxes
that would have been recorded if the Company had not been an S Corporation,
based on the tax laws in effect during the respective periods. The difference
between the federal statutory income tax rate and the pro forma income tax rate
primarily relates to state and local income taxes and expenses not deductible
for tax purposes.
F-63
<PAGE>
THE REICH GROUP COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
2. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
USEFUL DECEMBER 31,
LIVES 1995
----- ----
(IN THOUSANDS)
<S> <C> <C>
Telemarketing equipment................... 5 $1,766
Furniture and office equipment............ 5-7 768
Leasehold improvements.................... 7 76
------
2,610
Less--Accumulated depreciation and amortization (1,282)
------
$1,328
======
</TABLE>
Depreciation expense for the years ended December 31, 1994 and 1995, and for the
period from January 1, 1996 to August 12, 1996, was $143,000, $220,000 and
$279,000, respectively.
3. OTHER CURRENT LIABILITIES:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
----
(IN THOUSANDS)
<S> <C>
Advance billings.................................. $60
Other accrued liabilities......................... 8
---
$68
===
</TABLE>
4. LINE OF CREDIT:
The Company has a revolving line of credit with a bank that provides for maximum
borrowings of $700,000. Borrowings under the line are limited to 60% of eligible
accounts receivable, as defined. The line is collateralized by the Company's
accounts receivable and general intangibles, a second mortgage on the personal
residences of the Company's shareholder and his wife and other personal assets
of the Company's shareholder and his wife. The line is also personally
guaranteed by the Company's shareholder and his wife. At December 31, 1995,
there was no outstanding balance on this line of credit. Interest on the
outstanding balance is payable monthly and accrues on borrowings under the
revolving line of credit at the bank's base rate (10.5% at December 31, 1995).
The agreement shall continue until all indebtedness to the bank has been repaid
in full and the parties terminate the agreement.
F-64
<PAGE>
THE REICH GROUP COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
5. LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
----
<S> <C>
(IN THOUSANDS)
Note payable to bank, interest payable monthly at the
bank's rate plus 1/2% (11% on December 31, 1995); princi-
pal due in monthly installments of $4,000 through August
1998; collateralized by accounts receivable, equipment and
other assets of the Company and a second mortgage on the
personal residences of the Company's shareholder and his
wife; payment also guaranteed by the Company's shareholder
and his wife....................................................... $105
Note payable to regional industrial development authority,
interest accrues at 5%; principal and interest due in
monthly installments of $3,000 through August 2000; col-
lateralized by specified furniture and equipment of the
Company............................................................ 155
Payable to landlord, no stated interest (discounted at
8.9%), unsecured, due in varying monthly installments from
$3,000 to $4,000 through October 31, 1998.......................... 96
Capitalized lease obligations (Note 6).............................. 170
---
526
Less--Current portion............................................... (155)
-----
$371
=====
</TABLE>
Minimum principal repayments of long-term debt as of December 31, 1995,
excluding capitalized lease obligations (see Note 6), are as follows (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
1996.................................................................. $ 95
1997.................................................................. 111
1998.................................................................. 91
1999.................................................................. 35
2000.................................................................. 24
----
$356
====
</TABLE>
In December 1995, the City of Wheeling, West Virginia, issued a commitment to
provide $235,000 of financing at 5% interest for a term of five years.
Additionally, the West Virginia Economic Development Authority issued a
commitment to provide $500,000 of financing at prime less 4% (minimum rate of
5%) interest for a term of five years. Each loan is to be collateralized by the
furniture and equipment in the Company's West Virginia facility.
In 1995, the Company received a grant of $187,000 from the West Virginia
Economic Development Authority as a reimbursement for certain costs in
connection with the establishment of a calling center in West Virginia. The
grant has been recorded as an offset to cost of services in the combined
statement of income.
F-65
<PAGE>
6. COMMITMENTS AND CONTINGENCIES:
The Company leases facilities and equipment under capital and noncancelable
operating leases with terms through 2000. Interest rates on the capital leases
range from 11.0% to 15.5%. At December 31, 1995, the capital leases are
collateralized by telemarketing equipment with a book value of $137,000 (net of
accumulated amortization of $313,000). Rent expense under operating leases for
the years ended December 31, 1994 and 1995, and for the period from January 1,
1996 to August 12, 1996, was $140,000, $195,000, and $183,000, respectively.
F-66
<PAGE>
THE REICH GROUP COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Future minimum lease payments under the Company's leases as of December 31,
1995, are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
------ ------
<S> <C> <C>
1996.............................................. $238 $78
1997.............................................. 220 78
1998.............................................. 188 44
1999.............................................. 11 1
2000.............................................. 1 -
-- --
Total minimum lease payments...................... $658 201
====
Less--Amount representing interest................ (31)
---
Present value of future minimum lease payments.... 170
Less--Current portion of principal payments....... (60)
---
$110
====
</TABLE>
In February 1996, the Company entered into an additional capital lease for the
acquisition of furniture and equipment for the Company's Delaware facility. The
total amount of the future lease commitment was $250,000 with monthly payments
of $8,000 for 36 months.
In November and December 1995, the Company entered into two leases for new
office space in connection with the expansion of its telemarketing facilities in
Delaware and West Virginia. The lease for the Delaware facility commenced on
January 1, 1996, with a minimum monthly rental payment of $6,000 for a term of
three years. The lease for the West Virginia facility commenced on April 1,
1996, with a minimum monthly rental payment of $10,000 beginning June 15, 1996,
for a term of five years.
The Company is party to various claims and other matters arising in the normal
course of business. In the opinion of management, the outcome of these matters
will not have a material adverse effect on the Company's financial position or
results of operations.
7. NOTES PAYABLE TO SHAREHOLDER:
In December 1995, the Company received the proceeds from two demand notes
payable to its shareholder for $500,000 (repaid subsequent to December 31, 1995)
and $70,000, respectively. The remaining note of $70,000 accrues interest at 8%.
F-67
<PAGE>
THE REICH GROUP COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
8. COMMON STOCK:
The description of the Company's common stock is as follows:
<TABLE>
<CAPTION>
COMMON STOCK
PAR VALUE
---------
<S> <C>
The Reich Group, Inc.
$1 par value, 1,000 shares authorized, 100 shares issued and
outstanding................................................... $ 100
DialDirect, Inc.
$1 par value, 1,000 shares authorized, 100 shares issued and
outstanding................................................... 100
DialDirect Telemarketing, Ltd.
$1 par value, 1,000 shares authorized, 100 shares issued and
outstanding................................................... 100
TRG/Communications, Inc.
$2,000 stated value, 150 shares outstanding.................... 2,000
InsureDirect Agency, Inc.
$1 par value, 1,000 shares authorized, 100 shares issued and
outstanding................................................... 100
------
$2,400
======
</TABLE>
F-68
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Response Center, Inc. and The Tab House, Inc.:
We have audited the accompanying combined balance sheet of The Response Center,
Inc. and The Tab House, Inc. (Pennsylvania corporations) as of September 30,
1995, and the related combined statements of income, shareholders' equity and
cash flows for each of the two fiscal years in the period ended September 30,
1995, and for the period from October 1, 1995 to August 12, 1996. These
financial statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of The Response Center,
Inc. and The Tab House, Inc. as of September 30, 1995, and the results of their
operations and their cash flows for each of the two fiscal years in the period
ended September 30, 1995, and for the period from October 1, 1995 to August 12,
1996, in conformity with generally accepted accounting principles.
As discussed in Note 2 to the combined financial statements, the Company changed
its method of accounting for marketable securities in fiscal 1995.
Arthur Andersen LLP
Philadelphia, Pa.,
September 30, 1996
F-69
<PAGE>
THE RESPONSE CENTER, INC. AND THE TAB HOUSE, INC.
COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 1995
(IN THOUSANDS--EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents.......................................... $ 282
Marketable securities.............................................. 324
Accounts receivable, net of reserve of $28......................... 1,522
Prepaid expenses and other......................................... 23
------
Total current assets............................................ 2,151
PROPERTY AND EQUIPMENT, net........................................... 139
OTHER ASSETS.......................................................... 8
------
Total assets.................................................... $2,298
======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................... $ 119
Accrued expenses................................................... 275
Deferred revenue................................................... 92
------
Total current liabilities....................................... 486
---
COMMITMENTS AND CONTINGENCIES (Note 5)
SHAREHOLDERS' EQUITY:
Common stock (The Response Center, Inc.), no par value, 1,000
shares authorized, 550 shares issued and outstanding.............. 51
Common stock (The Tab House, Inc.), $.01 par value, 1,000 shares
authorized, 550 shares issued and outstanding..................... ------
Additional paid-in capital......................................... 1
Net unrealized gain on marketable securities available for sale.... 121
Retained earnings.................................................. 1,639
------
Total shareholders' equity...................................... 1,812
------
Total liabilities and shareholders' equity...................... $2,298
======
</TABLE>
The accompanying notes are an integral part of this statement.
F-70
<PAGE>
THE RESPONSE CENTER, INC. AND THE TAB HOUSE, INC.
COMBINED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
FOR THE YEAR ENDED OCTOBER 1,
SEPTEMBER 30, 1995 TO
------------ AUGUST 12,
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
REVENUES................................. $6,183 $6,719 $5,279
------ ------ ------
OPERATING EXPENSES:
Cost of services........................ 3,426 3,583 2,849
Selling, general and administrative
expenses............................... 2,800 2,717 1,954
------ ------ ------
Total operating expenses.............. 6,226 6,300 4,803
------ ------ ------
Operating income (loss)............... (43) 419 476
INTEREST INCOME.......................... 8 10 20
INTEREST EXPENSE......................... (2) -- --
------ ------ ------
NET INCOME (LOSS)....................... $ (37) $ 429 $ 496
------- ------ ------
PRO FORMA DATA (UNAUDITED):
Historical net income (loss)............. $ (37) $ 429 $ 496
Pro forma provision (benefit) for
income taxes............................ (15) 180 196
------ ------ ------
Pro forma net income (loss).............. $ (22) $ 249 $ 300
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-71
<PAGE>
THE RESPONSE CENTER, INC. AND THE TAB HOUSE, INC.
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS--EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THE RESPONSE THE TAB
CENTER, INC. HOUSE, INC. UNREALIZED
COMMON STOCK COMMON STOCK ADDITIONAL GAIN ON TOTAL
-------------- -------------- PAID-IN MARKETABLE RETAINED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL SECURITIES EARNINGS EQUITY
------ ------ ------ ------ ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 1,
1993......................... 550 $51 550 $-- $1 $ -- $1,301 $1,353
Net loss.................... -- -- -- -- -- -- (37) (37)
Distributions............... -- -- -- -- -- -- (33) (33)
--- --- --- --- --- ---- ------ ------
BALANCE, SEPTEMBER 30,
1994......................... 550 51 550 -- 1 -- 1,231 1,283
Net income.................. -- -- -- -- -- -- 429 429
Distributions............... -- -- -- -- -- -- (21) (21)
Net unrealized gain on
marketable
securities................. -- -- -- -- -- 121 -- 121
--- --- --- --- --- ---- ------ ------
BALANCE, SEPTEMBER 30,
1995......................... 550 51 550 -- 1 121 1,639 1,812
Net income.................. -- -- -- -- -- -- 496 496
Distributions............... -- -- -- -- -- -- (820) (820)
Net unrealized gain
(loss) on marketable
securities................. -- -- -- -- -- (21) -- (21)
--- --- --- --- --- ---- ------ ------
BALANCE, AUGUST 12,
1996. 550 $51 550 $-- $1 $100 $1,315 $1,467
=== === === === === ==== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-72
<PAGE>
THE RESPONSE CENTER, INC. AND THE TAB HOUSE, INC.
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
FOR THE PERIOD FROM
YEAR ENDED OCTOBER 1,
SEPTEMBER 30, 1995 TO
-------------- AUGUST 12,
1994 1995 1996
----- ------ ----
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss)................................. $ (37) $ 429 $496
Adjustments to reconcile net income to net cash
provided by operating activities--
Depreciation and amortization.................... 43 48 57
Gain on sale of marketable securities............ (7) (22) (2)
Changes in operating assets and liabilities--
Accounts receivable............................. 13 (165) 478
Due from TeleSpectrum Worldwide Inc............. -- -- (49)
Prepaid expenses and other...................... 41 (8) (81)
Other assets.................................... (2) -- (82)
Accounts payable................................ (202) (7) 71
Accrued expenses................................ 219 (51) (37)
Deferred revenue................................ 43 (36) (52)
----- ----- -----
Net cash provided by operating activities...... 111 188 799
----- ----- -----
INVESTING ACTIVITIES:
Purchases of marketable securities................. (93) -- (17)
Proceeds on sales of marketable securities......... 73 67 25
Purchases of property and equipment................ (39) (23) (159)
----- ----- -----
Net cash provided by (used in) investing
activities..................................... (59) 44 (151)
----- ----- -----
FINANCING ACTIVITIES:
Repayment of shareholder loan..................... (160) -- --
Distributions paid................................ (33) (22) (820)
----- ----- -----
Net cash used in financing activities........... (193) (22) (820)
----- ----- -----
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................................ (141) 210 (172)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD............................................. 213 72 282
----- ----- -----
CASH AND CASH EQUIVALENTS, END OF PERIOD............ $ 72 $ 282 $ 110
----- ----- -----
</TABLE>
The accompanying notes are an integral part of these statements.
F-73
<PAGE>
THE RESPONSE CENTER, INC. AND THE TAB HOUSE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
Industry Information
The Response Center, Inc. and The Tab House, Inc. (collectively, the "Company")
provide custom market research and analysis, principally to clients in the
telecommunications, financial services, pharmaceutical and health care
industries.
On August 12, 1996, the Company sold substantially all of its assets and
liabilities to TeleSpectrum Worldwide Inc. The Response Center and The Tab
House, Inc. are predecessor companies to TeleSpectrum Worldwide Inc.
The accompanying financial statements reflect the combined financial position
and results of operations of The Response Center, Inc. and The Tab House, Inc.
The accompanying financial statements are presented on a combined basis, as The
Response Center, Inc. and The Tab House, Inc. are owned by the same shareholders
who have identical ownership in each entity. The financial statements reflect
the elimination of all significant intercompany accounts and transactions.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition and Concentration of Credit Risk
The Company recognizes revenues as services are performed for customers on a
per-project basis. In fiscal 1994 and 1995 and the period from October 1, 1995
to August 12, 1996, the Company had one customer that accounted for 36%, 27% and
24% of revenues, respectively. At September 30, 1994 and 1995, the Company had
one customer, which accounted for 24% and 27% of accounts receivable,
respectively.
The concentration of credit risk is limited to trade accounts receivables and is
subject to the financial conditions of the Company's customers. The Company does
not require collateral or other securities to support customer receivables.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. At the balance sheet
dates, cash equivalents were composed primarily of investments in money market
funds.
The Company maintains cash accounts that, at times, may exceed federally insured
limits. The Company has not experienced losses from maintaining cash accounts in
excess of federally insured limits. The Company believes that it is not exposed
to significant credit risk in relation to these cash accounts.
Marketable Securities
During fiscal 1995, the Company began reporting marketable securities in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115.
All securities have been classified as available-for-sale and
F-74
<PAGE>
THE RESPONSE CENTER, INC. AND THE TAB HOUSE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
reported at quoted market value with net unrealized gains being reported as a
separate component of shareholders' equity. Prior to 1995, marketable securities
were reported at the lower of cost or market.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization are
provided using the straight-line method over the estimated useful lives as
follows:
Computer and office equipment 5 years
Furniture and fixtures 7 years
Leasehold improvements The lesser of 6 years or the lease term.
Expenditures for maintenance, repairs and betterments that do not prolong the
normal useful life of an asset have been charged to operations as incurred.
Additions and improvements that substantially extend the useful lives of the
properties are capitalized. Upon sale or other disposition of assets, the cost
and related accumulated depreciation and amortization are removed from the
respective accounts, and the resulting gain or loss, if any, is included in
income.
Income Taxes
The Company had elected to be taxed under Subchapter S of the Internal Revenue
Code. As a result, the Company was not subject to federal income taxes, and the
taxable income of the Company was included in the shareholders' tax returns. The
Company had also elected S Corporation status for state income tax purposes.
Therefore, no provision for federal and state income taxes has been made in the
accompanying financial statements.
The Company was on the cash basis of accounting for income tax purposes and on
the accrual basis for financial reporting purposes. Therefore, the Company
reports certain income and expense items for income tax purposes on a basis
different from that reflected in the accompanying financial statements. At
September 30, 1995, the Company's financial reporting basis of the net assets
exceeds the tax basis of the net assets by approximately $1,000,000.
Fair Value of Financial Instruments
Cash, accounts receivable, accounts payable and accrued liabilities are
reflected in the financial statements at the fair value due to the short-term
nature of those instruments.
401(k) Plan
On October 1, 1991, the Company adopted a 401(k) plan for its employees (the
"Plan"). The Plan allows all participants to contribute a percentage of their
compensation with Company contributions. The Company contributed $10,000,
$13,000 and $11,000 in fiscal 1994 and 1995 and for the period from October 1,
1995 to August 12, 1996, respectively.
Pro Forma Data (Unaudited)
Given the sale of the business, for informational purposes, the accompanying
statements of income include an unaudited pro forma adjustment for income taxes
that would have been recorded if the Company had not been an S Corporation,
based on the tax laws in effect during the respective periods. The difference
between the federal statutory income tax rate and the pro forma income tax rate
primarily relates to state and local income taxes and expenses not deductible
for tax purposes.
F-75
<PAGE>
THE RESPONSE CENTER, INC. AND THE TAB HOUSE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
2. MARKETABLE SECURITIES:
The Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," effective October 1, 1994. SFAS No. 115 requires the
Company to classify its investment securities as (1) held-to-maturity, (2)
available-for-sale or (3) trading securities. At September 30, 1995, all of the
Company's marketable securities are classified as available for sale and
reported at market value; therefore, any unrealized holding gains or losses are
presented as a separate component of shareholders' equity. The cumulative effect
of adopting SFAS No. 115 was an increase in shareholders' equity of $121,000.
The following is a summary of available-for-sale securities as of September 30,
1995 (in thousands):
<TABLE>
<CAPTION>
UNREALIZED UNREALIZED
HOLDING HOLDING MARKET
COST LOSSES GAINS VALUE
---- ------ ----- -----
<S> <C> <C> <C> <C>
Common stocks............................. $118 $(6) $106 $218
Municipal bonds, maturity dates ranging
from 12/99 to 3/05....................... 59 -- 20 79
Mutual funds.............................. 26 -- 1 27
---- --- ---- ----
Total marketable securities............... $203 $(6) $127 $324
==== === ==== ====
</TABLE>
During the year ended September 30, 1995, the Company sold marketable securities
in the amount of $103,000. Under the specific identification method, the Company
realized gains of $22,000 on these sales.
3. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1995
----
(IN THOUSANDS)
<S> <C>
Computer equipment............................... $ 154
Furniture and office equipment................... 96
Leasehold improvements........................... 19
-----
269
Less--Accumulated depreciation and amortization.. (130)
-----
$ 139
=====
</TABLE>
Depreciation and amortization expense for the fiscal years ended September
30, 1994 and 1995, and for the period from October 1, 1995 to August 12, 1996,
was $43,000, $48,000 and $56,000, respectively.
F-76
<PAGE>
4. ACCRUED EXPENSES:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1995
----
(IN THOUSANDS)
<S> <C>
Accrued compensation and related expenses............. $132
Accrued local taxes................................... 30
Other accrued liabilities............................. 113
----
$275
====
</TABLE>
F-77
<PAGE>
THE RESPONSE CENTER, INC. AND THE TAB HOUSE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
5. COMMITMENTS AND CONTINGENCIES:
The Company leases a facility and equipment. Such leases have terms that extend
through 2000. Rent expense for the fiscal years ended September 30, 1994 and
1995, and for the period from October 1, 1995 to August 12, 1996, was $157,000,
$161,000 and $108,000, respectively.
Future minimum lease payments under the Company's leases as of September 30,
1995, are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1996............................................................ $ 138
1997............................................................ 111
1998............................................................ 58
1999............................................................ 55
2000............................................................ 55
-----
Total minimum lease payments.................................... $ 417
=====
</TABLE>
F-78
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To TeleSpectrum, Inc. and TeleSpectrum Training Services, Inc.:
We have audited the accompanying combined balance sheet of TeleSpectrum, Inc.
and TeleSpectrum Training Services, Inc. (Maryland corporations) as of December
31, 1995, and the related combined statements of income, stockholders' equity
and cash flows for the year ended December 31, 1995, and for the period from
January 1, 1996 to August 12, 1996. These financial statements are the
responsibility of the Companies' management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of TeleSpectrum, Inc. and
TeleSpectrum Training Services, Inc. as of December 31, 1995, and the results of
their operations and their cash flows for the year ended December 31, 1995, and
for the period from January 1, 1996 to August 12, 1996, in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Philadelphia, Pa.,
October 3, 1996
F-79
<PAGE>
TELESPECTRUM, INC. AND TELESPECTRUM TRAINING SERVICES, INC.
COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1995
(IN THOUSANDS--EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS:
Cash......................................... $ 15
Accounts receivable, net of reserve of $22... 2,690
Due from shareholder/officer................. 4
Prepaid expenses and other................... 95
------
Total current assets....................... 2,804
PROPERTY AND EQUIPMENT, net.................. 657
OTHER ASSETS................................. 88
------
Total assets............................... $3,549
======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit............................... $1,350
Current portion of long-term debt............ 198
Accounts payable............................. 498
Accrued compensation......................... 161
Deferred revenue............................. 197
Other accrued expenses....................... 363
------
Total current liabilities.................. 2,767
======
LONG-TERM DEBT AND OTHER NONCURRENT
LIABILITIES................................. 81
--
DEFERRED TAXES................................ 14
--
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY:
Common stock, TeleSpectrum, Inc. $.01 par
value, 5,000 shares authorized, 3,000
shares issued and outstanding............... --
Common stock, TeleSpectrum Training
Services, Inc. no par value, 5,000 shares
authorized, 200 shares issued and
outstanding................................. 6
Additional paid-in capital................... 217
Retained earnings............................ 464
---
Total stockholders' equity 687
---
Total liabilities and stockholders'
equity.................................. $3,549
======
</TABLE>
The accompanying notes are an integral part of this statement.
F-80
<PAGE>
TELESPECTRUM, INC. AND TELESPECTRUM TRAINING SERVICES, INC.
COMBINED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
FOR THE JANUARY 1,
YEAR ENDED 1996 TO
DECEMBER 31, AUGUST 12,
1995 1996
------- -------
<S> <C> <C>
REVENUES......................................... $11,854 $10,529
OPERATING EXPENSES:
Cost of services................................ 8,338 6,974
Selling, general and administrative expenses.... 3,072 2,929
------- -------
Total operating expenses...................... 11,410 9,903
------- -------
Operating income.............................. 444 626
INTEREST EXPENSE................................. (184) (129)
------- -------
Income before income taxes.................... 260 497
INCOME TAX BENEFIT............................... 18 --
------- -------
NET INCOME....................................... $ 278 $ 497
------- -------
PRO FORMA DATA (UNAUDITED):
Historical net income........................... $ 278 $ 497
Pro forma provision for income taxes............ 112 196
------- -------
Pro forma net income............................ $ 166 $ 301
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-81
<PAGE>
TELESPECTRUM, INC. AND TELESPECTRUM TRAINING SERVICES, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS--EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
------------
TELESPECTRUM
TRAINING
TELESPECTRUM, SERVICES, ADDITIONAL TOTAL
INC. INC. PAID-IN RETAINED STOCKHOLDERS'
SHARES SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ------ ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1,
1995..................... 3,000 200 $6 $217 $186 $ 409
Net income............... -- -- -- -- 278 278
----- --- -- ---- ---- ------
BALANCE, DECEMBER 31,
1995..................... 3,000 200 6 217 464 687
Capital contribution..... -- -- - 500 -- 500
Net income............... -- -- - -- 497 497
----- --- -- ---- ---- ------
BALANCE, AUGUST 12,
1996..................... 3,000 200 $6 $717 $961 $1,684
===== === == ==== ==== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-82
<PAGE>
TELESPECTRUM, INC. AND TELESPECTRUM TRAINING SERVICES, INC.
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR
THE PERIOD
FROM
FOR THE JANUARY 1,
YEAR ENDED 1996 TO
DECEMBER 31, AUGUST 12,
1995 1996
----- -------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income....................................... $ 278 $ 497
Adjustments to reconcile net income to net cash
provided by (used in) operating activities--
Depreciation and amortization................... 343 127
Changes in operating assets and liabilities--
Accounts receivable............................ (679) (1,193)
Due from stockholder/officer................... 1 --
Prepaid expenses and other..................... (2) (257)
Other, net..................................... (114) --
Deferred revenue............................... (205) --
Accounts payable and accrued liabilities....... 374 1,795
----- -------
Net cash provided by (used in) operating
activities................................... (4) 969
----- -------
INVESTING ACTIVITIES:
Purchases of property and equipment.............. (99) (2,044)
----- -------
Net cash used in investing activities (99) (2,044)
----- -------
FINANCING ACTIVITIES:
Net borrowings on line of credit................. 807 3,060
Proceeds from notes payable...................... -- 500
Principal payments on long-term debt and capital
leases.......................................... (852) (1,844)
----- -------
Net cash provided by (used in) financing
activities................................... (45) $ 1,716
----- -------
NET (DECREASE) INCREASE IN CASH................... (148) 641
CASH, BEGINNING OF PERIOD......................... 163 15
----- -------
CASH, END OF PERIOD............................... $ 15 $ 656
----- -------
CASH PAID FOR:
Interest........................................ $ 182 $ 120
----- -------
Taxes........................................... $ 36 $ --
----- -------
</TABLE>
The accompanying notes are an integral part of these statements.
F-83
<PAGE>
TELESPECTRUM, INC. AND TELESPECTRUM TRAINING SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
Industry Information
TeleSpectrum, Inc. and TeleSpectrum Training Services, Inc. (together, the
"Company") specialize in providing both outbound and inbound telemarketing
services and fulfillment to the high technology, pharmaceutical and health care
and consumer products industries.
On August 12, 1996, the Company sold substantially all of its assets and
liabilities to TeleSpectrum Worldwide Inc. TeleSpectrum, Inc. and TeleSpectrum
Training Services, Inc. are predecessor companies to TeleSpectrum Worldwide Inc.
Upon signing the asset purchase agreement, TeleSpectrum Worldwide Inc. advanced
the Company $500,000 in the form of a promissory note due in one year with
interest at 9%. Upon the closing of the transaction on August 12, 1996, a
portion of the purchase price was paid by cancellation of the promissory note.
The financial statements reflect the combined financial position and results of
operations of TeleSpectrum, Inc. and TeleSpectrum Training Services, Inc. The
accompanying financial statements are presented on a combined basis, as
TeleSpectrum, Inc. and TeleSpectrum Training Services, Inc. are owned by the
same stockholders who have identical ownership in each entity. The financial
statements reflect the elimination of all significant intercompany accounts and
transactions.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition and Concentration of Credit Risk
The Company recognizes revenues on programs as services are performed for the
clients, generally based upon hours incurred. In 1995, the Company had one
client that accounted for 12% of revenues and 15% of accounts receivable. For
the period from January 1, 1996 to August 12, 1996, the Company had one client
which accounted for 25% of revenues.
The concentration of credit risk is limited to trade accounts receivables and is
subject to the financial conditions of the Company's customers. The Company does
not require collateral or other securities to support customer receivables.
Property and Equipment
Property and equipment are recorded at cost. Property and equipment capitalized
under capital leases are recorded at the present value of the minimum lease
payment due over the term of the lease. Depreciation and amortization are
provided using the straight-line method over the estimated useful lives of three
to ten years.
Expenditures for maintenance, repairs and betterments that do not prolong the
normal useful life of an asset have been charged to operations as incurred.
Additions and betterments that substantially extend the useful life of the
properties are capitalized. Upon sale or other disposition of assets, the cost
and related accumulated
F-84
<PAGE>
TELESPECTRUM, INC. AND TELESPECTRUM TRAINING SERVICES INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
depreciation and amortization are removed from the respective accounts, and the
resulting gain or loss, if any, is included in income.
Income Taxes
TeleSpectrum, Inc. had elected to be taxed as an S Corporation under the
provision of the federal and state statutes. In lieu of federal and state
corporate income taxes, the stockholders were taxed on their proportionate share
of the Company's taxable income. Accordingly, no provision for federal or state
income taxes was recorded for the year ended December 31, 1995, or for the
period from January 1, 1996 to August 12, 1996.
The Company reported certain income and expense items for income tax purposes on
a basis different from that reflected in the accompanying financial statements.
The principal differences relate to the timing of the recognition of accrued
expenses that are not deductible for federal income tax purposes until paid and
the use of accelerated methods of depreciation for income tax purposes. At
December 31, 1995, the financial reporting basis of the Company's net assets
exceeds the tax basis of the net assets by approximately $140,000.
TeleSpectrum Training Services, Inc. was a C Corporation and followed the
provisions of Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." This standard requires an asset and liability approach to the
recognition of deferred tax assets and liabilities related to the expected
future consequences of events that have been recognized in the financial
statements or tax returns.
TeleSpectrum Training Services, Inc. had recorded $14,000 of long-term deferred
tax liabilities as of December 31, 1995. This amount related principally to
differences between the accelerated depreciation methods used for income tax
purposes and those used for financial reporting purposes.
At December 31, 1995, the benefit for income taxes for TeleSpectrum Training
Services, Inc. is comprised of the following (in thousands):
<TABLE>
<S> <C>
Current.................................................... $ 2
Deferred................................................... (20)
-----
Total benefit.......................................... $ (18)
=====
</TABLE>
Fair Value of Financial Instruments
Cash, accounts receivable, accounts payable and accrued liabilities are
reflected in the financial statements at fair value due to the short-term nature
of those instruments. The carrying amounts of line of credit, long-term debt and
capital lease obligations approximate fair value at the balance sheet dates.
Pro Forma Data (Unaudited)
Given the sale of the business, for informational purposes, the accompanying
statements of income include an unaudited pro forma adjustment for income taxes
that would have been recorded if the Company had not been an S Corporation,
based on the tax laws in effect during the respective periods. The differences
between the federal statutory income tax rate and the pro forma income tax rate
primarily related to state and local income taxes and expenses not deductible
for tax purposes.
F-85
<PAGE>
TELESPECTRUM, INC. AND TELESPECTRUM TRAINING SERVICES INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
2. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
USEFUL DECEMBER 31,
LIVES 1995
------- ------------
(IN THOUSANDS)
<S> <C> <C>
Telemarketing equipment............................................. 5-7 $ 825
Furniture and office equipment...................................... 3-5 1,221
Leasehold improvements.............................................. 3-10 91
-------
2,137
Less--Accumulated depreciation and amortization................... (1,480)
-------
$ 657
=======
</TABLE>
Depreciation expense for the year ended December 31, 1995, and for the period
from January 1, 1996 to August 12, 1996, was $343,000 and $127,000,
respectively.
3. LINE OF CREDIT:
The Company entered into a new line of credit agreement in May 1996 (the."new
line") and used proceeds from the new line to pay down the amount owed under the
existing line of credit (the "old line"). The amount available for borrowing
under the new line is $4 million, with interest at the bank's prime rate.plus
1.5% (under the old line, interest, calculated as the bank's prime rate plus
2.5%, was 11% at December 31, 1995). At December 31, 1995, the balance of the
old line was $1.35 million. Interest expense on borrowings under the old.line
amounted to $127,000 during 1995, and interest expense under the old and.new
lines amounted to $98,000 during the period from January 1, 1996 to August 12,
1996.
4. LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
-----------
(IN THOUSANDS)
<S> <C>
Note payable to bank (see Note 3), interest at the bank's
prime rate plus 2%, monthly principal payments of $13,000
plus interest, maturing July 1996, collateralized by all
assets of the Company; 80% guaranteed by the United States
Small Business Administration; personally guaranteed by the
Company's officers.................................................... $ 91
Note payable, interest at 15%, monthly principal and inter-
est payments of $2,000, maturing October 1997, guaranteed
by an officer of the Company......................................... 38
Capitalized lease obligations (Note 5)................................. 126
-------
255
Less--Current portion.................................................. (198)
-------
$ 57
=======
</TABLE>
Minimum principal repayments of long-term debt as of December 31, 1995,
excluding capitalized lease obligations, are as follows (in thousands):
<TABLE>
<S> <C>
1996............................................ $ 110
1997............................................ 19
------
$ 129
======
</TABLE>
F-86
<PAGE>
TELESPECTRUM, INC. AND TELESPECTRUM TRAINING SERVICES INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
5. COMMITMENTS AND CONTINGENCIES:
The Company is party to various claims and other matters arising in the normal
course of business. In the opinion of management, the outcome of these matters
will not have a material adverse effect on the Company's financial position or
results of operations.
The Company leases facilities and equipment at several locations. Rent expense
under operating leases for the year ended December 31, 1995, and for the period
from January 1, 1996 to August 12, 1996, was $264,000 and $240,000,
respectively.
Future minimum lease payments under the Company's leases as of December 31,
1995, are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- -------
<S> <C> <C>
1996.............................................................. $ 395 $ 99
1997.............................................................. 447 36
1998.............................................................. 441 4
1999.............................................................. 382 --
2000.............................................................. 19 --
------- -------
Total minimum lease payments...................................... $ 1,684 139
=======
Less--Amount representing interest................................ (13)
-------
Present value of future minimum lease payments.................... 126
Less--Current portion............................................. (88)
-------
$38
=======
</TABLE>
F-87
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To TeleSpectrum Worldwide Inc.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of TeleSpectrum Worldwide Inc. and
subsidiaries included in this Form 10-K and have issued our report thereon dated
March 23, 1998. Our audit was made for the purpose of forming an opinion on
the basic financial statements taken as a whole. The accompanying financial
statement schedule is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
March 23, 1998
S-1
<PAGE>
TELESPECTRUM WORLDWIDE INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1997 AND
FOR THE PERIOD FROM APRIL 26, 1996 (INCEPTION)
TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
APRIL 26, 1996 CHARGED TO COSTS OTHER BALANCE AT
DESCRIPTION (INCEPTION) AND EXPENSES ACCOUNTS DEDUCTIONS DECEMBER 31, 1996
----------- ----------- ------------ -------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts $--- $ 543 $--- $ (24)/1/ $519
==== ===== ==== ========= ====
<CAPTION>
CHARGED TO
BALANCE AT CHARGED TO COSTS OTHER BALANCE AT
DESCRIPTION DECEMBER 31, 1996 AND EXPENSES ACCOUNTS DEDUCTIONS DECEMBER 31, 1997
----------- ----------------- ------------ -------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts $519 $1,034 $--- $(584)/1/ $969
==== ====== ==== ========= ====
</TABLE>
/1/ Write-off of amounts previously reserved.
S-2
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
This Agreement is made as of this 18th day of March 1998 between
TeleSpectrum Worldwide Inc., a Delaware corporation (the "Company"), and Keith
E. Alessi (the "Employee").
RECITALS
--------
The Company desires to employ the Employee, and the Employee desires to
provide services to the Company, upon the terms and conditions hereinafter set
forth.
WITNESSETH:
----------
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, the parties hereto, each intending to be legally bound hereby,
agree as follows:
1. Employment.
----------
(a) During the term of the Employee's employment under this Agreement (the
"Employment Term"), the Employee shall be the Chief Executive Officer and
President of the Company and shall perform such duties consistent with such
office as described in the Company's Bylaws (a copy of which has been furnished
to the Employee) and as are assigned by the Company's Board of Directors (the
"Board"). In addition, the Company shall appoint Employee to the Board to fill
the current vacancy in such Board and shall initially serve as Chairman of the
Board, subject to annual reelection by the members of the Board as Chairman by
the Board. The current members of the Board have expressed their intention to
re-elect the Employee as the Chairman of the Board during such time as he
remains a director and the Chief Executive Officer of the Company.
(b) Employee represents to the Company that he is not subject or a party
to any employment agreement, non-competition covenant, non-disclosure agreement
or any other agreement, covenant, understanding or restriction of any nature
which would prohibit Employee from executing this Agreement and performing fully
his duties and responsibilities hereunder.
2. Term. The Employment Term shall begin on the date hereof and, unless
----
terminated earlier pursuant to the terms of this Agreement, continue until March
19, 2001.
3. Compensation for Employment.
---------------------------
(a) The basic annual rate of compensation of the Employee for his
employment services to the Company during the Employment Term shall be $200,000
(such amount is referred to herein as the "Salary"), which the Company shall pay
to the Employee in equal installments in accordance with the normal payroll
policies of the Company.
<PAGE>
(b) The Employee shall be eligible to receive annual bonuses (such amounts
are referred to herein as the "Bonus") in such amounts as approved by the
Compensation Committee of the Board of Directors and participate in such bonus
programs as are established for executive officers of the Company.
(c) On the date hereof, the Company shall grant Employee stock options
(the "Base Options") to purchase an aggregate of 1,500,000 shares of the
Company's common stock, par value $.01 per share (the "Common Stock"). The Base
Options will contain such terms as contained in the forms of Grant Letter
attached as "Exhibits A and B" hereto, including vesting in three equal amounts
(each representing 33.33% of the shares underlying such option) beginning on the
one year anniversary of the date of grant and on the next two successive annual
anniversary dates of the date of grant In addition, on the date hereof, the
Company shall grant Employee a stock option (the "Performance Option") to
purchase 500,000 shares of Common Stock. As soon as reasonably practicable after
the date of this Agreement, the Company shall register the shares of Common
Stock underlying the Base and Performance Options, to the extent not already so
registered, under the Securities Act of 1933, as amended, pursuant to a
Registration Statement on Form S-8. The Performance Option will include such
terms as contained in the form of Grant Letter attached as "Exhibit C" hereto,
including the following vesting schedule:
(i) 166,667 shares if the closing price of the Common Stock on
Nasdaq reaches $8.00 per share for ten consecutive trading days prior to the 18
month anniversary of this Agreement;
(ii) 166,667 shares if the closing price of the Common Stock on
Nasdaq reaches $12.00 per share for ten consecutive trading days prior to the 27
month anniversary of this Agreement;
(iii) 166,666 shares if the closing price of the Common Stock on
Nasdaq reaches $18.00 per share for ten consecutive trading days prior to the 36
month anniversary of this Agreement; and
(iv) if not vested by the fourth anniversary of the date of this
Agreement, then all shares underlying the Performance Option shall automatically
vest on such date.
(d) Concurrent with the execution and delivery of this Agreement, the
Employee and the Company have also executed and delivered a subscription
agreement attached as Exhibit "D" hereto pertaining to the purchase of shares of
Common Stock by the Employee.
(e) During the Employment Term, the Company shall provide the Employee
with fringe benefits that are substantially equivalent to the fringe benefits
specified on Exhibit "E" (the "Fringe Benefits") at such levels that are
provided to the senior officers of the Company.
-2-
<PAGE>
(f) All amounts payable by the Company under Sections 3(a) and (b) and the
Fringe Benefits allowed under Section 3(e) shall be subject to proration based
upon the number of days in each such year that the Employee was employed by the
Company hereunder.
4. Termination Without Compensation.
--------------------------------
(a) Total Disability. If the Employee becomes totally disabled (as defined
----------------
below), the Company may terminate the Employment Term by notice to the Employee,
and as of the termination date, the Company shall have no further liability or
obligation to the Employee hereunder except as follows: the Employee shall
receive (i) unpaid Salary, Bonus, if any, and Fringe Benefits that have accrued
through the date of termination; and (ii) whatever benefits that he may be
entitled to receive under any then existing disability benefit plans of the
Company, including any such plans included in the Fringe Benefits. For the
purposes hereof, the Employee shall be deemed to be "totally disabled" if the
Employee is considered totally disabled under any group disability plan
maintained by the Company and in effect at that time, or in the absence of any
such plan, under applicable Social Security regulations. In the event of any
dispute under this Section 4(a), the Employee shall submit to a physical
examination by a licensed physician mutually satisfactory to the Company and the
Employee, the cost of such examination to be paid by the Company, and the
determination of such physician shall be determinative.
(b) Death. If the Employee dies, this Employment Agreement shall terminate
-----
on the date of death, and thereafter the Company shall not have any further
liability or obligation to the Employee, his executors, administrators, heirs,
assigns or any other person claiming under or through his except that the
Employee's estate shall receive any unpaid Salary, Bonus, if any, and Fringe
Benefits that have accrued through the date of termination.
(c) Cause. The Company may terminate the Employment Term for "cause" by
-----
giving the Employee 30 days' notice of the termination date, and as of the
termination date, the Company shall not have any further liability or obligation
to the Employee, except that the Employee shall receive any unpaid Salary,
Bonus, if any, and Fringe Benefits that have accrued through the date of
termination. For purposes of this Agreement, "cause" shall mean the Employee's
(i) breach of (other than by reason of illness, injury or incapacity) of any of
the material terms or provisions of this Agreement, (ii) the willful and
substantial failure to comply fully with the lawful directives of the Board,
(iii) substantial and willful misconduct, (iv) material neglect of the Company's
business, (v) conviction of a felony or other crime involving moral turpitude,
(vi) misappropriation of funds or (vii) habitual abuse of alcohol, narcotics or
other controlled substances. In the case of a termination for "cause," the
notice of termination shall specify the basis for the Company's determination of
"cause"; provided, however, that in the case of conduct described in clauses
-------- -------
(i), (ii), (iii) and (iv) above, such conduct shall not constitute "cause" for
the purposes of this paragraph (c) unless (A) the Board shall have given the
Employee notice setting forth with specificity (1) the conduct deemed to
constitute "cause," (2) reasonable action that would remedy the objectionable
conduct, and (3) a reasonable time (not less than 5 days) within which the
Employee may take such remedial action,
-3-
<PAGE>
and (B) the Employee shall not have taken such specified remedial action within
such specified reasonable time.
(d) Resignation. The Employee shall have the right to terminate the
-----------
Employment Term at any time by giving the Company 60 days' notice of the
termination date. Under such circumstances, the Company shall not have any
further liability or obligation to the Employee, except that the Employee shall
receive any unpaid Salary, Bonus, if any, and Fringe Benefits that have accrued
through the date of termination, net of any liabilities that the Employee may
have to the Company.
5. Termination With Compensation. The Company shall have the right to
-----------------------------
terminate the Employment Term without cause at any time by giving the Employee
30 days' notice of the termination date. In the event of a termination of the
Employment Term pursuant to this Section 5, the Company shall continue to pay to
the Employee the Salary and continue to provide the Fringe Benefits listed in
paragraph (a) of Exhibit B hereto for a period ending one year after the date of
any such termination. The Salary to be paid and the Fringe Benefits to be
provided under this Section 5 are referred to herein as the "Termination
Compensation." The Employee shall not be entitled to any Termination
Compensation unless the Employee executes and delivers to the Company after a
notice of termination a release in a form satisfactory to the Company in its
sole discretion by which the Employee releases the Company from any obligations
and liabilities of any type whatsoever under this Agreement, except for the
Company's obligations with respect to the Termination Compensation. The parties
hereto acknowledge that the Termination Compensation to be provided under this
Section 5 is to be provided in consideration for the above-specified release.
6. Agreement Not to Compete.
------------------------
(a) The Employee covenants that for the period beginning on the
termination of Employee's employment hereunder and ending on the second
anniversary of the date of such termination of employment hereunder (the
"Restricted Period"), he will not, directly or indirectly, own, manage, operate,
join, control, finance or participate in the ownership, management, operation,
control or financing of, or be connected as a partner, principal, agent,
representative, consultant or otherwise with or use or permit his name to be
used in connection with, any business or enterprise engaged directly or
indirectly in competition with the business conducted by the Company at any time
during such period within any portion of the United States in the direct
marketing business which includes inbound and outbound telemarketing, customer
retention and interactive voice response (the "Business"). It is recognized by
the Employee and the Company that the Business is and is expected to continue to
be conducted throughout the United States and that more narrow geographical
limitations of any nature on this non-competition covenant (and the non-
solicitation covenant set forth in Section 6(b)) are therefore not appropriate.
The foregoing restriction shall not be construed to prohibit the ownership by
Employee as a passive investment of not more than five percent (5%) of any class
of securities of any corporation which is engaged in any of the foregoing
businesses having a class of securities registered pursuant to the Securities
Exchange Act of 1934.
-4-
<PAGE>
(b) The Employee further covenants that during the Restricted Period,
he will not, either directly or indirectly, (i) call on or solicit any person
who or which has been a customer of the Company with respect to the activities
prohibited by Section 6(a) or (ii) solicit the employment of any person who is
employed by the Company during such period on a full or part-time basis.
(c) The Employee recognizes and acknowledges that by reason of his
employment by the Company he will have access to Confidential Information
relating to the Business. The Employee acknowledges that such Confidential
Information is a valuable and unique asset and covenants that he will not
disclose any such Confidential Information after the date hereof to any person
for any reason whatsoever, unless such information (i) is in the public domain
through no wrongful act of Employee, (ii) has been rightfully received from a
third party without restriction and without breach of this Agreement or (iii)
except as may be required by law.
(d) The Employee acknowledges that the restrictions contained in this
Section 6 are reasonable and necessary to protect the legitimate interests of
the Company, and that any violation will result in irreparable injury to the
Company.
(e) The Employee agrees that the Company shall be entitled to
preliminary and permanent injunctive relief, without the necessity of proving
actual damages, as well as an equitable accounting of all earnings, profits and
other benefits arising from any violation of this Section 6, which rights shall
be cumulative and in addition to any other rights or remedies to which the
Company may be entitled. In the event that any of the provisions of this Section
6 should ever be adjudicated to exceed the time, geographic, product or service,
or other limitations permitted by applicable law in any jurisdiction, then such
provisions shall be deemed reformed in such jurisdiction to the maximum time,
geographic, product or service, or other limitations permitted by applicable
law.
7. Inventions, Designs and Product Developments. All inventions, innovations,
--------------------------------------------
designs, ideas and product developments, developed or conceived by the Employee,
solely or jointly with others, whether or not patentable or copyrightable, at
any time during the Employment Term or during his employment by the Company
prior to the commencement of the Employment Term and that relate to the actual
or planned business activities of the Company (collectively, the "Developments")
and all of the Employee's right, title and interest therein, shall be the
exclusive property of the Company. The Employee hereby assigns, transfers and
conveys to the Company all of his right, title and interest in and to any and
all such Developments. The Employee shall disclose fully, as soon as
practicable and in writing, all material and substantial Developments to the
Board. At any time and from time to time, upon the request of the Company, the
Employee shall execute and deliver to the Company any and all instruments,
documents and papers, give evidence and do any and all other reasonable acts
that, in the opinion of counsel for the Company, are or may be necessary or
desirable to document such transfer or to enable the Company to file and
prosecute applications for and to acquire, maintain and enforce any and all
patents, trademark registrations or copyrights under United States or foreign
law with respect to any such Developments or to obtain any extension,
validation, re-issue, continuance or renewal of any such patent, trademark or
copyright. The Company will be
-5-
<PAGE>
responsible for the preparation of any such instruments, documents and papers
and for the prosecution of any such proceedings and will reimburse the Employee
for all reasonable expenses incurred by his in compliance with the provisions of
this Section 7.
8. Confidential Information.
------------------------
(a) The Employee has had and will have possession of or access to
confidential information relating to the business of the Company, including
writings, equipment, processes, drawings, reports, manuals, invention records,
financial information, business plans, customer lists, the identity of or other
facts relating to prospective customers, inventory lists, arrangements with
suppliers and customers, computer programs, or other material embodying trade
secrets, customer or product information or technical or business information of
the Company. All such information, other than any information that is in the
public domain through no act or omission of the Employee or which he is
authorized to disclose, is referred to collectively as the "Company
Information." During and after the Employment Term, the Employee shall not (i)
use or exploit in any manner the Company Information for himself or any person,
partnership, association, corporation or other entity other than the Company,
(ii) remove any Company Information, or any reproduction thereof, from the
possession or control of the Company or (iii) treat Company Information
otherwise than in a confidential manner.
(b) All Company Information developed, created or maintained by the
Employee, alone or with others while employed by the Company, and all Company
Information maintained by the Employee thereafter, shall remain at all times the
exclusive property of the Company. The Employee shall return to the Company all
Company Information, and reproductions thereof, whether prepared by his or
others, that are in his possession immediately upon request and in any event
upon the completion of his employment by the Company.
9. Remedies. The Employee expressly acknowledges that the remedy at law for
--------
any breach of Sections 6, 7 and 8 will be inadequate and that upon any such
breach or threatened breach, the Company shall be entitled as a matter of right
to injunctive relief in any court of competent jurisdiction, in equity or
otherwise, and to enforce the specific performance of the Employee's obligations
under these provisions without the necessity of proving the actual damage to the
Company or the inadequacy of a legal remedy.
10. General.
-------
(a) Governing Law. This Agreement is made and entered into in the
-------------
Commonwealth of Pennsylvania, and shall in all respects be interpreted, enforced
and governed by and under the laws of the Commonwealth.
(b) Company. For purposes of Sections 6, 7, 8 and 9, the term "Company"
-------
shall be deemed to include any incorporated or unincorporated entities that are
controlled, directly or
-6-
<PAGE>
indirectly, by the Company through ownership, agreement or otherwise, and any
such entity to which the Company assigns its rights hereunder.
(c) Binding Effect. All of the terms and provisions of this Agreement
--------------
shall be binding upon and inure to the benefit and be enforceable by the
respective heirs, representatives, successors (including any successor as a
result of a merger or similar reorganization) and assigns of the parties hereto,
except that the duties and responsibilities of the Employee hereunder are of a
personal nature and shall not be assignable in whole or in part by the Employee.
(d) Notices. All notices required to be given under this Agreement shall
-------
be in writing and shall be deemed to have been given when personally delivered
or when mailed by registered or certified mail, postage prepaid, return receipt
requested, or when sent by Federal Express or other overnight delivery service,
addressed as follows:
TO EMPLOYEE:
Mr. Keith E. Alessi
110 West Preston St.
Lexington, VA 24450
With a copy to:
Clark & Stant, P.C.
One Columbus Center
Virginia Beach, VA 23462-6762
Fax: 757-473-0395
Attn: John M. Paris, Jr., Esquire
TO THE COMPANY:
443 S. Gulph Road
King of Prussia, PA 19406
Fax: 610-962-5109
Attn: Chief Financial Officer
With a copy to:
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, PA 19103
Fax: 215-963-5299
Attn: Stephen M. Goodman, Esquire
-7-
<PAGE>
(e) Entire Agreement; Modification. This Agreement constitutes the entire
------------------------------
agreement of the parties hereto with respect to the subject matter hereof and
may not be modified or amended in any way except in writing by the parties
hereto.
(f) Duration. Notwithstanding the termination of the Employment Term and
--------
of the Employee's employment by the Company, this Agreement shall continue to
bind the parties for so long as any obligations remain under the terms of this
Agreement.
(g) Waiver. No waiver of any breach of this Agreement shall be construed
------
to be a waiver as to succeeding breaches.
(h) Severability. If any provision of this Agreement or application
-------------
thereof to anyone under any circumstances is adjudicated to be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect any other provisions or applications of this Agreement which can be given
effect without the invalid or unenforceable provision or application and shall
not invalidate or render unenforceable such provision in any other jurisdiction.
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound, have
hereunto duly executed this Agreement as of the day and year first written
above.
TELESPECTRUM WORLDWIDE INC.
By:_______________________________________________
J. Brian O'Neill, Chairman, Chief Executive
Officer and President
__________________________________________________
KEITH ALESSI
-8-
<PAGE>
TELESPECTRUM WORLDWIDE INC. -- STOCK OPTION
Date of Grant: March 18, 1998
TeleSpectrum Worldwide Inc. (the "Company") hereby grants an option to
Keith E. Alessi (the "Grantee"), as a condition precedent to the acceptance of
employment by Grantee with the Company, in accordance with the terms set forth
herein. While certain terms are incorporated by reference from the Company's
1996 Equity Compensation Plan ("Plan"), this Option has not been granted under
the Plan and shall not for any purpose be deemed to be granted under the Plan.
1. Option Grant and Acceptance The Company hereby grants to the Grantee
---------------------------
effective as of the date of grant first stated above (the "Date of Grant,") the
right and option (the "Option") to purchase 1,000,000 shares (the "Shares") of
common stock, par value $.01 per share (the "Common Stock"), of the Company.
The Grantee has indicated his acceptance of this Option by executing this Grant
Letter.
2. Option Price The purchase price of each Share covered by the Option shall
------------
be $3.29 (the "Option Price").
3. Option Expiration The Option, to the extent that it has not theretofore
-----------------
been exercised, shall automatically expire on the earliest to occur of the
following events:
(a) the close of business on the last business day preceding the
tenth (10th) anniversary of the Date of Grant;
(b) in the event of the Grantee's death while employed by the Company
or within 90 days of the Grantee's termination of employment described in
subsection (e) below, the Option to the extent then exercisable, may be
exercised thereafter, by the legal representative of the estate or by the
legatee of the Grantee under the will of the Grantee, for a period of one year
from the date of such death or, if earlier, the date specified in Section 3(a);
(c) in the event the Grantee ceases to be an Employee of the Company
on account of Disability (as defined in Section 4(a) of the Employment Agreement
dated as of March 18, 1998 between the Grantee and the Company (the "Employment
Agreement"), the Option may thereafter be exercised by the Grantee, to the
extent it was exercisable at the date the Grantee ceased to be an Employee of
the Company, for a period of one year from the date of such termination of
employment or, if earlier, the date specified in Section 3(a);
(d) in the event the Grantee ceases to be an Employee of the Company
on account of a termination for "cause" (as defined in Section 4(c) of the
Employment Agreement,
<PAGE>
the Option shall terminate on the date of such termination of employment; or
(e) in the event the Grantee ceases to be an Employee of the Company
for any reason other than his death, Disability or termination for "cause," the
Option, to the extent then exercisable, may thereafter be exercised by the
Grantee within 90 days of the date on which the Grantee ceases to be an Employee
or, if earlier, the date specified in Section 3(a).
4. Exercisability of Option The Option shall be exercisable as follows:
------------------------
(a) the Option may be exercised to purchase one-third (1/3) of the
Shares on and after the date of the first anniversary of the Date of Grant, and
an additional one-third of the Shares each anniversary thereafter if the Grantee
is still employed by the Company on such dates;
(b) the right to purchase Shares under the Option as provided in
subsection (a) hereof may be exercised in a cumulative fashion; any right to
purchase Shares becoming exercisable on a given date shall remain exercisable
until the Option expires in accordance with the terms of Section 3; and
(c) the Committee, in its sole discretion, may accelerate the
exercisability of all or a portion of the Option, at any time for any reason.
5. Change of Control In the event of a "Change of Control," as defined in
-----------------
Section 14 of the Plan, the Option shall become exercisable and be exercised in
the manner set forth in Section 15 of the Plan.
6. Time and Method of Exercise Subject to the terms of Sections 4 and 5, the
---------------------------
Option may be exercised, in whole or in part, at any time or from time to time,
prior to the time it expires in accordance with the terms of Section 3, by
written notice to the Committee in such form as the Committee shall prescribe.
Such notice shall be effective upon receipt by the Committee and shall be
accompanied by:
(a) cash, a check, or the equivalent thereof acceptable to the
Company, for the full Option Price of the number of Shares being purchased;
(b) if and only if permitted by the Committee, one or more
certificates representing a number of Shares which are, in the aggregate, equal
in Fair Market Value on the date of exercise to the full Option Price for the
Shares being purchased, such certificates being duly endorsed (or accompanied by
stock powers signed in blank) so as to transfer to the Company all right, title
and interest in and to the Shares represented by such certificates; or
(c) if and only if permitted by the Committee, a combination of the
forms of payment specified in Section 6(a) and 6(b) above which, in the
aggregate, is equal to the full Option Price for the number of Shares being
purchased.
-2-
<PAGE>
7. Adjustments If there is any change in the number or kind of shares of
-----------
Common Stock outstanding by reason of a stock dividend, spinoff, a
recapitalization, stock split, or combination or exchange of shares, or merger,
reorganization or consolidation in which the Company is the surviving
corporation, reclassification or change in par value or by reason of any other
extraordinary or unusual events affecting the outstanding Common Stock as a
class without the Company's receipt of consideration, or if the value of
outstanding shares of Common Stock is substantially reduced due to the Company's
payment of an extraordinary dividend or distribution, the number of shares
covered by the Option and the Option Price shall be proportionately adjusted by
the Committee to reflect any increase or decrease in the number or kind or value
of issued shares of Common Stock to preclude the enlargement or dilution of
rights and benefits under such Grants; provided, however, that any fractional
shares resulting from such adjustment shall be eliminated. Notwithstanding the
foregoing, no adjustment shall be authorized or made pursuant to this Section to
the extent that such authority or adjustment would cause the Option to fail to
comply with section 422 of the Code.
8. Withholding If applicable, the Grantee or other person receiving Shares
-----------
upon an exercise of the Option, in whole or in part, shall be required to pay to
the Company the amount of any federal, state or local taxes or other charges
that the Company is required to withhold with respect to such exercise,
including an election to satisfy tax withholding by authorizing the Company to
withhold shares in the manner set forth in Section 10(b) of the Plan. The
Company shall have the right to take whatever action it deems necessary to
protect the interests of the Company in respect of such liabilities, including,
without limitation, deducting the withholding amount from grants paid in cash or
from other wages paid by the Company to the Grantee. The Company's obligation
to issue or transfer Shares upon exercise of the Option shall be conditioned
upon the Grantee's compliance with the requirements of this Section to the
satisfaction of the Committee.
9. Administration All questions of interpretation and application of this
--------------
Grant shall be determined by the Committee in its discretion, and such
determination shall be final and binding upon all persons. The validity,
construction and effect of this Option shall be determined in accordance with
the laws of the Commonwealth of Pennsylvania, without giving effect to the
principles of conflicts of law thereof.
10. No Stockholder Rights Neither the Grantee nor any person entitled to
---------------------
exercise the Grantee's rights in the event of the Grantee's death shall have any
of the rights and privileges of a stockholder with respect to the Shares subject
to the Option, except to the extent that certificates for such Shares shall have
been issued or transferred on the stock transfer records of the Company upon the
exercise of the Option as provided herein.
-3-
<PAGE>
11. Termination or Amendment This Option may be terminated or amended, in
------------------------
whole or in part, at any time (a) by the Committee, if the Committee determines
that such termination or amendment is necessary or advisable to bring such
Option into compliance with any federal or state securities law or other
applicable law or regulation (but in no event will any termination or amendment
adversely affect Grantee without his prior written consent), or (b) by written
agreement of the Company and the Grantee.
12. Notice Any notice to the Committee provided for in this Grant Letter
------
shall be addressed to it at TeleSpectrum Worldwide Inc., Chief Financial
Officer, and any notice to the Grantee shall be addressed to such Grantee at the
current address shown on the payroll of the Company, or to such other address
the Grantee may designate to the Company in writing. Any notice provided for
hereunder shall be delivered by hand, sent by telecopy or telex or enclosed in a
properly sealed envelope addressed as stated above, registered and deposited,
postage and registry being prepaid, in a post office or branch post office
regularly maintained by the United States Postal Service.
13. Grantee's Securities Law Representations If the Committee shall deem it
----------------------------------------
appropriate by reason of any securities law, it may require that the Grantee
upon exercise, in whole or in part of the Option, represent to the Company and
agree in writing to comply with any such restrictions on the Grantee's
subsequent disposition of such Shares as the Committee shall deem necessary or
advisable as a result of any applicable law, regulation or official
interpretation thereof. The Committee may require that the Share certificates
be inscribed with a legend restricting transfer in accordance with applicable
securities law requirements.
TELESPECTRUM WORLDWIDE INC.
Attest: ________________________ By:______________________________
Accepted By:
Witness: _______________________ _________________________________
Grantee
-4-
<PAGE>
TELESPECTRUM WORLDWIDE INC. -- STOCK OPTION
Date of Grant: March 18, 1998
TeleSpectrum Worldwide Inc. (the "Company") hereby grants an option to
Keith E. Alessi (the "Grantee"), as a condition precedent to the acceptance of
employment by Grantee with the Company, in accordance with the terms set forth
herein. While certain terms are incorporated by reference from the Company's
1996 Equity Compensation Plan ("Plan"), this Option has not been granted under
the Plan and shall not for any purpose be deemed to be granted under the Plan.
1. Option Grant and Acceptance The Company hereby grants to the Grantee
---------------------------
effective as of the date of grant first stated above (the "Date of Grant,") the
right and option (the "Option") to purchase 500,000 shares (the "Shares") of
common stock, par value $.01 per share (the "Common Stock"), of the Company.
The Grantee has indicated his acceptance of this Option by executing this Grant
Letter.
2. Option Price The purchase price of each Share covered by the Option shall
------------
be $3.29 (the "Option Price").
3. Option Expiration The Option, to the extent that it has not theretofore
-----------------
been exercised, shall automatically expire on the earliest to occur of the
following events:
(a) the close of business on the last business day preceding the tenth
(10th) anniversary of the Date of Grant;
(b) in the event of the Grantee's death while employed by the Company
or within 90 days of the Grantee's termination of employment described in
subsection (e) below, the Option to the extent then exercisable, may be
exercised thereafter, by the legal representative of the estate or by the
legatee of the Grantee under the will of the Grantee, for a period of one year
from the date of such death or, if earlier, the date specified in Section 3(a);
(c) in the event the Grantee ceases to be an Employee of the Company
on account of Disability (as defined in Section 4(a) of the Employment Agreement
dated as of March 18, 1998 between the Grantee and the Company (the "Employment
Agreement"), the Option may thereafter be exercised by the Grantee, to the
extent it was exercisable at the date the Grantee ceased to be an Employee of
the Company, for a period of one year from the date of such termination of
employment or, if earlier, the date specified in Section 3(a);
(d) in the event the Grantee ceases to be an Employee of the Company
on account of a termination for "cause" (as defined in Section 4(c) of the
Employment Agreement,
<PAGE>
the Option shall terminate on the date of such termination
of employment; or
(e) in the event the Grantee ceases to be an Employee of the Company
for any reason other than his death, Disability or termination for "cause," the
Option, to the extent then exercisable, may thereafter be exercised by the
Grantee within 90 days of the date on which the Grantee ceases to be an Employee
or, if earlier, the date specified in Section 3(a).
4. Exercisability of Option The Option shall be exercisable as follows:
------------------------
(i) 166,667 shares if the closing price of the Common Stock on Nasdaq
reaches $8.00 per share prior to the 18 month anniversary of the date of this
Agreement;
(ii) 166,667 shares if the closing price of the Common Stock on Nasdaq
reaches $12.00 per share prior to the 27 month anniversary of the date of this
Agreement;
(iii) 166,666 shares if the closing price of the Common Stock on
Nasdaq reaches $18.00 per share prior to the 36 month anniversary of the date of
this Agreement; and
(iv) if not vested by the fifth anniversary of the date of this
Agreement, then all shares underlying the Option shall automatically vest on
such date.
5. Change of Control In the event of a "Change of Control," as defined in
-----------------
Section 14 of the Plan, the Option shall become exercisable and be exercised in
the manner set forth in Section 15 of the Plan.
6. Time and Method of Exercise Subject to the terms of Sections 4 and 5, the
---------------------------
Option may be exercised, in whole or in part, at any time or from time to time,
prior to the time it expires in accordance with the terms of Section 3, by
written notice to the Committee in such form as the Committee shall prescribe.
Such notice shall be effective upon receipt by the Committee and shall be
accompanied by:
(a) cash, a check, or the equivalent thereof acceptable to the
Company, for the full Option Price of the number of Shares being purchased;
(b) if and only if permitted by the Committee, one or more
certificates representing a number of Shares which are, in the aggregate, equal
in Fair Market Value on the date of exercise to the full Option Price for the
Shares being purchased, such certificates being duly endorsed (or accompanied by
stock powers signed in blank) so as to transfer to the Company all right, title
and interest in and to the Shares represented by such certificates; or
(c) if and only if permitted by the Committee, a combination of the
forms of payment specified in Section 6(a) and 6(b) above which, in the
aggregate, is equal to the full Option Price for the number of Shares being
purchased.
-2-
<PAGE>
7. Adjustments If there is any change in the number or kind of shares of
-----------
Common Stock outstanding by reason of a stock dividend, spinoff, a
recapitalization, stock split, or combination or exchange of shares, or merger,
reorganization or consolidation in which the Company is the surviving
corporation, reclassification or change in par value or by reason of any other
extraordinary or unusual events affecting the outstanding Common Stock as a
class without the Company's receipt of consideration, or if the value of
outstanding shares of Common Stock is substantially reduced due to the Company's
payment of an extraordinary dividend or distribution, the number of shares
covered by the Option and the Option Price shall be proportionately adjusted by
the Committee to reflect any increase or decrease in the number or kind or value
of issued shares of Common Stock to preclude the enlargement or dilution of
rights and benefits under such Grants; provided, however, that any fractional
shares resulting from such adjustment shall be eliminated. Notwithstanding the
foregoing, no adjustment shall be authorized or made pursuant to this Section to
the extent that such authority or adjustment would cause the Option to fail to
comply with section 422 of the Code.
8. Withholding If applicable, the Grantee or other person receiving Shares
-----------
upon an exercise of the Option, in whole or in part, shall be required to pay to
the Company the amount of any federal, state or local taxes or other charges
that the Company is required to withhold with respect to such exercise,
including an election to satisfy tax withholding by authorizing the Company to
withhold shares in the manner set forth in Section 10(b) of the Plan. The
Company shall have the right to take whatever action it deems necessary to
protect the interests of the Company in respect of such liabilities, including,
without limitation, deducting the withholding amount from grants paid in cash or
from other wages paid by the Company to the Grantee. The Company's obligation
to issue or transfer Shares upon exercise of the Option shall be conditioned
upon the Grantee's compliance with the requirements of this Section to the
satisfaction of the Committee.
9. Administration All questions of interpretation and application of this
--------------
Grant shall be determined by the Committee in its discretion, and such
determination shall be final and binding upon all persons. The validity,
construction and effect of this Option shall be determined in accordance with
the laws of the Commonwealth of Pennsylvania, without giving effect to the
principles of conflicts of law thereof.
10. No Stockholder Rights Neither the Grantee nor any person entitled to
---------------------
exercise the Grantee's rights in the event of the Grantee's death shall have any
of the rights and privileges of a stockholder with respect to the Shares subject
to the Option, except to the extent that certificates for such Shares shall have
been issued or transferred on the stock transfer records of the Company upon the
exercise of the Option as provided herein.
11. Termination or Amendment This Option may be terminated or amended, in
------------------------
whole or in part, at any time (a) by the Committee, if the Committee determines
that such termination or amendment is necessary or advisable to bring such
Option into compliance with any federal or state securities law or other
applicable law or regulation (but in no event will any termination or amendment
adversely affect Grantee without his prior written consent), or (b) by written
-3-
<PAGE>
agreement of the Company and the Grantee.
12. Notice Any notice to the Committee provided for in this Grant Letter
------
shall be addressed to it at TeleSpectrum Worldwide Inc., Chief Financial
Officer, and any notice to the Grantee shall be addressed to such Grantee at the
current address shown on the payroll of the Company, or to such other address
the Grantee may designate to the Company in writing. Any notice provided for
hereunder shall be delivered by hand, sent by telecopy or telex or enclosed in a
properly sealed envelope addressed as stated above, registered and deposited,
postage and registry being prepaid, in a post office or branch post office
regularly maintained by the United States Postal Service.
13. Grantee's Securities Law Representations If the Committee shall deem it
----------------------------------------
appropriate by reason of any securities law, it may require that the Grantee
upon exercise, in whole or in part of the Option, represent to the Company and
agree in writing to comply with any such restrictions on the Grantee's
subsequent disposition of such Shares as the Committee shall deem necessary or
advisable as a result of any applicable law, regulation or official
interpretation thereof. The Committee may require that the Share certificates
be inscribed with a legend restricting transfer in accordance with applicable
securities law requirements.
TELESPECTRUM WORLDWIDE INC.
Attest: ________________________ By:______________________________
Accepted By:
Witness: _______________________ _________________________________
Grantee
-4-
<PAGE>
SUBSCRIPTION AGREEMENT
This Subscription Agreement is dated as of March 18, 1998 between
TeleSpectrum Worldwide Inc., a Delaware corporation (the "Company") and Keith E.
Alessi (the "Subscriber").
BACKGROUND
Concurrent with the execution and delivery of this Agreement, the Company
and Subscriber have entered into the Employment Agreement attached as Exhibit A
hereto providing for the employment by the Subscriber as the Chairman, Chief
Executive Officer and President. In connection with such employment of the
Subscriber, the Company desires to sell to Subscriber, and the Subscriber
desires to purchase from the Company shares of common stock, par value $0.01 per
share (the "Common Stock"), and the Company and the Subscriber desire to provide
for such other matters related to the shares of Common Stock purchased by the
Subscriber, pursuant to the terms and conditions of this Agreement.
WITNESSETH
NOW THEREFORE, in consideration of the mutual covenants and promises
contained herein, the parties hereto, each intending to be legally bound hereby,
agree as follows:
SECTION 1.1 ISSUANCE AND SALE OF COMMON STOCK. The Company hereby sells
----------- ---------------------------------
to Subscriber, and Subscriber hereby purchases from the Company, 227,964 shares
of Common Stock (the "Purchased Shares"), for an aggregate purchase price of
$500,000 or $2.1933 per Purchased Share (the "Purchase Price").
SECTION 1.2 REPRESENTATIONS AND WARRANTIES OF THE COMPANIES. The
----------- -----------------------------------------------
Company represents and warrants to Subscriber that:
(a) The Company is a corporation duly incorporated, validly existing and
in good standing under the laws of the State of Delaware.
(b) The Company has all requisite power and authority to execute and
deliver this Agreement and to carry out the transactions contemplated hereby.
The execution and delivery and performance of this Agreement by the Company have
been duly authorized by all requisite corporate action. This Agreement
constitutes a valid and binding agreement of the Company enforceable against it
in accordance with its terms.
<PAGE>
(c) The total authorized capital stock of the Company consists of
200,000,000 shares of Common Stock (of which approximately 25,500,000 shares are
issued and outstanding) and 5,000,000 shares of preferred stock, par value $.01
per share (of which no shares are outstanding). All of the outstanding shares
of Common Stock are duly and validly authorized and issued, fully paid and non-
assessable. None of the Purchased Shares are subject to any preemptive rights.
The Purchased Shares, when issued and delivered against payment thereof in
accordance with this Agreement, will be duly authorized, validly issued, fully
paid and nonassessable
(d) The Company has heretofore delivered or made available to the
Subscriber, in the form filed with the U.S. Securities and Exchange Commission,
its (i) Annual Report on Form 10-K for the fiscal year ended December 31, 1996,
(ii) its proxy statement and annual review relating to its May 28, 1997 meeting
of stockholders, and (iii) its Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1996 (collectively, the "SEC Reports"). The SEC
Reports were prepared substantially in accordance with the requirements of the
Securities Exchange Act of 1934, as amended, as the case may be, and the rules
and regulations promulgated under such act, and did not at the time they were
filed contained any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
SECTION 1.3 REPRESENTATIONS AND WARRANTIES OF SUBSCRIBER. Subscriber
----------- --------------------------------------------
hereby represents, warrants and acknowledges to the Company that:
(a) The Purchased Shares subscribed for hereunder are being acquired
for investment and not with a view to the distribution or resale thereof, the
effect of which is that such Shares must be held indefinitely unless
subsequently registered under the Securities Act of 1933, as amended (the
"Act"), or an exemption from such registration is available.
(b) The Subscriber is an "accredited investor" as such term is
defined in Rule 501(a) of Regulation D promulgated under the Act. The
Subscriber's present and anticipated financial position permits him to purchase
and hold the Purchased Shares indefinitely for investment purposes. Subscriber
acknowledges that he is thoroughly familiar with the business of the Companies
and has made all investigations which he deems necessary or desirable in
connection with the acquisition of the Purchased Shares.
(c) The Company have informed Subscriber that:
(i) the Purchased Shares are not registered under the Act or
under any applicable state securities law and must be held by him
indefinitely unless they are subsequently so registered or unless an
exemption from such registration is available;
2
<PAGE>
(ii) the Company is under no obligation to register the
Purchased Shares under any circumstances; and
(iii) if, at a time when registration is required, it is
legally permissible for him to sell the Purchased Shares privately
without registration, any Securities so sold will be restricted in the
hands of the purchaser.
(d) Subscriber will not make any sale or other transfer of the
Purchased Shares in violation of the Act or any state securities laws.
(e) The Purchased Shares subscribed for hereunder may be deemed a
"security" within the meaning of the act of December 5, 1972 (P.L. 1280, No.
284), known as the Pennsylvania Securities Act of 1972 (the "Pa. Securities
Act"), and will be issued to him on the basis of an exemption from registration
afforded by Section 203(f) of the Pa. Securities Act. Section 207(m) of the Pa.
Securities Act provides that "[e]ach person who accepts an offer to purchase
securities exempted from registration by Section 203(f) . . . directly from an
issuer . . . shall have the right to withdraw his acceptance without incurring
any liability to the seller, underwriter (if any) or any other person, within
two business days from the date of receipt by the issuer of his written binding
contract of purchase or, in the case of a transaction in which there is no
written binding contract of purchase . . . within two business days after he
makes the initial payment for the securities being offered." If Subscriber
desires to withdraw in accordance with the foregoing, he must:
(i) cause a written notice of his intention to withdraw to be
received by the Companies at 443 S. Gulph Road, King of Prussia, PA
19406 or
(ii) deliver such notice of intention to withdraw to a
telegraph office or other message service for transmittal to the
Company at the foregoing address, or
(iii) deposit such notice to withdraw in the United States
mails (either registered or certified mail) addressed to the Company
at the foregoing address,
within two business days from the date this Subscription Agreement as executed
by the undersigned is accepted by the Company. All telegraph, postage or other
transmittal fees shall be paid by the undersigned.
(f) The certificates representing shares subscribed for hereunder may
bear the following legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS
3
<PAGE>
AMENDED, OR UNDER ANY APPLICABLE STATE SECURITIES
LAW. SUCH SHARES HAVE BEEN ACQUIRED FOR INVESTMENT
AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR SUCH SHARES UNDER THE
SECURITIES ACT OF 1933, 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.
SECTION 1.4 PAYMENT OBLIGATION UPON TERMINATION OF EMPLOYMENT FOR
----------- -----------------------------------------------------
CAUSE OR UPON RESIGNATION. In the event that, prior to the first anniversary
- -------------------------
of this Agreement, the Company terminates Subscriber's employment pursuant to
Section 4(c) of the Employment Agreement (a "Cause Termination") or Subscriber
resigns from full-time employment with the Company pursuant to Section 4(d) of
the Employment Agreement (a "Resignation"), on or prior to the 60th calendar day
following such date of termination (the "Payment Date"), the Employee shall pay
the Company an amount equal to $250,000 (the "Differential Amount"), which
amount represents the difference between the fair market value of the Purchased
Shares on the date hereof (which fair market value has been calculated by
reference to the average closing sale price of the Common Stock on the Nasdaq
National Market for the 30 trading days preceding the date hereof) and the
Purchase Price. The obligation of Subscriber to pay any Differential Amount
shall also be evidenced by the Promissory Note delivered by the Subscriber to
the Company on the date hereof, a copy of which is attached as Exhibit B hereto.
SECTION 1.5 CONTENTS OF AGREEMENT. This Agreement sets forth the
----------- ---------------------
entire understanding of the parties hereto with respect to the matters contained
herein and supersedes all prior agreements or understandings among the parties
regarding those matters.
SECTION 1.6 SEVERABILITY; GOVERNING LAW. If any provisions of this
----------- ---------------------------
Agreement shall be determined to be illegal or unenforceable by any court of
law, the remaining provisions shall be severable and enforceable to the maximum
extent possible in accordance with their terms. This Agreement shall be
construed and interpreted in accordance with the laws of the Commonwealth of
Pennsylvania, without regard to its provisions concerning conflict of laws.
SECTION 1.7 COUNTERPARTS. This Agreement may be executed in one or
----------- ------------
more counterparts each of which shall be deemed to be an original, but all of
which taken together shall constitute one and the same instrument. Each such
copy shall be deemed an original, and it
4
<PAGE>
shall not be necessary in making proof of this Agreement to produce or account
for more than one such counterpart.
IN WITNESS WHEREOF, the parties hereto have caused this Subscription
Agreement to be executed as of the date first above written.
TELESPECTRUM WORLDWIDE INC.
By:______________________________
Title:
SUBSCRIBER
_________________________________
Keith E. Alessi
5
<PAGE>
EXHIBIT 10.11
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT
---------------------------------------
This Amendment No. 1 to the Employment Agreement made as of the 21st day of
May, 1996 between TeleSpectrum Worldwide Inc. ("TELESPECTRUM" or the "COMPANY")
and J. Brian O'Neill ("O'NEILL" or the "EMPLOYEE") ("AGREEMENT") is made and is
effective as of January 1, 1998 ("AMENDMENT NO. 1").
WHEREAS:
A. O'Neill is currently employed as TeleSpectrum's Chief Executive Officer
("CEO") pursuant to the Agreement.
B. TeleSpectrum and O'Neill desire to amend the Agreement on the terms and
conditions described below to provide for and state the current rights, duties
and obligations, and the added terms that will exist if TeleSpectrum employs
another person as CEO.
NOW, THEREFORE, in consideration of the mutual covenants and promises
stated below, TeleSpectrum and O'Neill, intending to be legally bound, AGREE as
follows:
1. CONSIDERATION: Amendment No. 1 is made in consideration for the
-------------
promises stated below and particularly for O'Neill's continued employment and
O'Neill's agreement to allow TeleSpectrum to consider employing another person
as CEO during the Employment Term and despite the existence of the Agreement,
and his continued, diligent service and employment while TeleSpectrum considers
employing another person as CEO.
2. PERFORMANCE OF AMENDMENT NO. 1:
------------------------------
2.1 Performance of the rights, duties and obligations of Sections 3
through 4.2 below is conditioned on TeleSpectrum employing a person other than
O'Neill as CEO during the Employment Term of the Agreement. If for any reason
TeleSpectrum employs a person other than O'Neill as CEO during the Employment
Term, then performance of the rights, duties and obligations of Sections 3
through 4.2 below will be required immediately from the date on which such
person is employed as CEO.
2.2 Performance under Sections 5 through 9 below is required
immediately as of the effective date of this Amendment No. 1 first written
above.
Amendment No. 1 to Employment Agreement ________ ________
J.B.O'N. TWI
<PAGE>
3. MODIFICATION OF VESTING AND EXERCISE OF INCENTIVE OPTIONS IN SECTION
--------------------------------------------------------------------
4(c): If TeleSpectrum gives Employee notice of termination of the Agreement,
- ----
for any reason including those stated in Sections 5(a) through 5(b) or 6 of the
Agreement, or if TeleSpectrum seeks in any way to terminate or materially modify
its obligations under the Agreement without Employee's express written consent,
then each outstanding option described in Section 4(c) of the Agreement will
immediately be fully vested, and TeleSpectrum waives any restrictions,
contractual or otherwise, on Employee's immediate ability to exercise such
options, including but not limited to the ninety (90) day restriction on such
transactions.
4. MODIFICATIONS TO TERMINATION WITH COMPENSATION IN SECTION 6:
-----------------------------------------------------------
4.1 The provision in Section 6 of the Agreement concerning the
reduction of TeleSpectrum's "obligations by and to the extent of income earned
by Employee through employment with another employer other than Company" is
modified so that such obligations of TeleSpectrum shall NOT be reduced in any
amount or in under any circumstances, including but not limited to income earned
by Employee through employment with another employer other than the Company.
4.2 If Employee's employment as CEO is terminated for any reason,
including those described in Sections 5(a) through (b) or 6 of the Agreement, or
if TeleSpectrum seeks in any way to terminate or modify its obligations under
the Agreement without Employee's express written consent, then: (i) instead of
the Salary described in Sections 4(a) and 6 of the Agreement, on a biweekly
basis from the effective date of the termination of Employee's employment as CEO
until May 20, 2000, TeleSpectrum will pay Employee $5,769.23, minus all payroll
deductions required by law or authorized by Employee; and (ii) all options to
purchase shares of TeleSpectrum's common stock that have been granted to
Employee will immediately be vested, and TeleSpectrum waives any restrictions,
contractual or otherwise, on the immediate availability to exercise such
options, including but not limited to the ninety (90) day restriction on such
transactions.
5. MODIFICATION OF NOTICES IN SECTION 11(d): Copies of all notices
----------------------------------------
required to be given to Employee under the Agreement shall also be sent to:
Alexander D. Bono, Esquire
Blank Rome Comisky & McCauley LLP
One Logan Square
Philadelphia, PA 19103-6998
215-569-5617
215-569-5546 (Fax)
Amendment No. 1 to Employment Agreement ________ ________
J.B.O'N. TWI
<PAGE>
6. PAYMENT OF COUNSEL FEES: TeleSpectrum will pay any reasonable legal
-----------------------
fees and expenses that Employee incurs in connection with this Amendment No. 1.
This payment will be made upon Employee's presentation of supporting
documentation for the legal services provided and expenses incurred.
7. RATIFICATION OF OTHER TERMS: All other terms in the Agreement are
---------------------------
ratified and will remain in full force and effect.
8. COUNTERPART: This Amendment No. 1 can be signed in counterpart.
-----------
IN WITNESS WHEREOF, TeleSpectrum and Employee, intending to be legally
bound, have signed this Amendment No. 1 to Employment Agreement as of the date
first written above.
TELESPECTRUM WORLDWIDE INC.
By: ____________________________
Name: ____________________________
Title: ____________________________
____________________________
J. BRIAN O'NEILL
Amendment No. 1 to Employment Agreement 3
Amendment No. 1 to Employment Agreement ________ ________
J.B.O'N. TWI
<PAGE>
EXHIBIT 10.12
EMPLOYMENT AGREEMENT
--------------------
This Agreement is made as of this 28th day of August 1997 between
TeleSpectrum Worldwide Inc., a Delaware corporation (the "Company"), and
Jonathan P. Robinson (the "Employee").
RECITALS
--------
The Company desires to employ the Employee, and the Employee desires to
provide services to the Company, upon the terms and conditions hereinafter set
forth.
WITNESSETH:
----------
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, the parties hereto, each intending to be legally bound hereby,
agree as follows:
1. Employment. During the term of the Employee's employment under this
----------
Agreement (the "Employment Term"), the Employee shall be the Chief Operating
Officer of the Company and shall perform such duties consistent with such office
and as are assigned by the Company's Chief Executive Officer or Board of
Directors. Except for periodic travel incident to Employee's duties hereunder,
Employee shall not be required to perform his duties hereunder outside a 35 mile
radius of the Company's current principal office.
(b) Employee represents to the Company that he is not subject or a party to
any employment agreement, non-competition covenant, non-disclosure agreement or
any other agreement, covenant, understanding or restriction of any nature which
would prohibit Employee from executing this Agreement and performing fully his
duties and responsibilities hereunder.
2. Term.
----
The Employment Term shall begin on the date hereof and shall continue until
August 27, 1998 and shall automatically continue for subsequent one year terms
unless notice is given by either party within thirty days of the end of the then
existing term.
3. Compensation for Employment.
---------------------------
(a) The basic annual rate of compensation of the Employee for his
employment services to the Company during the Employment Term shall be $200,000
(such amount is referred to herein as the "Salary"), which the Company shall pay
to the Employee in equal installments in accordance with the normal payroll
policies of the Company.
<PAGE>
(b) The Employee shall be eligible to receive annual bonuses in such
amounts as approved by the Compensation Committee of the Board of Directors and
participate in such bonus programs as are established for executive officers of
the Company.
(c) Subject to the approval of the Compensation Committee of the Company's
Board of Directors, the Company shall grant Employee an incentive stock option
to purchase 50,000 shares of the Company's common stock, par value $.01 per
share (the "Common Stock") with an exercise price equal to the fair market value
on the date of grant. Such option will be granted under the Company's 1996
Equity Compensation Plan and will vest in four equal amounts (each representing
25% of the option) beginning on the date of grant and on the next three
successive annual anniversary dates of the date of grant; provided, however,
-------- -------
that such option as well as an option for 50,000 shares granted in August 1996
and amended in September 1997 shall automatically become fully vested upon a
termination of the Employment Term pursuant to Sections 4(a), 4(b) or 5. In
addition, such options shall not expire upon termination of employment pursuant
to sections 4a, 4b or 4c, but may be exercised thereafter until the 10th
anniversary of the date of grant.
(d) During the Employment Term, the Company shall provide the Employee with
fringe benefits that are substantially equivalent to the fringe benefits
specified on Exhibit "A" (the "Fringe Benefits") at such levels that are
provided to the senior officers of the Company.
(e) All amounts payable by the Company under this Section 3 shall be
subject to proration based upon the number of days in each such year that the
Employee was employed by the Company hereunder. The Employee's Salary will be
reviewed from time to time for possible increases, taking into account
Employee's responsibilities, the profitability of the Company, compensation of
other executives of the Company, increases in cost of living and other pertinent
factors. In light of such review, the Company in its sole discretion, may
increase the Salary but not decrease the Salary during the Employment Term.
(f) The Company shall reimburse the Employee for those expenses that are
incurred by him in connection with the performance of his duties under this
Agreement, are reasonably related to the Company's business or that have been
approved in writing by the Company's Board of Directors.
4. Termination Without Compensation.
--------------------------------
(a) Total Disability. If the Employee becomes totally disabled (as defined
----------------
below), the Company may terminate the Employment Term by notice to the Employee,
and as of the termination date, the Company shall have no further liability or
obligation to the Employee hereunder except as follows: the Employee shall
receive (i) unpaid Salary, Base Bonus and Fringe Benefits that have accrued
through the date of termination; and (ii) whatever benefits that he may be
entitled to receive under any then existing disability benefit plans of the
Company, including any such plans included in the Fringe Benefits. For the
purposes hereof, the Employee shall be deemed to be "totally disabled" if the
Employee is considered totally disabled under any group disability plan
maintained
-2-
<PAGE>
by the Company and in effect at that time, or in the absence of any such plan,
under applicable Social Security regulations. In the event of any dispute under
this Section 4(a), the Employee shall submit to a physical examination by a
licensed physician mutually satisfactory to the Company and the Employee, the
cost of such examination to be paid by the Company, and the determination of
such physician shall be determinative.
(b) Death. If the Employee dies, this Employment Agreement shall terminate
-----
on the date of death, and thereafter the Company shall not have any further
liability or obligation to the Employee, his executors, administrators, heirs,
assigns or any other person claiming under or through his except that the
Employee's estate shall receive any unpaid Salary, Base Bonus and Fringe
Benefits that have accrued through the date of termination.
(c) Cause. The Company may terminate the Employment Term for "cause" by
-----
giving the Employee 30 days' notice of the termination date, and as of the
termination date, the Company shall not have any further liability or obligation
to the Employee, except that the Employee shall receive any unpaid Salary, Base
Bonus and Fringe Benefits that have accrued through the date of termination.
For purposes of this Agreement, "cause" shall mean the Employee's (i) breach of
(other than by reason of illness, injury or incapacity) of any of the material
terms or provisions of this Agreement, (ii) the willful and substantial failure
to comply fully with the lawful directives of the Board, (iii) substantial and
willful misconduct, (iv) material neglect of the Company's business, (v)
conviction of a felony or other crime involving moral turpitude, (vi)
misappropriation of funds or (vii) habitual abuse of alcohol, narcotics or other
controlled substances. In the case of a termination for "cause," the notice of
termination shall specify the basis for the Company's determination of "cause";
provided, however, that in the case of conduct described in clauses (i), (ii),
- -------- -------
(iii) and (iv) above, such conduct shall not constitute "cause" for the purposes
of this paragraph (c) unless (A) the Board shall have given the Employee notice
setting forth with specificity (1) the conduct deemed to constitute "cause," (2)
reasonable action that would remedy the objectionable conduct, and (3) a
reasonable time (not less than 5 days) within which the Employee may take such
remedial action, and (B) the Employee shall not have taken such specified
remedial action within such specified reasonable time.
5. Termination With Compensation. The Company shall have the right to
-----------------------------
terminate the Employment Term without cause at any time by giving the Employee
30 days' notice of the termination date. In addition, the Employee may
terminate his services under this Agreement "for good reason" by giving the
Board of Directors of the Company twenty (20) business days prior written notice
of such intent, which notice shall set forth in reasonable detail the facts and
circumstances which constitute "for good reason". In the event of a termination
of the Employment Term pursuant to this Section 5, the Company shall continue to
pay to the Employee the Salary and continue to provide the Fringe Benefits
listed in paragraph (a) of Exhibit A hereto for a period ending nine months
after the date of any such termination. The Salary to be paid and the Fringe
Benefits to be provided under this Section 5 are referred to herein as the
"Termination Compensation." The Employee shall not be entitled to any
Termination Compensation unless the Employee executes and delivers to the
Company after a notice of termination a release in a form
-3-
<PAGE>
satisfactory to the Company in its sole discretion by which the Employee
releases the Company from any obligations and liabilities of any type whatsoever
under this Agreement, except for the Company's obligations with respect to the
Termination Compensation. The parties hereto acknowledge that the Termination
Compensation to be provided under this Section 5 is to be provided in
consideration for the above-specified release. The Company's obligations under
this Section 5 shall be reduced by and to the extent of any income earned by the
Employee through employment with an employer other than the Company that is
received by or accrued for the benefit of the Employee during the remainder of
the Employment Term; provided, however, that such obligations shall only be so
-------- -------
reduced by any such earnings if the Company, upon written request from the
Employee, grants a waiver of its rights under Section 6 hereunder. For purposes
hereof, the term "for good reason" shall mean (i) any material breach by the
Company of any provision of this Agreement which is not fully addressed within
thirty (30) days after written receipt of notice of a breach or (ii) (A) on or
after the date any "person" (as defined in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") is or becomes a
"beneficial owner" (as defined in Rule 13d-3 promulgated under the Exchange
Act), directly or indirectly, of securities of the Company representing 50% or
more of the voting power of the then outstanding securities of the Company (such
event is referred to as a "change in control") and (B) without Employee's
express written consent, any of the following shall occur: (1) the assignment to
Employee of any duties inconsistent with Employee's positions, duties,
responsibilities and status with Employee immediately prior to a change in
control; (2) a change in Employee's reporting responsibilities, titles or
offices as in effect immediately prior to a change in control; (3) any removal
of Employee from, or any failure to re-elect Employee to the office of Chief
Operating Officer, except in connection with a termination of employment
pursuant to this Agreement.
6. Agreement Not to Compete.
------------------------
(a) The Employee covenants that for the period beginning on the
termination of Employee's employment hereunder and ending on the second
anniversary of the date of such termination of employment hereunder (the
"Restricted Period"), he will not, directly or indirectly, own, manage, operate,
join, control, finance or participate in the ownership, management, operation,
control or financing of, or be connected as a partner, principal, agent,
representative, consultant or otherwise with or use or permit his name to be
used in connection with, any business or enterprise engaged directly or
indirectly in competition with the business conducted by the Company at any time
during such period within any portion of the United States in the direct
marketing business which includes inbound and outbound telemarketing,
fulfillment, direct mail, customer retention, market research and interactive
voice response (the "Business"). It is recognized by the Employee and the
Company that the Business is and is expected to continue to be conducted
throughout the United States and that more narrow geographical limitations of
any nature on this non-competition covenant (and the non-solicitation covenant
set forth in Section 6(b)) are therefore not appropriate. The foregoing
restriction shall not be construed to prohibit the ownership by Employee as a
passive investment of not more than five percent (5%) of any class of securities
of any corporation which is engaged in any of the foregoing businesses having a
class of securities registered pursuant to the Securities Exchange Act of 1934.
-4-
<PAGE>
(b) The Employee further covenants that during the Restricted Period,
he will not, either directly or indirectly, (i) call on or solicit any person
who or which has been a customer of the Company with respect to the activities
prohibited by Section 6(a) or (ii) solicit the employment of any person who is
employed by the Company during such period on a full or part-time basis.
(c) The Employee recognizes and acknowledges that by reason of his
employment by the Company he has had access to Confidential Information relating
to the Business. The Employee acknowledges that such Confidential Information is
a valuable and unique asset and covenants that he will not disclose any such
Confidential Information after the date hereof to any person for any reason
whatsoever, unless such information (i) is in the public domain through no
wrongful act of Employee, (ii) has been rightfully received from a third party
without restriction and without breach of this Agreement or (iii) except as may
be required by law.
(d) The Employee acknowledges that the restrictions contained in this
Section 6 are reasonable and necessary to protect the legitimate interests of
the Company, and that any violation will result in irreparable injury to the
Company.
(e) The Employee agrees that the Company shall be entitled to
preliminary and permanent injunctive relief, without the necessity of proving
actual damages, as well as an equitable accounting of all earnings, profits and
other benefits arising from any violation of this Section 6, which rights shall
be cumulative and in addition to any other rights or remedies to which the
Company may be entitled. In the event that any of the provisions of this
Section 6 should ever be adjudicated to exceed the time, geographic, product or
service, or other limitations permitted by applicable law in any jurisdiction,
then such provisions shall be deemed reformed in such jurisdiction to the
maximum time, geographic, product or service, or other limitations permitted by
applicable law.
(f) The covenants set forth in this Section 6 shall be in addition to
not in limitation of any similar covenants set forth in the Purchase Agreement.
7. Inventions, Designs and Product Developments.
--------------------------------------------
All inventions, innovations, designs, ideas and product developments,
developed or conceived by the Employee, solely or jointly with others, whether
or not patentable or copyrightable, at any time during the Employment Term or
during his employment by the Company prior to the commencement of the Employment
Term and that relate to the actual or planned business activities of the Company
(collectively, the "Developments") and all of the Employee's right, title and
interest therein, shall be the exclusive property of the Company. The Employee
hereby assigns, transfers and conveys to the Company all of his right, title and
interest in and to any and all such Developments. The Employee shall disclose
fully, as soon as practicable and in writing, all material and substantial
Developments to the Board. At any time and from time to time, upon the request
of the Company, the Employee shall execute and deliver to the Company any and
all instruments, documents and papers, give evidence and do any and all other
reasonable acts that, in the opinion
-5-
<PAGE>
counsel for the Company, are or may be necessary or desirable to document such
transfer or to enable the Company to file and prosecute applications for and to
acquire, maintain and enforce any and all patents, trademark registrations or
copyrights under United States or foreign law with respect to any such
Developments or to obtain any extension, validation, re-issue, continuance or
renewal of any such patent, trademark or copyright. The Company will be
responsible for the preparation of any such instruments, documents and papers
and for the prosecution of any such proceedings and will reimburse the Employee
for all reasonable expenses incurred by his in compliance with the provisions of
this Section 7.
8. Confidential Information.
------------------------
(a) The Employee has had and will have possession of or access to
confidential information relating to the business of the Company, including
writings, equipment, processes, drawings, reports, manuals, invention records,
financial information, business plans, customer lists, the identity of or other
facts relating to prospective customers, inventory lists, arrangements with
suppliers and customers, computer programs, or other material embodying trade
secrets, customer or product information or technical or business information of
the Company. All such information, other than any information that is in the
public domain through no act or omission of the Employee or which he is
authorized to disclose, is referred to collectively as the "Company
Information." During and after the Employment Term, the Employee shall not (i)
use or exploit in any manner the Company Information for himself or any person,
partnership, association, corporation or other entity other than the Company,
(ii) remove any Company Information, or any reproduction thereof, from the
possession or control of the Company or (iii) treat Company Information
otherwise than in a confidential manner.
(b) All Company Information developed, created or maintained by the
Employee, alone or with others while employed by the Company, and all Company
Information maintained by the Employee thereafter, shall remain at all times the
exclusive property of the Company. The Employee shall return to the Company all
Company Information, and reproductions thereof, whether prepared by his or
others, that are in his possession immediately upon request and in any event
upon the completion of his employment by the Company.
9. Remedies.
--------
The Employee expressly acknowledges that the remedy at law for any breach
of Sections 6, 7 and 8 will be inadequate and that upon any such breach or
threatened breach, the Company shall be entitled as a matter of right to
injunctive relief in any court of competent jurisdiction, in equity or
otherwise, and to enforce the specific performance of the Employee's obligations
under these provisions without the necessity of proving the actual damage to the
Company or the inadequacy of a legal remedy. Subject to the remainder of this
Section 9, the rights conferred upon the Company by the preceding sentence
shall not be exclusive of, but shall be in addition to, any other rights or
remedies which the Company may have at law, in equity or otherwise.
-6-
<PAGE>
10. General.
-------
(a) Governing Law. This Agreement is made and entered into in the
-------------
Commonwealth of Pennsylvania, and shall in all respects be interpreted, enforced
and governed by and under the laws of the Commonwealth. Any dispute,
controversy or claim which relates in any way to this Agreement and which has
not been resolved by the parties shall be determined and settled in Pennsylvania
in accordance with Arbitration rules of the American Arbitration Association.
The arbitration hearing shall be held in Pennsylvania unless the Company and
Employee mutually agree to another location. The arbitration shall be heard by
a panel of three arbitrators, each of whom shall be experienced in the
resolution of disputes, controversies or claims relating to employment issues.
One such arbitrator shall be selected by Employee, one such arbitrator shall be
selected by the Company, and one such arbitrator shall be selected by the
arbitrators selected by the Company and Employee. Resolution of disputes,
controversies or claims shall be determined by a majority vote of the
arbitration panel. The Company shall bear all fees, costs and expenses of the
arbitration, and the legal expenses and attorneys' fees of each party, and costs
of all experts and witnesses, unless the arbitration award is granted to the
Company, in which event, the Company and Employee shall share equally all fees,
costs and expenses of the arbitration, including reasonable attorney's fees. Any
award rendered shall be final and conclusive upon the parties and any judgment
thereon may be enforced in any court having jurisdiction, unless otherwise
provided by Pennsylvania law. The party submitting such dispute shall request
the American Arbitration Association to allow the parties (i) to request
reasonable discovery pursuant to the rules then in effect under the Federal
Rules of Civil Procedure (as used in the United States District Court in the
Eastern District of Pennsylvania) for a period not to exceed 60 days prior to
such arbitration and (ii) to require the testimony to be transcribed. The fact
that arbitration has commenced shall not impair the exercise of any termination
rights in accordance with the provisions of this Agreement.
(b) Company. For purposes of Sections 6, 7, 8 and 9, the term "Company"
-------
shall be deemed to include any incorporated or unincorporated entities that are
controlled, directly or indirectly, by the Company through ownership, agreement
or otherwise.
(c) Binding Effect. All of the terms and provisions of this Agreement
--------------
shall be binding upon and inure to the benefit and be enforceable by the
respective heirs, representatives, successors (including any successor as a
result of a merger or similar reorganization) and assigns of the parties hereto,
except that the duties and responsibilities of the Employee hereunder are of a
personal nature and shall not be assignable in whole or in part by the Employee.
(d) Notices. All notices required to be given under this Agreement shall
-------
be in writing and shall be deemed to have been given when personally delivered
or when mailed by registered or certified mail, postage prepaid, return receipt
requested, or when sent by Federal Express or other overnight delivery service,
addressed as follows:
-7-
<PAGE>
TO EMPLOYEE:
Mr. Jonathan P. Robinson
TO THE COMPANY:
443 S. Gulph Road
King of Prussia, PA 19406
Fax: 610-962-5109
Attn: Chairman of the Board
With a copy to:
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, PA 19103
Fax: 215-963-5299
Attn: Stephen M. Goodman, Esquire
(e) Entire Agreement; Modification. This Agreement constitutes the entire
------------------------------
agreement of the parties hereto with respect to the subject matter hereof and
may not be modified or amended in any way except in writing by the parties
hereto.
(f) Duration. Notwithstanding the termination of the Employment Term and
--------
of the Employee's employment by the Company, this Agreement shall continue to
bind the parties for so long as any obligations remain under the terms of this
Agreement.
(g) Waiver. No waiver of any breach of this Agreement shall be construed
------
to be a waiver as to succeeding breaches.
(h) Severability. If any provision of this Agreement or application
-------------
thereof to anyone under any circumstances is adjudicated to be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect any other provisions or applications of this Agreement
-8-
<PAGE>
which can be given effect without the invalid or unenforceable provision or
application and shall not invalidate or render unenforceable such provision in
any other jurisdiction.
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound, have
hereunto duly executed this Agreement as of the day and year first written
above.
TELESPECTRUM WORLDWIDE INC.
By:__________________________
Chairman of the Board
_____________________________
JONATHAN P. ROBINSON
-9-
<PAGE>
EXHIBIT A
FRINGE BENEFITS
---------------
(a) Health insurance and short-term and long-term disability insurance for
the Employee, with the same benefits generally provided to the Company's most
senior executive employees from time to time during the Employment Term.
(b) Eligibility to participate in any 401(k) savings plans maintained by
the Company during the Employment Term.
(c) Term life insurance.
(d) Eligibility to participate in any employee stock option plan maintained
by the Company during the Employment Term.
(e) Reimbursement, in accordance with the Company's policies, upon proper
accounting, of the monthly fee of a mobile telephone and charges for any
business telephone calls made on the Employee's personal telephone.
(f) Paid holidays in accordance with the Company's policies.
(g) Paid vacation of four weeks per year.
<PAGE>
Exhibit 10.15
Amendment No. 1 to 1996 Equity Compensation Plan
Section 3(a) of the Plan is hereby amended by replacing the word
"2,300,000" in the first sentence of such Section with $5,000,000".
<PAGE>
EXHIBIT 10.17
- --------------------------------------------------------------------------------
ASSET PURCHASE AGREEMENT
by and between
TELESPECTRUM WORLDWIDE INC.,
(a Delaware corporation),
FIRSTSERVICE CORPORATION,
(an Ontario corporation),
DDS DYMENT DISTRIBUTION SERVICES LTD.
(an Ontario corporation),
DDS HARRIS, LIMITED
(a Delaware corporation),
and
DDS HARRIS FULFILLMENT, LIMITED
(a Delaware corporation).
Dated as of March 10, 1998
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
-----------------
Section Page
------- ----
1. Definitions............................................. -1-
-----------
2. Purchase and Sale of the Business and Purchased Assets.. -6-
------------------------------------------------------
3. Closing................................................. -9-
-------
4. Representations and Warranties of the Seller............ -10-
--------------------------------------------
5. Representations and Warranties of the Buyer............. -19-
-------------------------------------------
6. Certain Agreements...................................... -19-
------------------
7. Conditions of the Business Pending Closing............. -22-
------------------------------------------
8. Conditions Precedent to the Obligations of the Buyer.... -23-
----------------------------------------------------
9. Conditions Precedent to the Obligations of the Seller... -23-
-----------------------------------------------------
10. Indemnification....................................... -24-
---------------
11. Termination........................................... -26-
-----------
12. Payment of Expenses................................... -27-
-------------------
13. Contents of Agreement................................. -27-
---------------------
14. Amendment, Parties in Interest, Assignment, Etc....... -27-
-----------------------------------------------
15. Interpretation........................................ -27-
--------------
16. Notices............................................... -27-
-------
17. Remedies; No Third-Party Beneficiaries................ -29-
--------------------------------------
18. Communications........................................ -29-
--------------
19. Governing Law; Waiver of Jury Trial................... -29-
-----------------------------------
20. Counterparts.......................................... -29-
------------
21. Consent to Jurisdiction; Service of Process, etc...... -29-
-------------------------------------------------
22. Further Assurances.................................... -30-
------------------
<PAGE>
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT is made as of March [10], 1998, by and among
TeleSpectrum Worldwide Inc., a Delaware corporation (the "Seller"), FirstService
Corporation, an Ontario corporation ("FirstService"), DDS Dyment Distribution
Services Ltd., an Ontario corporation ("DDS"), DDS Harris, Limited, a Delaware
corporation ("DHL"), DDS Harris Fulfillment, Limited, a Delaware corporation
("DHFL"). FirstService, DDS, DHL and DHFL are sometimes collectively referred
to herein as the "Buyer".
Background
----------
Through its Harris Division (the "Division"), the Seller is engaged in the
business of the provision of direct mail and fulfillment services. The Buyer
desires to purchase all of the assets of the Seller used or held for use by it
exclusively in conducting the Division's business on a going concern basis and
the Seller desires such assets to be sold, all on the terms and subject to the
conditions of this Agreement.
NOW, THEREFORE, in consideration of and reliance on the respective
representations, warranties and covenants contained herein and intending to be
legally bound hereby, the parties hereto agree as follows:
1. Definitions. For convenience, certain terms used in more than one part of
-----------
this Agreement are listed in alphabetical order and defined or referred to below
(such terms as well as any other terms defined elsewhere in this Agreement shall
be equally applicable to both the singular and plural forms of the terms
defined).
"Accounts Receivable" means as of any date any trade accounts receivable
(billed and unbilled), notes receivable, bid or performance deposits, employee
advances and other miscellaneous receivables included in the Purchased Assets.
"Affiliates" means, with respect to a particular party, Persons
controlling, controlled by or under common control with that party, as well as
the officers, directors and majority-owned Persons of that party and of its
other Affiliates. For the purposes of the foregoing, ownership, directly or
indirectly, of 20% or more of the voting stock or other equity interest shall be
deemed to constitute control.
"Agreement" means this Agreement and the Exhibits and Disclosure Letter
hereto.
"Assumed Liabilities" is defined in Section 2.3.
"Assets" means all of the assets, properties, goodwill and rights of every
kind and description, real and personal, tangible and intangible (including
goodwill), wherever situated and whether or not reflected in the Financial
Statements, that are owned or possessed by the Division and used or held for use
in connection with the operation of the Business.
"Balance Sheet" means the balance sheet of the Division as at December 31,
1997.
<PAGE>
"Balance Sheet Date" means December 31, 1997.
"Benefit Plans" means all employee benefit plans of Seller within the
meaning of Section 3(3) of ERISA and any related or separate Contracts, plans,
trusts, programs, policies, arrangements, practices, customs and understandings,
in each case whether formal or informal, that provide benefits so described in
ERISA Sections 3(1) or 3(2) to any present or former employee of Seller, or
present or former beneficiary, dependent or assignee of any such employee or
former employee, including, without limitation, all incentive, bonus, deferred
compensation, vacation, holiday, medical, disability, share purchase or other
similar plans, policies, programs, practices or arrangements.
"Business"means the entire existing business conducted by the Division and
the operations, facilities and other Assets of the Seller that are used or held
for use exclusively in conducting such business.
"Buyer" is defined in the preamble.
"Charter Documents" means an entity's certificate or articles of
incorporation, certificate defining the rights and preferences of securities,
articles of organization, general or limited partnership agreement, operating
agreement, certificate of limited partnership, joint venture agreement or
similar document governing the entity.
"Closing" is defined in Section 3.1.
"Closing Date" is defined in Section 3.1.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means any confidential information or trade
secrets of the Seller which are exclusively related to the Business and treated
as confidential by the Seller.
"Contract" means any written contract, agreement, lease, plan, instrument
or other document or commitment, arrangement, undertaking, practice or
authorization that is binding on any Person or its property under applicable
law.
"Conveyance Documents" means collectively the Bill of Sale and Assignment
and Assumption Agreement in substantially the form attached as Exhibit A hereto.
"Court Order" means any judgment, decree, injunction, order or ruling of
any Federal, state, local or foreign court or governmental or regulatory body or
arbitrator or authority that is binding on any Person or its property under
applicable law.
"Damages" means any Liabilities, claims, demands, judgments, settlement
payments, losses, costs, fees, liens, penalties, interest, damages and expenses
whatsoever (including reasonable attorneys', consultants' and other professional
fees and disbursements of every kind, nature and description incurred by such
Person in connection therewith), but excluding any consequential damages.
"Default" means (a) a breach, default or violation, (b) the occurrence of
an event that with
-2-
<PAGE>
or without the passage of time or the giving of notice, or both, would
constitute a breach, default or violation, cause an Encumbrance to arise or give
rise to a right to receive Damages or (c) with respect to any Contract, the
occurrence of an event that with or without the passage of time or the giving of
notice, or both, would give rise to a right of termination, renegotiation or
acceleration or a right to receive Damages.
"Disclosure Letter" means the Disclosure Letter of the Seller delivered
pursuant to Section 4.
"Division" is defined in the Background Section of this Agreement.
"Encumbrances" means any lien, mortgage, security interest, pledge,
restriction, defect of title or other claim, charge or encumbrance of any nature
whatsoever.
"Environmental Condition" is defined in Section 4.13(b).
"Environmental Law" is defined in Section 4.13(b).
"Employment Agreement" means the mutually acceptable Employment Agreement
between the Buyer and Bruce Shorle in substantially the form attached as Exhibit
B hereto.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Escrow Agreement" means the Escrow Agreement among the Buyer and the
Seller in substantially the form attached as Exhibit C hereto.
"Excluded Assets" is defined in Section 2.2.
"Excluded Liabilities" is defined in Section 2.4.
"Financial Statements" is defined in Section 4.4.
"GAAP" means United States generally accepted accounting principles.
"Hazardous Substances" means (i) any "hazardous substance" as defined by
the federal Comprehensive Environmental Response, Compensation and Liability
Act, 42 U.S.C. (S)(S) 9601 et seq., (ii) any "extremely hazardous substance,"
-- ----
"hazardous chemical," or "toxic chemical" as those terms are defined by the
federal Emergency Planning and Community Right-to-Know Act, 42 U.S.C. (S)(S)
11001 et seq., (iii) any "hazardous waste," as defined under the federal Solid
-- ----
Waste Disposal Act, as amended by the Resource Conservation and Recovery Act, 42
U.S.C. (S)(S) 6901 et seq., (iv) any "pollutant," as defined under the federal
-- ----
Water Pollution Control Act, 33 U.S.C. (S)(S) 1251 et seq., (v) any pesticide as
-- ----
defined by the federal Insecticide, Fungicide, and Rodenticide Act 7 U.S.C.
(S)(S) 136 et seq., (vi) any source material, special nuclear material, or
-- ----
byproduct material as defined by the Atomic Energy Act of 1954 42 U.S.C. (S)(S)
2011 et seq., as any of such laws in clauses (i) through (vi) may be amended
-- ----
from time to time, and (vii) any regulated substance or waste under any Laws or
Court Orders that currently exist.
"Holdback" means the sum of $250,000 to be paid to Escrow Agent pursuant to
the terms of the Escrow Agreement.
-3-
<PAGE>
"Indemnified Buyer Party" is defined in Section 10.1.
"Indemnified Seller Party" is defined in Section 10.2.
"Independent Accounting Firm" is defined in Section 2.7.
"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements thereto,
and all patents, patent applications and patent disclosures, together with all
reissuances, continuances, continuations in part, revisions, examinations and
reexaminations thereof (b) all trademarks, service marks, trade dress, logos,
trade names together with all translations, adaptations, derivations, and
combinations thereof and including the goodwill continuation as associated
therewith, and all applications, registrations and renewals in connection
therewith; (c) all copyrightable works, all copyrights and all applications,
registrations and renewal in connection therewith; (d) all mask works and all
applications, registrations and renewals in connection therewith; (e) all trade
secrets and confidential business information (including ideas, research and
development, know how, formulas, techniques, customers and supplier lists,
pricing and cost information and business and marketing plans and proposals; (f)
all computer software (including data and related documentation); (g) all other
proprietary rights; and (g) all copies and tangible embodiments (in whatever
form or medium).
"Inventory" means any inventory, including raw materials, supplies, work in
process and finished goods.
"Knowledge of the Seller" means the actual knowledge, after reasonable
investigation, of any of the Seller's current Chief Executive Officer (J. Brian
O'Neill), Chief Financial Officer (Richard C. Schwenk) or Director of
Acquisitions (Kevin Mullin) or its President of the Division (Bruce Shorle).
"Law" means any statute, law, common law, ordinance, regulation, order,
rule or other provision having the force or effect of law, of any Federal,
state, local, foreign or other governmental agency or body or of any other type
of regulatory body, including those covering environmental, energy, safety,
health, transportation, bribery, record keeping, zoning, antidiscrimination,
antitrust, wage and hour, and price and wage control matters, in each case as
presently in effect.
"Liability" means any direct or indirect liability, indebtedness,
obligation, expense, claim, loss, damage, deficiency, guaranty or endorsement of
or by any Person, known or unknown, absolute or contingent, accrued or
unaccrued, due or to become due, liquidated or unliquidated, asserted or
unasserted including any liability for Taxes.
"Litigation" means any lawsuit, action, arbitration, administrative or
other proceeding or criminal prosecution or, to the knowledge of an applicable
Party, any governmental investigation or inquiry.
"Material Adverse Effect" means a material adverse effect on the Division's
financial condition or results of operations.
-4-
<PAGE>
"Ordinary course" or "ordinary course of business" means the ordinary
course of business that is consistent in nature, frequency and, where relevant,
amount with past practices of the Division.
"Permit" means any governmental permit, license, registration, certificate
of occupancy, approval and other authorization.
"Person" means any natural person, corporation, partnership,
proprietorship, association, trust or other legal entity, including a
governmental entity (or any department, agency or political subdivision
thereof).
"Personal Property Leases" is defined in Section 4.8.
"Purchase Price" is defined in Section 2.5.
"Purchased Assets" are defined in Section 2.1.
"Real Estate Leases" is defined in Section 4.6.
"Real Property" is defined in Section 4.6.
"Required Consents" is defined in Section 4.3.
"Tax" means any federal, state, local or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental, customs, duties, capital, franchise, profits,
withholding, social security (or similar), unemployment, disability, real
property, personal property, sales, transfer, use, registration, value added,
alternative or add-on minimum, or other tax of any kind whatsoever including any
interest, penalty or addition thereto whether disputed or not.
"Tax Return" means any return, declaration report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment hereof.
"Trademarks" means registered trademarks, registered service marks,
trademark and service mark applications and unregistered trademarks and service
marks.
"Transaction Documents" means this Agreement, the Disclosure Letter, the
Escrow Agreement, the Employment Agreement and the Conveyance Documents.
"Transactions" means the purchase and sale of the Purchased Assets and the
consummation of the other transactions contemplated by this Agreement.
-5-
<PAGE>
2. Purchase and Sale of the Business and Purchased Assets.
------------------------------------------------------
2.1 The Purchased Assets. The Seller, subject to the terms and conditions
--------------------
of this Agreement, shall sell, transfer, convey and deliver to the Buyer all of
its right, title and interest in all of the Assets (collectively, the "Purchased
Assets") that are listed on Exhibit 2.1 hereto.
2.2 The Excluded Assets. Notwithstanding anything to the contrary in
-------------------
Section 2.1, the Assets (collectively, the "Excluded Assets") of the Seller
that are not listed on Exhibit 2.1 hereto are not included in the Purchased
Assets.
2.3 Assumed Liabilities. At the Closing, the Buyer shall assume and
-------------------
thereafter in due course timely pay and fully satisfy all obligations
(collectively, the "Assumed Liabilities"):
(a) incurred on or after the Closing Date under all Contracts and
Permits that are conveyed to the Buyer as Purchased Assets pursuant to the
terms and conditions hereof;
(b) any and all Liabilities relating to the Business that are listed
on Exhibit 2.3 hereto; and
(c) all other Liabilities incurred after the Closing by the Buyer in
the operation of the Business.
2.4 Excluded Liabilities. Except as expressly assumed pursuant to Section
--------------------
2.3, the Buyer shall not, by virtue of its purchase of the Purchased Assets or
otherwise in connection with the Transactions, assume or become responsible for
any Liabilities (collectively, the "Excluded Liabilities") of the Seller,
including, (a) Liabilities for any Taxes, (b) Liabilities relating to the
violation of any Law, (c) tort Liabilities, (d) Liabilities from claims arising
under any Contract or Permit not expressly assumed by the Buyer hereunder; and
(e) Liabilities for claims arising under any Contract or Permit to the extent
such claim is based on acts or omissions of any Person that occurred prior to
the Closing and (f) any environmental Liabilities resulting from Environmental
Conditions caused or resulting from any actions or omissions of Seller or any
agent, predecessor, or Affiliate of Seller, including any Person hired by the
Seller to dispose of any Hazardous Substance generated by the Seller.
2.5 Purchase Price.
--------------
(a) The aggregate price paid by the Buyer to Seller (the "Purchase
Price") for the purchase of the Purchased Assets shall be the sum of (i)
$23,000,000, (ii) the Contingent Payment and (iii) the assumption of the Assumed
Liabilities.
(b) The Contingent Payment shall be equal to the sum of (i) the amount
obtained by multiplying 5.5 by the amount obtained by subtracting (x) $4,700,000
from (y) 1999 EBITDA and (ii) the amount obtained by multiplying 5.5 by the
amount obtained by subtracting (x) $4,700,000 from (y) 2000 EBITDA.
Notwithstanding the foregoing, the Contingent Payment shall be limited to
$4,000,000 in the aggregate.
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<PAGE>
For purposes hereof:
"EBITDA" shall mean the earnings before interest, taxes, depreciation and
amortization of the Division.
"1999 EBITDA" shall mean the EBITDA during the 12 month period beginning on
April 1, 1998 and ending on March 31, 1999.
"2000 EBITDA" shall mean the EBITDA during the 24 month period beginning on
April 1, 1998 and ending on March 31, 2000, divided by 2.
EBITDA shall be calculated in accordance with GAAP, consistently applied in all
material respects with the Audited Financial Statements, provided that,
notwithstanding the foregoing:
(i) any management or overhead expenses allocated to the Division
during the Applicable Measurement Period shall be disregarded in determining
EBITDA;
(ii) any interest costs or other financing expenses incurred or
allocated to the Division will be disregarded in determining EBITDA, except to
the extent that the proceeds of such financing are either (x) applied to the
refinancing of third party debt outstanding on the Closing Date and included in
the Assumed Liabilities or (y) applied to transactions effected by the Division
in the ordinary course of its business;
(iii) all revenues, income and expenses associated with any
acquisition of any operating businesses or entities by the Buyer (or any of
their respective subsidiaries) during the Applicable Measurement Period shall be
disregarded in calculating EBITDA;
(iv) for the purposes of calculating EBITDA, the Transactions shall
be deemed to have been consummated by April 1, 1998;
(v) any accounting charges or effects resulting from the Transactions,
including any amortization or depreciation expenses relating to or resulting
from the writeup of goodwill or assets resulting from, or as charges against the
earnings or revenues of, the Transactions shall be disregarded for the purposes
of calculating EBITDA;
(vi) the salaries of a sales manager, a production manager, two sales
professionals and two accounting department employees, the expenses relating to
moving to a new building and the additional rental costs for the new building,
shall be included in expenses of the Division in determining EBITDA.
(c) The Buyer shall compute the 1999 and 2000 EBITDA on a basis consistent
with Section 2.5(b) and deliver to the Seller a statement (each a "Statement")
as soon as reasonably practicable after each of April 1, 1999 and 2000, but no
later than May 15 in each such year. The Buyer shall provide with each
Statement a copy of its detailed calculation of the EBITDA that will allow the
Seller a reasonable opportunity to assess the applicable EBITDA. The Buyer
shall pay the Seller the amount of any Contingent Payment that is set forth on
each Statement via wire transfer (pursuant to instructions provided by Seller
for that purpose) on the same day that it delivers such Statement to the Buyer.
Notwithstanding anything in this Section 2.5 to the contrary, if the Seller
disputes the determination of EBITDA as set forth on any such Statement, then
Seller shall notify the Buyer in writing of such dispute and specify the amount
thereof and the reason for the dispute
-7-
<PAGE>
within 45 business days after its receipt of the applicable Statement. If the
parties hereto cannot resolve any such dispute which would affect the EBITDA as
set forth on any Statement, then such dispute shall be resolved by a big-six
accounting firm independent of the parties (an "Independent Accounting Firm").
The determination of the Independent Accounting Firm shall be made as promptly
as practicable and shall be final and binding upon the parties, absent manifest
error which error may only be corrected by such Independent Accounting Firm. The
costs of the Independent Accounting Firm shall be borne by the party (either
Seller or the Buyer) whose determination of EBITDA was further from the
determination of the Independent Accounting Firm. Once EBITDA is finally
determined with respect to any Statement, any Contingent Payment which was not
previously paid shall be paid via wire transfer (pursuant to instructions
provided by Seller for that purpose) within three business days after the such
final determination; provided that in the event that any Contingent Payment was
not paid to the Seller on the date a Statement was delivered is determined to be
due to the Seller, the Seller shall receive such additional Contingent Payment
plus interest which shall accrue at the rate of 10% during the period from April
1 of the applicable year through the date that such portion of the Contingent
Payment is actually paid by the Buyer.
2.6 Post-Closing Adjustment to Purchase Price. As soon as commercially
-----------------------------------------
reasonable after the Closing, but in any event within 60 days after the Closing,
the Seller shall prepare, in accordance with GAAP consistently applied in all
material respects with the Audited Financial Statements, a statement of assets
and liabilities of the Division as of March 31, 1998 (the "Closing Date Balance
Sheet") which shall include a description of the material transactions between
the Seller and the Division. If the amount obtained from subtracting (i) the
Assumed Liabilities, plus an interest factor equal to $5,356 multiplied by the
number of days remaining in the month of March 1998, following the Closing Date,
from (ii) the Purchased Assets as at the end of business on the Closing Date
Balance Sheet is less than $5,448,700 (such amount is subject to final
adjustment, employing the same methodologies, upon the delivery of the audit
opinion covering the Audited Financial Statements), such amount (such deficiency
amount, if any, is referred to as the "Net Worth Deficiency"), shall be deducted
from the Purchase Price. If the amount obtained from subtracting (i) the
Assumed Liabilities (such amount is subject to final adjustment upon the
delivery of the audit opinion covering the Audited Financial Statements) from
(ii) the Purchased Assets as at the end of business on the Closing Date Balance
Sheet is greater than $5,448,700 (such amount is subject to final adjustment,
employing the same methodologies, upon the delivery of the audit opinion
covering the Audited Financial Statements), such amount (such excess amount, if
any, is referred to as the "Net Worth Excess") shall be added to the Purchase
Price, less the foregoing interest factor set forth in this Section 2.6(i).
Notwithstanding anything in this Section 2.6 to the contrary, if there is any
Net Worth Deficiency or Excess, and any party hereto disputes any item contained
on the Closing Date Balance Sheet, such party shall notify the other parties in
writing of each disputed item, and specify the amount thereof in dispute within
30 business days after the delivery of the Closing Date Balance Sheet. If the
parties cannot resolve any such dispute which would eliminate or reduce the
amount of the Net Worth Deficiency or Excess, as applicable, then such dispute
shall be resolved by an Independent Accounting Firm. The determination of the
Independent Accounting Firm shall be made as promptly as practicable and shall
be final and binding on the parties, absent manifest error which error may only
be corrected by such Independent Accounting Firm. Any expenses relating to the
engagement of the Independent Accounting Firm shall be allocated between the
Buyer and the Seller so that the Seller's share of such costs shall be in the
same proportion that the aggregate amount of the disputed amounts submitted to
the Independent Accounting Firm that are unsuccessfully disputed by the Seller
(as finally determined by the Independent Accounting Firm) bears to the total
amount of such disputed amounts so submitted to the Independent Account Firm.
-8-
<PAGE>
Upon the final resolution of any Net Worth Deficiency or Excess in accordance
with this Section 2.6, the amount of such Net Worth Deficiency or Excess shall
be paid to the Buyer or the Seller as applicable within 5 business days after
such final resolution. If such final resolution results in a Net Worth
Deficiency, the Buyer and the Seller shall instruct the Escrow Agent to
distribute (i) that portion of the Holdback to the Buyer for the purpose of
satisfying such Net Worth Deficiency and (ii) any remaining balance of the
Holdback to the Seller. Because the Closing Date may precede March 31, 1998,
the end of the Buyer's fiscal year, and the intent of the parties is for the
earnings, if any, that accrue during the period (the "Stub Period") between the
Closing Date and March 31, 1998 are to accrue to the benefit of the Seller and
the losses, if any, that accrue during the Stub Period are to accrue to the
detriment of the Seller, during the Stub Period, the Business shall be operated
by the DHL and DHFL in the ordinary course and neither DHL or DHFL shall make
any distributions of any Assets associated with the Business or incur any
intercompany or other Liability with any Affiliate.
2.7 Allocation of the Purchase Price. The Purchase Price shall be
--------------------------------
allocated, for all purposes (including financial, accounting and tax purposes)
among the Purchased Assets as set forth on Exhibit 2.7. The Seller and the
Buyer shall prepare their respective Federal, state, provincial and local tax
returns and financial reports employing the allocation set forth on Exhibit 2.7.
The Seller and the Buyer shall give prompt notice to each other of the assertion
of any proposed deficiency or adjustment by any taxing authority or agency with
respect to such allocation.
3. Closing.
-------
3.1 Location; Date. The closing of the Transactions (the "Closing") shall
--------------
take place at the offices of Morgan, Lewis & Bockius LLP, 2000 One Logan Square,
Philadelphia, Pennsylvania 19103 on the business day immediately following the
satisfaction of (or waiver by the party entitled to the benefit of) the
conditions set forth in Sections 8 and 9, or at such other place, date and time
as the parties may agree in writing. The date on which the Closing occurs is
referred to herein as the "Closing Date."
3.2 Closing Deliveries. In connection with the completion of the
------------------
Transactions at the Closing,
(a) the Buyer shall deliver or cause to be delivered:
(i) $23,000,000 via wire transfer to Mellon Bank, ABA #
and Account # for the benefit of TeleSpectrum Worldwide
Inc.;
(ii) executed counterparts of the Employment Agreement, the
Escrow Agreement and the Conveyance Documents;
(iii) a legal opinion of Fogler & Rubinoff in substantially the
form attached as Exhibit 3.2 (a) hereto; and
(iv) such other agreements, documents and instruments
contemplated by this Agreement and such other items as may be reasonably
requested; and
(b) the Seller shall deliver or cause to be delivered:
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<PAGE>
(i) executed copies of the Escrow Agreement and Conveyance
Documents;
(ii) a legal opinion of Morgan, Lewis & Bockius LLP in
substantially the form attached as Exhibit 3.2(b) hereto; and
(iii) such other agreements, documents and instruments
contemplated by this Agreement and such other items as may be
reasonably requested.
4. Representations and Warranties of the Seller. Except as set forth in a
--------------------------------------------
letter dated the date of this Agreement, executed by the Seller and containing
information required by this Agreement and exceptions to the representations and
warranties of the Companies under this Agreement (the "Disclosure Letter"), the
Seller hereby represents and warrants to the Buyer that the statements contained
in Section 4 are correct and complete as of the date of this Agreement and will
be correct and complete as of the Closing Date (as though made then and as
though the Closing Date were SUBSTITUTED for the date of this Agreement).
4.1 Corporate Status. The Seller is a corporation duly organized, validly
----------------
existing and in good standing under the laws of the State of Delaware, and with
respect to the Business, is qualified to do business as a foreign corporation
and is in good standing in each jurisdiction where it is required to be so
qualified, except where the failure to so qualify would not have a Material
Adverse Effect. The Seller is not insolvent and will not be rendered insolvent
upon the consummation of the Transactions.
4.2 Authorization. The Seller has the full corporate power and authority
-------------
to own its property and carry on the Business as currently conducted, and to
execute and deliver the Transaction Documents and to perform its obligations
hereunder. Such execution, delivery and performance by the Seller have been
duly authorized by all necessary corporate action. Each Transaction Document
executed and delivered by the Seller has been duly executed and delivered by the
Seller and constitutes a valid and binding obligation of the Seller, enforceable
against it in accordance with its terms.
4.3 Consents and Approvals. There is no Litigation pending, or to the
----------------------
knowledge of Seller, threatened, by or against or affecting Seller in connection
with or relating to the Transactions or any action to be taken in connection
herewith or therewith or the consummation thereof. Except for the consents
specified in the Disclosure Letter (the "Required Consents") and the required
filing under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), neither the execution or delivery by Seller of the
Transaction Documents to which it is a party, nor the performance of the
Transactions to be performed by it thereunder, will require any filing, consent
or approval, constitute a Default or cause any payment obligation to arise
under (a) any Law or Court Order known to Seller to which Seller is subject, (b)
the Charter Documents or bylaws of Seller or (c) any Contract, Permit or other
document to which Seller is a party or by which the Business or Purchased Assets
may be subject.
4.4 Financial Statements and Balance Sheet. The Disclosure Letter
--------------------------------------
includes complete copies of financial statements (including the notes thereto)
of the Division consisting of balance sheets of the Division as of December 31,
1996 and 1997 and the related statements of income for the years then ended
(collectively, the "Unaudited Financial Statements"). Prior to the Closing, the
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<PAGE>
Disclosure Letter will be updated to include complete copies of financial
statements (including the notes thereto) of the Division consisting of a
balance sheet of the Division as of December 31, 1997 and the related statement
of income for the year then ended which have been audited and reported on by
Arthur Andersen LLP (the "Audited Financial Statements, and together with the
Unaudited Financial Statements, the "Financial Statements"), which balance sheet
and statement of income shall contain amounts of stockholders' equity and net
income that are not less than that reported on the Unaudited Financial
Statements at December 31, 1997 and for the year then ended, respectively.
Except as set forth on the Disclosure Letter, the Financial Statements are in
all material respects consistent with the books and records of the Seller and
include all material costs incurred in the operation of the Division, and there
are no transactions required by GAAP, applied on a consistent basis, to be
recorded in the books and records that have not been recorded in the books and
records underlying such Financial Statements and such books and records are
accurate and complete. Except as set forth on the Disclosure Letter, the
Financial Statements have been prepared in accordance with GAAP consistently
applied and present fairly the financial position and assets and liabilities of
the Division as of the date thereof and its results of its operations for the
year then ended. Except as set forth in the Disclosure Letter, the balance
sheet included in the Financial Statements does not include any material assets
that are not intended to constitute part of the Business or the Purchased Assets
after giving effect to the Transactions. Except as set forth in the Disclosure
Letter, the income statement included in the Financial Statement do not reflect
any material operations that are not intended to constitute part of the Business
or the Purchased Assets after giving effect to the Transactions. The balance
sheet that is included in the Financial Statements is referred to herein as the
"Balance Sheet" and the date thereof is referred to as the "Balance Sheet Date."
4.5 Title to Purchased Assets and Related Matters. Except as set forth in
---------------------------------------------
the Disclosure Letter, the Seller has valid (good and marketable with respect to
the Real Property owned by the Seller) title to, valid leasehold interests in or
valid licenses to use, all of the Purchased Assets, in each case, free from any
Encumbrances. Except as set forth in the Disclosure Letter, the Purchased
Assets are all in the possession or under the control of the Seller and consist
of all of the material assets of the Seller that are exclusively employed and
required by the Seller in connection with the Business as it is now being
operated. The tangible personal property included in the Purchased Assets is in
all material respects (a) in good working condition and reasonable repair,
subject to normal wear and tear, (b) usable in the ordinary course of business
and (c) in conformity with all applicable Laws relating to its use and
operation. Upon the consummation of the Transactions, the Buyer will receive
valid title (good and marketable with respect to the Real Property), in each
case free and clear of all Encumbrances.
4.6 Real Property. The Disclosure Letter describes all real estate used
-------------
in the operation of the Business and the improvements (including buildings and
other structures) located on such real estate (collectively, the "Real
Property"), identifies which Real Property is owned and which is leased, and
lists any leases under which any such Real Property is possessed by the Seller
or leased by the Seller to others (the "Real Estate Leases"). To the knowledge
of Seller, all of the buildings and structures included in the Real Property are
structurally sound, and all of the heating, ventilating, air conditioning,
plumbing, sprinkler, electrical and drainage systems, elevators and roofs, and
all other fixtures, equipment and systems at or serving such Real Property are
generally in good condition, repair and working order (normal wear and tear
excepted) and are generally adequate for the present use of the Real Property by
the Seller in conducting its Business, and there is no condition which will
result in the termination of the present access from the Real Property to such
utility services and other facilities. The Seller has not received any notice,
oral or written, and has
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<PAGE>
no reason to believe, that any governmental body having jurisdiction over any
Real Property intends to exercise the power of eminent domain or a similar power
with respect to all or any part of the Real Property. The Seller has not
received any notice, oral or written, from any governmental body, and has no
reason to believe, that any of the Real Property or any improvements erected or
situate thereon, or the uses conducted thereon or therein, violate any Laws of
any governmental body having jurisdiction over such Real Property. The Seller
has not received any notice from the holder of any mortgage, from any insurance
agent of Seller which has issued a policy with respect to any of the Real
Property or from any board of fire underwriters (or other body exercising
similar functions) claiming any defects or deficiencies in any of the Real
Property or suggesting or requesting the performance of any repairs, alterations
or other work to any of the Real Property. The Seller has heretofore delivered
to the Seller copies of all title reports and title insurance policies received
or held by the Seller.
4.7 Certain Personal Property. The Seller has delivered to the Buyer a
-------------------------
complete fixed asset schedule, describing and specifying the location of all
items of tangible personal property that are included in the Balance Sheet with
a book value in excess of $25,000. Except as set forth in the Disclosure
Letter, since the Balance Sheet Date and with respect to the Business, the
Seller has not (i) acquired any items of tangible personal property that has, in
any case, a carrying value in excess of $5,000, or an aggregate carrying value
in excess of $50,000 or (ii) disposed of any items of tangible personal property
(other than inventory) that have, in any case, an initial carrying value in
excess of $5,000, or an initial aggregate carrying value in excess of $50,000.
Seller is not required to deposit cash received from customers for prepaid
postage into separate escrow accounts.
4.8 Personal Property Leases. The Disclosure Letter lists all Purchased
------------------------
Assets and property (other than Real Property) of the Seller and that are
possessed by the Seller under an existing lease, including all trucks,
automobiles, machinery, equipment, furniture and computers, except for any
lease under which the aggregate annual payments are less than $5,000 (each, an
"Immaterial Lease"). The Disclosure Letter also lists the leases under which
such assets and property listed in the Disclosure Letter are possessed. All of
such leases (excluding "Immaterial Leases") are referred to herein as the
"Personal Property Leases."
4.9 Accounts Receivable. The Accounts Receivable included in the Purchased
-------------------
Assets are bona fide Accounts Receivable created in the ordinary course of
business. To the knowledge of the Seller, except as set forth in the Disclosure
Letter, the Seller has no reason to believe that such Accounts Receivable are
not good and collectible at the aggregate recorded amounts thereof (in each
case, net of the reserves for such items included on the Balance Sheet). The
Disclosure Letter includes a correct and complete Accounts Receivable aging of
the Seller as of the Balance Sheet Date reflecting the aggregate dollar amount
of all Accounts Receivable due the Seller which have been outstanding for: 30
days or less; more than 30 but less than 61 days; more than 60 but less than 91
days; and more than 90 days.
4.10 Accounts Payable; Inventory. All accounts payable as set forth on
---------------------------
the Balance Sheet or arising since the date thereof have been incurred in the
ordinary course of business. Except as disclosed on the Balance Sheet or the
Disclosure Letter, the Seller has no material amounts of Inventory held for use
in the conduct of the Business.
4.11 Liabilities. The Seller does not have any Liabilities and none of
-----------
the Purchased Assets are subject to any material Liabilities, except (a) as
specifically disclosed on the Balance Sheet, (b)
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<PAGE>
Liabilities incurred primarily in the operation of the Business in the ordinary
course since the Balance Sheet Date (none of which results from, arising out of,
relates to, is in the nature of, or caused by any breach of contract, warranty,
tort, infringement or violation of law), and (c) Liabilities under any Contracts
expressly assumed under the Conveyance Documents.
4.12 Taxes. The Seller has duly filed all Tax Returns that are required
-----
to be filed and that were due prior to the Closing Date, and has paid or
properly accrued all Taxes that were due to be paid by the Seller. All such Tax
Returns were correct and complete in all material respects. All Taxes that the
Seller has been required by law to withhold or to collect have been duly
withheld and collected and have been paid over to the proper governmental
authorities or are properly held by The Seller for such payment. To the
knowledge of Seller, there are no proceedings or other actions, nor to the
knowledge of Seller, is there any basis for any proceedings or other actions,
for the assessment or collection of additional Taxes with respect to the
Business or the Purchased Assets.
4.13 Legal Proceedings and Compliance with Law.
-----------------------------------------
(a) Except as set forth in the Disclosure Letter, there is no
Litigation that is pending or, to the knowledge of Seller, threatened against or
related to Seller which is related to the operation of the Business. The Seller
has conducted the Business in compliance with all Laws applicable to the
Business except where non-compliance would not have a Material Adverse Effect.
The Seller has not received any notice from any governmental entity regarding
any alleged Default under any Law except those that have been cured without
material cost or that would not have a Material Adverse Effect. There has been
no Default with respect to any Court Order applicable to Seller.
(b) Without limiting the generality of Section 4.13(a), to the
knowledge of Seller, except as set forth in the Disclosure Letter, there is no
Environmental Condition (i) at any premises at which the Business is currently
conducted, (ii) at any property owned, leased or operated at any time by the
Seller or any Person controlled by Seller, or (iii) at any property at which
wastes have been deposited or disposed by or at the behest or direction of
Seller or any Person controlled by any Affiliate of Seller, nor has Seller
received written notice of any such Environmental Condition in either case which
would or could have a Material Adverse Affect. "Environmental Condition" means
any condition or circumstance, including the presence of Hazardous Substances,
whether created by Seller (or any predecessor of Seller) or any third party, at
or relating to any such property or premises that would (i) require or be
subject to abatement, correction, assessment or investigation under an
Environmental Law, (ii) give rise to any civil or criminal liability under an
Environmental Law, or (iii) create a public or private nuisance. "Environmental
Law" means all Laws and Court Orders relating to pollution or protection of the
environment as well as any principles of common law under which a Person may be
held liable for the release or discharge of any materials into the environment.
(c) The Seller has delivered to the Buyer correct and complete copies
of any written reports, studies or assessments in the possession or control of
Seller that relate to any Environmental Condition. To the knowledge of Seller
after due inquiry, there are no other written reports, studies or assessments,
whether or not in the possession or control of Seller, that relate to any
Environmental Condition.
(d) Except in those cases where the failure would not have a Material
Adverse
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<PAGE>
Effect or as set forth in the Disclosure Letter, (i) the Seller has obtained and
is in full compliance with all Permits that are included in the Purchased
Assets, all of which are listed in the Disclosure Letter along with their
respective expiration dates, that are required for the ownership of the
Purchased Assets or operation of the Business and Purchased Assets as currently
operated by the Seller, (ii) all of such Permits are currently valid and in full
force and (iii) the Seller has filed such timely and complete renewal
applications as may be required with respect to such Permits. To the knowledge
of Seller, no revocation, cancellation or withdrawal of any such Permit has been
threatened.
4.14 Contracts.
---------
(a) The Disclosure Letter lists each Contract of the following types
to which the Seller is a party or by which it is bound or that are included in
the Purchased Assets:
(i) Contracts with any present or former stockholder, director,
officer, employee, partner or consultant or with any Affiliate of Seller;
(ii) Contracts for the purchase of, or payment for, supplies or
products, or for the performance of services, from or by a third party, in
excess of $5,000 with respect to any one supplier or other party;
(iii) Contracts to sell any product inventory or other property
or provide any service to a governmental or regulatory body or third party;
(iv) Contracts limiting or restraining it from engaging or
competing in any lines or business with any Person or concerning
confidentiality;
(v) Contracts with any customer providing for a volume refund,
retrospective price adjustment or price guarantee;
(vi) Contracts to lease to or to operate for any other party any
asset that involve an amount in excess of $50,000 in any individual case
(other than Real Property Leases and Personal Property Leases identified in
the Disclosure Letter);
(vii) Any notes, debenture, bonds, conditional sale agreements,
equipment trust agreements, letter of credit agreements, reimbursement
agreements, loan agreements or other Contracts for the borrowing or lending
of money (including loans to or from officers, directors, partners or
stockholders or with Affiliates of any shareholder of Seller or any members
of the immediate family of any shareholder), or agreements or arrangements
for a line of credit or for a guarantee of, or other undertaking in
connection with, the indebtedness of any other Person;
(viii) Contracts creating or recognizing any Encumbrances with
respect to any of the Purchased Assets;
(ix) Contracts with distributors, manufacturers sales
representatives or other sales agents;
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<PAGE>
(x) Contracts that relate in whole or in part to any software,
technical assistance or other know-how or other Intellectual Property
right;
(xi) Contracts for any capital expenditure or leasehold
improvement in excess of $50,000; and
(xii) Any other Contracts (other than those that may be
terminated on not more than 30 days' notice without Liability and those
described in any of (i) through (xi) above) not made in the ordinary course
of business of the Seller or which are material to the Business or the
Purchased Assets.
(b) Except as set forth in the Disclosure Letter, the Seller is not in
Default under any Contract included in the Purchased Assets. Except as set
forth in the Disclosure Letter, to the knowledge of Seller, Seller has not
received any written communication from, or given any written communication to,
any other party indicating that the Seller or such other party, as the case may
be, is in Default under any such Contract. Except as set forth in the
Disclosure Letter, the Seller, and to the knowledge of the Seller, all other
parties to any such contract, is not in Default thereunder. Each of the
Contracts listed in the Disclosure Letter, except as set forth in the Disclosure
Letter, is valid and enforceable in accordance with its terms; the Seller is,
and to the knowledge of the Seller, all other parties thereto are, in compliance
with the provisions thereof. To the knowledge of the Seller and, after due
inquiry, except for those consents that have been obtained, none of the rights
of the Seller under any Contract will be impaired by the consummation of the
transactions contemplated hereby, and all such rights will be enforceable by the
Buyer after the Closing without the consent or agreement of any other party.
4.15 Intellectual Property. The Seller does not currently use nor has it
---------------------
previously used in the operation of the Business any Intellectual Property
except for that listed in the Disclosure Letter. Except as set forth in the
Disclosure Letter, the Seller owns or has the lawful right to use all
Intellectual Property that is used in the conduct of the Business and necessary
for the operation of the Business in the ordinary course. To the knowledge of
Seller, there is no default under any agreement in regard to such Intellectual
Property and all such rights and agreements are enforceable and will continue
after Closing. All of the Intellectual Property listed in the Disclosure Letter
as owned by the Seller is owned by the Seller free and clear of any
Encumbrances, or used pursuant to a valid agreement that is described in the
Disclosure Letter. Except in such cases that would not have a Material Adverse
Effect, the Seller does not infringe upon or unlawfully or wrongfully use any
Intellectual Property rights owned or claimed by another Person, and the Seller
is not in Default, and has not received any notice of any claim of infringement
or any other claim or proceeding, with respect to any such Intellectual
Property. Except for any rights under written licenses or other written
Contracts, no current or former employee of the Seller and no other Person owns
or has any proprietary, financial or other interest, direct or indirect, in
whole or in part, and including any right to royalties or other compensation, in
any of the Intellectual Property, or in any application therefor.
4.16 Employee Relations.
------------------
(a) Except as described in the Disclosure Letter, the Seller is not,
with respect to the Division (a) a party to or otherwise bound by any collective
bargaining or other type of union agreement, (b) a party to, involved in or, to
the knowledge of the Seller, threatened by, any labor dispute, unfair labor
practice charge or union organizing campaign, or (c) currently negotiating any
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<PAGE>
collective bargaining agreement, and the Seller has not experienced any work
stoppage during the last three years.
(b) With respect to the employees of the Division, the Seller is in
compliance in all material respects with all applicable Laws respecting
employment and employment practices, terms and conditions of employment and
wages and hours, and is not engaged in any unfair labor practice. With respect
to the employees of the Division, there are no outstanding claims against the
Seller (whether under Law, Contract, policy, or otherwise) asserted by or on
behalf of any such present or former employee on account of or for (i) overtime
pay, other than overtime pay for work done in the current payroll period, (ii
wages or salary for any period other than the current payroll period, (ii any
amount of vacation pay or pay in lieu of vacation time off, other than vacation
time off or pay in lieu thereof earned in or in respect of the current fiscal
year, (iv) any amount of severance pay or similar benefits, (v) unemployment
insurance benefits, (vi) workers' compensation or disability benefits, (vii) any
material violation of any Law relating to plant closings, employment
terminations or layoffs, including but not limited to The Workers Adjustment and
Retraining Act, (viii) any violation of any Law relating to employee
"whistleblower" or "right-to-know" rights and protection, (ix) any material
violation of any Law relating to the employment obligations of federal
contractors or subcontractors or (x) any violation of any Law relating to
minimum wages or maximum hours of work, and the Seller is not aware of any such
claims which have not been asserted. No Person (including any governmental
body) has asserted or threatened any claims against the Seller under or arising
out of any Law relating to discrimination or occupational safety in employment
or employment practices.
4.17 ERISA.
-----
(a) The Disclosure Letter contains a complete list of all Benefit
Plans sponsored or maintained by the Seller or under which the Seller may be
obligated. The Seller has delivered to the Buyer, to the extent applicable, (i)
accurate and complete copies of all Benefit Plan documents and all other
material documents relating thereto, including all summary plan descriptions,
summary annual reports and insurance contracts, (ii) accurate and complete
detailed summaries of all unwritten Benefit Plans, (iii) accurate and complete
copies of the most recent financial statements and actuarial reports with
respect to all Benefit Plans for which financial statements or actuarial reports
are required or have been prepared and (iv) accurate and complete copies of all
annual reports for all Benefit Plans (for which annual reports are required)
prepared within the last three years. Each Benefit Plan providing benefits that
are funded through a policy of insurance is indicated by the word "insured"
placed by the listing of the Benefit Plan in the Disclosure Letter.
(b) All Benefit Plans conform (and, to the knowledge of Seller, for
the past six years have conformed) to, and are being administered and operated
(and to the knowledge of Seller for the past six years have been administered
and operated) in material compliance with, the requirements of ERISA, the Code
and all applicable Laws. All returns, reports and disclosure statements
required to be made under ERISA and the Code with respect to all Benefit Plans
have been timely filed or delivered or an extension for the delayed filing has
been obtained from the Internal Revenue Service or the Department of Labor.
There have not been any "prohibited transactions," as such term is defined in
Section 4975 of the Code or Section 406 of ERISA involving any of the Benefit
Plans, that could subject The Seller to any penalty or tax imposed under the
Code or ERISA.
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<PAGE>
(c) Any Benefit Plan that is intended to be qualified under Section
401(a) of the Code and exempt from tax under Section 501(a) of the Code has been
determined by the Internal Revenue Service to be so qualified, and such
determination remains in effect and has not been revoked (or an application for
such determination will be timely filed with the Internal Revenue Service).
Copies of the most recent IRS determination letters, if any, applicable to the
Benefit Plans have been delivered to the Buyer. To the knowledge of Seller,
nothing has occurred since the date of any such determination (if received) that
would affect materially adversely such qualification or exemption, or result in
the imposition of excise taxes or income taxes on unrelated business income
under the Code or ERISA with respect to any Benefit Plan.
(d) The Seller does not sponsor or contribute to (and has not
sponsored or contributed to at any time during the past 6 years) a defined
benefit plan subject to Title IV of ERISA, nor does it have a current or
contingent obligation to contribute to any multiemployer plan (as defined in
Section 3(37) of ERISA) (nor had any such obligation at any time during the past
6 years). The Seller does not have any liability with respect to any employee
benefit plan (as defined in Section 3(3) of ERISA) other than with respect to
the Benefit Plans. For purposes of this Section 4.19(d), the term "Seller"
shall include any corporation that is a member of any controlled group of
corporations (as defined in Section 414(b) of the Code) that includes the
Seller, any trade or business (whether or not incorporated) that is under common
control (as defined in Section 414(c) of the Code) with the Seller, any
organization (whether or not incorporated) that is a member of an affiliated
service group (as defined in Section 414(m) of the Code) that includes the
Seller and any other entity required to be aggregated with the Seller pursuant
to the regulations issued under Section 414(o) of the Code.
(e) There are no pending or, to the knowledge of Seller threatened,
claims by or on behalf of any Benefit Plans, or by or on behalf of any
individual participants or beneficiaries of any Benefit Plans, alleging any
breach of fiduciary duty on the part of the Seller or any of its officers,
directors or employees under ERISA or any applicable Law, or claiming benefit
payments other than those made in the ordinary operation of such plans, nor is
there, to the knowledge of Seller, any basis for any such claim. To the
knowledge of Seller, the Benefit Plans are not the subject of any investigation,
audit or action by the Internal Revenue Service, the Department of Labor or the
Pension Benefit Guaranty Corporation ("PBGC").
(f) The Seller has made all required contributions under its Benefit
Plans on a timely basis, or such contributions are properly accrued on the
Financial Statements.
(g) With respect to any Benefit Plan that is an employee welfare
benefit plan (within the meaning of Section 3(1) of ERISA) (a "Welfare Plan"),
(i) each Welfare Plan for which contributions are claimed as deductions under
any provision of the Code is in material compliance with all applicable
requirements pertaining to such deduction, (ii) with respect to any welfare
benefit fund (within the meaning of Section 419 of the Code) related to a
Welfare Plan, there is no disqualified benefit (within the meaning of Section
4976(b) of the Code) that would result in the imposition of a tax under Section
4976(a) of the Code, (iii) any Benefit Plan that is a group health plan (within
the meaning of Section 4980B(g)(2) of the Code) complies, and in each and every
case has complied, with all of the material requirements of Section 4980B of the
Code, ERISA, Title XXII of the Public Health Service Act and the applicable
provisions of the Social Security Act, and (iv) all Welfare Plans may be amended
or terminated by The Seller at any time on or after the Closing Date.
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<PAGE>
4.18 Absence of Certain Changes. Except as contemplated by this Agreement
--------------------------
or as set forth in the Disclosure Letter, since the Balance Sheet Date, except
as mutually agreed, the Seller has conducted the Business in the ordinary course
and there has not been:
(a) any material adverse change in the Business, the Purchased Assets
or Liabilities related to the Seller or any material event outside the
ordinary course of business;
(b) any increase in the compensation payable or to become payable to
any director, officer, employee or agent, except for increases for non-
officer employees made in the ordinary course of business, nor any other
change in any employment or consulting arrangement;
(c) any sale, assignment or transfer, lease, license of any material
Purchased Assets, or any additions to or transactions involving any
material Purchased Assets, other than those made in the ordinary course of
business;
(d) other than in the ordinary course of business, any waiver, write-
off, or release of any claim or right or cancellation of any debt held;
(e) other than in the ordinary course of business, any payment to any
Affiliate of the Seller;
(f) any change in the accounting policies followed by the Seller or
the method of applying such policies;
(g) any capital expenditure commitment involving in any individual
case, or series of related cases, more than (i) $25,000 or (ii) an amount
that would cause the sum of all such capital expenditure commitments to
exceed $50,000; or
(h) other than in the ordinary course, any new agreements,
modifications, or termination of existing Contracts, the incurrance of any
Liabilities, change in Employee Benefits, or damage, destruction or loss of
any material Assets.
4.19 Customers. Except as set forth in the Disclosure Letter, the Seller
---------
has used reasonable business efforts to maintain, and, to the knowledge of
Seller, currently maintains, good working relationships with all of the
customers of each Division. The Disclosure Letter contains, with respect to the
year ended December 31, 1997 a list of the names of the ten customers that were
the largest dollar volume customers of products and services sold and provided
by each Division for such year. Except as set forth in the Disclosure Letter,
to the knowledge of Seller, none of such customers has given the Seller notice
or advised the Seller or its representatives terminating, canceling or
threatening to terminate or cancel any Contract or relationship with the Seller.
4.20 Finder's Fees. Other than Hunter Capital Group, LLC, whose fees and
-------------
expenses will be paid by the Seller, no Person retained by the Seller or any of
its shareholders is or will be entitled to any commission or finder's or similar
fee in connection with the Transactions.
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<PAGE>
4.21 Additional Information. The Disclosure Letter accurately lists the
----------------------
names of all officers and directors of the Seller and all names under which the
Seller has conducted the Business or which it has otherwise used in connection
with the Business at any time since August 8, 1996.
4.22 Full Disclosure. There are and will be no materially misleading
---------------
misstatements in any of the representations and warranties made by the Seller in
this Agreement, the Disclosure Letter, the Exhibits to this Agreement or any
other Transaction Document or in any of the certificates delivered or to be
delivered by the Seller pursuant to this Agreement taken as a whole, and the
Seller has not omitted to state any fact necessary to make statements made
herein or therein not materially misleading.
5. Representations and Warranties of the Buyer. Each of DDS, DHL, DHFL and
-------------------------------------------
FirstService, jointly and severally, hereby represents and warrants to the
Seller that the statements contained in Section 5 are correct and complete as of
the date of this Agreement and will be correct and complete as of the Closing
Date (as though made then and as though the Closing Date were SUBSTITUTED for
the date of this Agreement).
5.1 Corporate. Each of DDS and FirstService is a corporation duly
---------
organized, validly existing and in good standing under the laws of the Ontario.
Each of DHL and DHFL is a corporation duly organized, validly existing and in
good standing under the laws of the Delaware. Each Buyer has the requisite power
and authority to execute and deliver the Transaction Documents to which it is a
party and to perform the Transactions to be performed by it thereunder, and such
execution, delivery and performance by it have been duly authorized by all
necessary corporate action. No Buyer is insolvent or will be rendered insolvent
upon the consummation of the Transactions.
5.2 Enforceability. Each Transaction Document to which any Buyer is a
--------------
party constitute valid and binding obligations of such Buyer, enforceable
against it in accordance with their terms.
5.3 Consents and Approvals. Except for the required filing under the HSR
----------------------
Act, neither the execution and delivery by any Buyer of the Transaction
Documents to which it is a party nor the performance of the Transactions to be
performed by it thereunder, will require any filing, consent or approval or
constitute a Default under (a) any Law or Court Order to which it is subject,
(b) its Charter Documents or bylaws or (c) any Contract, Permit or other
document to which it is a party or by which its properties or other assets may
be subject.
5.4 Finder's Fees. No Person retained by any Buyer is or will be entitled
-------------
to any commission or finder's or similar fee in connection with the
Transactions.
5.5 Full Disclosure. There are and will be no materially misleading
---------------
misstatements in any of the representations and warranties made by any Buyer in
any Transaction Document, the Disclosure Letter, the Exhibits to this Agreement
or in any of the certificates delivered or to be delivered by any Buyer pursuant
to this Agreement taken as a whole and no Buyer has omitted to state any fact
necessary to make statements made herein or therein not materially misleading.
6. Certain Agreements.
------------------
6.1 Restrictive Covenants.
---------------------
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<PAGE>
(a) Seller shall not during the period of three years after the
Closing (the "Restricted Period"), directly or indirectly, own, manage, operate,
join, control, finance or participate in the ownership, management, operation,
control or financing of, or be connected as a partner, principal, agent,
representative, consultant or otherwise with or use or permit its or his name to
be used in connection with, any business or enterprise engaged directly or
indirectly in competition with the Business at any time during the Restricted
Period within any portion of the United States (the "Restricted Business"). It
is recognized by the Seller that the Restricted Business is and is expected to
continue to be conducted throughout the United States and that more narrow
geographical limitations of any nature on this non-competition covenant (and the
non-solicitation covenant set forth in Section 6.1(b)) are therefore not
appropriate. The foregoing restriction shall not be construed to prohibit (i)
the ownership by the Seller as a passive investment of not more than five
percent of any class of securities of any public or private corporation which is
engaged in any of the foregoing businesses, (ii) the provision of services that
are directly or indirectly in competition with the Business that are ancillary
to Contracts associated with any of the Seller's businesses (other than the
Business) or the provision of services that are directly or indirectly in
competition with the Business, which the aggregate of all such services under
this clause (ii) represent less than $1,000,000 on an annual basis; provided
that in any case, the Seller shall not transact business with any existing
customers of the Division that is not also a customer of any of its
telemarketing, customer care or interactive voice response businesses.
(b) Seller shall not during the Restricted Period, directly or
indirectly, (i) call on, solicit or contract with any Person who or which within
the past two years has been a customer with respect to the Restricted Business,
or (ii) hire, solicit the employment or utilize the services of any person
listed on Exhibit 6.1(b) hereto
(c) The Seller acknowledges that such Confidential Information is a
valuable and unique asset and Seller shall not disclose any such Confidential
Information after the Closing Date to any person for any reason whatsoever,
unless such information (a) is in the public domain through no wrongful act of
Seller, (b) has been rightfully received from a third party without restriction
and without breach of this Agreement or (c) except as may be required by Law.
(d) The Seller acknowledges that the restrictions contained in this
Section 6.1 are reasonable and necessary to protect the legitimate interests of
the Buyer and that any violation will result in irreparable injury to the Buyer.
(e) The Buyer shall be entitled to preliminary and permanent
injunctive relief, without the necessity of proving actual Damages, as well as
an equitable accounting of all earnings, profits and other benefits arising from
any violation of this Section 6.1, which rights shall be cumulative and in
addition to any other rights or remedies to which the Buyer may be entitled. In
the event that any of the provisions of this Section 6.1 should ever be
adjudicated to exceed the time, geographic, product or service, or other
limitations permitted by applicable law in any jurisdiction, then such
provisions shall be deemed reformed in such jurisdiction to the maximum time,
geographic, product or service, or other limitations permitted by applicable
law.
6.2 Required Consents. The Seller shall use its reasonable commercial
-----------------
efforts to take,
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<PAGE>
or cause to be taken, such action to execute and deliver, or
cause to be executed and delivered, such additional documents and instruments
and to do, or cause to be done, all things necessary, proper or advisable (other
than the payment of money) to obtain the Required Consents.
6.3 Employment Matters.
------------------
(a) Buyer shall offer employment to all employees of the Seller
employed in the Business on the day before the Closing Date (the "Seller
Employees," each a "Seller Employee") as an at-will-employee on the Closing
Date. Those Seller Employees who are on a leave of absence due to disability
(including but not limited to maternity leave) which terminates within the one-
year period beginning on the Closing Date and which are listed on the Disclosure
Letter shall receive an offer of employment from Buyer on the date such leave of
absence terminates and Buyer provide health and other benefits consistent with
the practices of FirstService. The terms of employment offered to such Seller
Employees shall be based on Buyer's employment practices and policies, provided
that it shall be a term of such offer that each such Seller Employee be
entitled to receive cash compensation (including bonuses) based on a pay scale
which is no less generous than the Companies pay scale. Buyer shall assume any
and all obligations for vacation, sick and personal leave earned by Seller
Employees who accept employment with Buyer, all of which data is set forth on
the Disclosure Letter. All employees who report to work following the Closing
Date shall be deemed to have accepted employment with the Buyer.
(b) Buyer shall not assume any obligations arising under any
"employee benefit plan" (as such term is defined in Section 3(3) of ERISA) which
the Seller maintains relating to any Seller Employee (collectively the "Plans").
(c) It is the intention of the parties that the Seller not be
obligated to offer "continuation coverage" as provided by Part 6 of Title I of
the Employee Retirement Income Security Act of 1974, as amended and Section
4980B of the Internal Revenue Code ("COBRA") under Seller's group health plans
with respect to the Seller Employees who accept Buyer's offer of employment.
Buyer shall provide as of the Closing Date such Seller Employees with immediate
and full coverage under group health plans which provide coverage which is
comparable to the coverage such under the Seller's group health plans and
without regard to any waiting period or eligibility requirement or pre-existing
condition exclusions that may otherwise be applicable. Buyer or its Affiliates
shall comply with all COBRA obligations applicable to group health plans
maintained or established by Buyer or its Affiliates on or after the Closing
Date for the benefit of Seller Employees who accept employment with Buyer, or
its Affiliates.
(d) Pursuant to the "Alternative Procedure" provided in Section 5 of
Revenue Procedure 84-77, 1984-2 C.B. 753, with respect to filing and furnishing
Internal Revenue Service Forms W-2, W-3 and 941, (i) the Seller and the Buyer
shall report on a "predecessor-successor" basis as set forth therein, (ii) the
Seller shall be relieved from furnishing Forms W-2 to transferred employees and
(iii) the Buyer shall assume the obligations of the Seller to furnish such forms
to such employees for the full 1998 calendar year.
6.4 Accounting Matters. For a period ending on the 60th day following the
------------------
Closing Date, on behalf of Buyer and without charge, the Seller shall continue
to perform all accounting functions on behalf of the Business on a basis
consistent with past practice and the Buyer and its representatives shall have
access to such accounting matters at all reasonable times.
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<PAGE>
6.5 Right of First Refusal. All of the current business being conducted
----------------------
by Seller with the Division shall continue after the Closing with the Buyer on
the same terms and conditions pertaining to the pre-Closing period. During the
three-year period commencing on the Closing Date, DHL shall have a right of
first refusal on any business opportunities (the "Third-Party Opportunities")
within the Restricted Business that are generated by the Seller's telemarketing,
customer care and interactive voice response activities. The Seller shall
provide DHL with prompt notice of such Third-Party Opportunities as they occur
from time-to-time, and provided that DHL's proposal (i) is acceptable to the
applicable customer of the Seller and (ii) on a basis, economic and otherwise,
in all material respects that is equal or superior to each proposal that Seller
receives from other Persons engaged in the Restricted Business, the Seller shall
award such Third-Party Opportunity to DHL. The Seller and DHL each acknowledge
that since the timely negotiation and performance of any Third-Party Opportunity
will be critical to the Seller's retention of the applicable customer as its
continuing customer, time shall be of the essence with respect to the rights
conferred to DHL pursuant to this Section 6.5.
7. Conduct of the Business Pending Closing.
---------------------------------------
7.1 Operation in Ordinary Course. Between the date of this Agreement and
----------------------------
the Closing Date, the Seller shall conduct the Business in all material respects
in the ordinary course and will use commercially reasonable efforts to maintain
all current business relationships related to the Business.
7.2 Business Organization. Between the date of this Agreement and the
---------------------
Closing Date, the Seller shall use commercially reasonable efforts to preserve
substantially intact the organization of the Business and keep available the
services of its present officers and employees.
7.3 Corporate Organization. Between the date of this Agreement and the
----------------------
Closing Date, the Seller shall not sell, lease, license or otherwise dispose of
any of the Purchased Assets, except in the ordinary course of business.
7.4 Business Restrictions. Between the date of this Agreement and the
---------------------
Closing Date, except as mutually agreed, the Seller shall not:
(a) other than in the ordinary course borrow any funds or otherwise
become subject to, whether directly or by way of guarantee or otherwise,
any indebtedness for borrowed money on the Purchased Assets or otherwise
create any Encumbrance on any of the Purchased Assets;
(b) make any capital expenditure or acquire any property or assets
with respect to the Division other than in the ordinary course;
(c) enter into any agreement that restricts the Seller from carrying
on the Business;
(d) cancel any debts of others or waive any claims or rights involving
the Business; or
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<PAGE>
(e) act or omit from taking any action which would cause any of the
representations and warranties in Section 4 to be inaccurate in any
material respect.
7.5 Update Disclosure Letter. Between the date hereof and the Closing
------------------------
Date, the Seller shall promptly disclose to Buyer in writing any information set
forth in the Disclosure Letter which is no longer applicable and any information
of the nature of that set forth in the Disclosure Letter which arises after the
date hereof and which would have been required to be included in the Disclosure
Letter if such information had been obtained on the date of delivery thereof.
8. Conditions Precedent to the Obligations of the Buyer.
----------------------------------------------------
All obligations of the Buyer to consummate the Transactions are subject to
the satisfaction (or waiver by the Buyer) prior thereto of each of the following
conditions:
8.1 Legality. No Law or Court Order shall be pending or threatened that
--------
prevents or that seeks to restrain the consummation, or challenges the validity
or legality, of the Transactions.
8.2 Representations and Warranties. The representations and warranties
------------------------------
of the Seller set forth in this Agreement shall be true and correct on the date
hereof in all material respects and (except to the extent such representations
and warranties speak as of an earlier date) shall also be true and correct in
all material respects on and as of the Closing Date with the same force and
effect as if made on and as of the Closing Date.
8.3 Agreements, Conditions and Covenants. The Seller shall have
------------------------------------
substantially performed or complied with all agreements, conditions and
covenants required by this Agreement to be performed or complied with by it on
or before the Closing Date.
8.4 Certificates. The Buyer shall have received a certificate of the
------------
Chief Operating Officer or Chief Financial Officer as to the effect set forth in
Sections 8.2 and 8.3 hereof.
8.5 HSR Act. The waiting period applicable to the consummation of the
-------
Transactions under the HSR Act shall have expired or been terminated.
8.6 Ancillary Documents. The Seller shall have tendered executed copies
-------------------
of the respective Transaction Documents to which they are intended to be
parties.
8.7 Required Consents. The Seller shall have obtained the Required
-----------------
Consents.
8.8 Legal Opinion. The Buyer shall have received an opinion of counsel to
-------------
Seller in substantially the form attached as Exhibit 3.2(b) hereto.
9. Conditions Precedent to the Obligations of the Seller.
-----------------------------------------------------
All obligations of the Seller to consummate the Transactions are subject to
the satisfaction (or waiver by the Seller) prior thereto of each of the
following conditions:
9.1 Legality. No Law or Court Order shall be pending or threatened that
--------
prevents or that
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<PAGE>
seeks to restrain the consummation, or challenges the validity or legality, of
the Transactions.
9.2 Representations and Warranties. The representations and warranties
------------------------------
of the Buyer set forth in this Agreement shall be true and correct in all
material respects on the date hereof and (except to the extent such
representations and warranties speak as of an earlier date) shall also be true
and correct in all material respects on and as of the Closing Date with the same
force and effect as if made on and as of the Closing Date.
9.3 Agreements, Conditions and Covenants. The Buyer shall have
------------------------------------
performed or complied with all agreements, conditions and covenants required by
this Agreement to be performed or complied with by it on or before the Closing
Date, including the delivery of the Purchase Price.
9.4 HSR Act. The waiting period applicable to the consummation of the
-------
Transactions under the HSR Act shall have expired or been terminated.
9.5 Ancillary Documents. The Buyer shall have tendered executed copies
-------------------
of the respective Transaction Documents to which they are intended to be
parties.
9.6 Legal Opinion. The Seller shall have received an opinion of counsel
-------------
to Buyer in substantially the form attached as Exhibit 3.2(a) hereto.
9.7 Required Consents. The Seller shall have obtained the Required
-----------------
Consents.
10. Indemnification.
---------------
10.1 Indemnification by the Seller. The Seller shall indemnify and hold
-----------------------------
harmless the Buyer and its respective shareholders Affiliates, officers,
directors, employees, agents, successors and assigns (each, an "Indemnified
Buyer Party") from and against any and all Damages that such Indemnified Buyer
Party may sustain, suffer or incur that result from, arise out of or relate to
(a) any Excluded Liability or (b) any breach of or any inaccuracy in any
representation, warranty, covenant or agreement of the Seller contained in this
Agreement, including any breach of the obligation to indemnify hereunder, (c)
Liability under Section 6.3(b) or (d) any Liability from any non-compliance with
the Pennsylvania Bulk Sales Act.
10.2 Indemnification by the Buyer. The Buyer shall indemnify and hold
----------------------------
harmless the Seller and each of its respective shareholders, Affiliates,
officers, directors, employees, agents, successors and assigns (each an
"Indemnified Seller Party") from and against any Damages that such Indemnified
Seller Party may sustain, suffer or incur that result from, arise out of or
relate to (a) any Assumed Liability, or (b) any breach of or inaccuracy in any
representation, warranty, covenant or agreement of the Buyer contained in this
Agreement, including any breach of the obligation to indemnify hereunder.
10.3 Procedure for Claims.
--------------------
(a) Any Indemnified Buyer Party or any Indemnified Seller Party that
desires to seek indemnification under any part of this Section 10 (each, an
"Indemnified Party") shall give notice (a "Claim Notice") to each party
responsible or alleged to be responsible for indemnification
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<PAGE>
hereunder (an "Indemnitor"). Such Claim Notice shall briefly explain the nature
of the claim and the parties known to be involved, and shall specify the amount
thereof. If the matter to which a claim relates shall not have been resolved as
of the date of the Claim Notice, the Indemnified Party shall estimate the amount
of the claim in the Claim Notice, but also specify therein that the claim has
not yet been liquidated (an "Unliquidated Claim"). If an Indemnified Party gives
a Claim Notice for an Unliquidated Claim, the Indemnified Party shall also give
a second Claim Notice (the "Liquidated Claim Notice") within 60 days after the
matter giving rise to the claim becomes finally resolved, and the Liquidated
Claim Notice shall specify the amount of the claim. Each Indemnitor to which or
whom a Claim Notice is given shall respond to any Indemnified Party that has
given a Claim Notice (a "Claim Response") within 30 days (the "Response Period")
after the later of (i) the date that the Claim Notice is given or (ii) if a
Claim Notice is first given with respect to an Unliquidated Claim, the date on
which the Liquidated Claim Notice is given. Any Claim Notice or Claim Response
shall be given in accordance with the notice requirements hereunder, and any
Claim Response shall specify whether or not the Indemnitor giving the Claim
Response disputes the claim described in the Claim Notice. If any Indemnitor
fails to give a Claim Response within the Response Period, such Indemnitor shall
be deemed not to dispute the claim described in the related Claim Notice. If any
Indemnitor elects not to dispute a claim described in a Claim Notice, whether by
failing to give a timely Claim Response or otherwise, then the amount of such
claim shall be conclusively deemed to be an obligation of such Indemnitor.
(b) If any Indemnitor shall be obligated to indemnify an Indemnified
Party hereunder, such Indemnitor shall pay to such Indemnified Party within 30
days after the last day of the applicable Response Period the amount to which
such Indemnified Party shall be entitled. If there shall be a dispute as to the
amount or manner of indemnification under this Section 10, the Indemnitor and
the Indemnified Party shall seek to resolve such dispute through negotiations
and, if such dispute is not resolved within twenty days, the Indemnified Party
may pursue whatever legal remedies may be available for recovery of the Damages
claimed from any Indemnitor. If any Indemnitor fails to pay all or part of any
undisputed indemnification obligation when due, then such Indemnitor shall also
be obligated to pay to the applicable Indemnified Party interest on the unpaid
amount for each day during which the obligation remains unpaid at an annual rate
equal to 10%.
(c) Notwithstanding any other provision of this Agreement, (i) no
Indemnified Party shall be entitled to indemnification hereunder for Damages
arising out of or based upon any inaccuracy in or breach of any representation
or warranty made in or pursuant to this Agreement or any other Transaction
Document until the aggregate of all Damages to all Indemnified Parties in the
group to which such Indemnified Party belongs (either Indemnified Buyer Parties,
as a group, or Indemnified Seller Parties, as a group) exceeds $250,000 (the
"Basket Amount") and then such Indemnified Party shall be entitled to
indemnification for all of its Damages, and (ii) no Indemnitor shall be liable
under this Agreement for any Damages in excess of the Indemnification Limitation
(defined below) arising out of or based upon any inaccuracy in or breach of any
representation or warranty made in or pursuant to this Agreement or any other
Transaction. The limitations of this paragraph (c), however, shall not apply to
any (i) breaches of any representations or warranties contained in Sections
4.12, 4.13(a), 4.13(b), 4.13(d) or 4.17 or (ii) covenants or agreements
contained in Section 6 hereof. For purposes hereof, the Indemnification
Limitation shall mean $5,000,000. In addition, the Buyer may set-off any
amounts that it is entitled to indemnification hereunder against any Contingent
Payment; provided, however, that the Buyer may no set-off any such amounts
against the Holdback.
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<PAGE>
10.4 Claims Period. Any claim for indemnification under this Section 10
-------------
for a breach of a representation or warranty shall be made by giving a Claim
Notice under Section 10.3 on or before the applicable "Expiration Date"
specified below in this Section 10.4, or the claim under this Agreement shall be
invalid. The Expiration Date shall mean the second anniversary of the Closing
Date, provided, however, that the Expiration Date shall mean the date on which
the applicable statute of limitations expires with respect to any claim for
Damages related to (a) a breach of any representation or warranty of a party to
this Agreement that relates to Taxes, (b) any representation or warranty that
was untrue when made with an actual intent to mislead or defraud and (c) any
covenants to be performed under this Agreement, which for purposes of
clarification shall not be deemed to have merged upon the Closing. If more than
one of such Expiration Dates applies to a particular claim, the latest of such
Expiration Dates shall be the controlling Expiration Date for such claim. So
long as an Indemnified Party gives a Claim Notice for an Unliquidated Claim on
or before the applicable Expiration Date, such Indemnified Party shall be
entitled to pursue its rights to indemnification regardless of the date on which
such Indemnified Party gives the related Liquidated Claim Notice.
10.5 Third Party Claims. An Indemnified Party that desires to seek
------------------
indemnification under any part of this Agreement with respect to any actions,
suits or other administrative or judicial proceedings (each, an "Action") that
may be instituted by a third party shall give each Indemnitor prompt notice of a
third party's institution of such Action. After such notice, any Indemnitor may
upon reasonable advance notice to the Indemnified Party, or if so requested by
such Indemnified Party, any Indemnitor shall, participate in such Action or
assume the defense thereof, with counsel reasonably satisfactory to such
Indemnified Party; provided, however, that such Indemnified Party shall have the
right to participate at its own expense in the defense of such Action; and
provided, further, that the Indemnitor shall not consent to the entry of any
judgment or enter into any settlement, except with the written consent of such
Indemnified Party (which consent shall not be unreasonably withheld), that (a)
fails to include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in respect
of any such Action or (b) grants the claimant or plaintiff any injunctive relief
against the Indemnified Party. Any failure to give prompt notice under this
Section 10.5 shall not bar an Indemnified Party's right to claim indemnification
under this Section 10, except to the extent that an Indemnitor shall have been
harmed by such failure.
10.6 Exceptions to Limitations. Nothing herein shall be deemed to limit
-------------------------
or restrict in any manner any rights or remedies which any party has, or might
have, at law, in equity or otherwise, against any other party based on a
fraudulent misrepresentation.
11. Termination.
-----------
11.1 Grounds for Termination. This Agreement may be terminated at any
-----------------------
time prior to the Closing Date:
(a) by mutual written consent of the Buyer and the Seller;
(b) by the Seller or the Buyer, if there shall be any Law that makes
consummation of the Transactions illegal or otherwise prohibited or if any
Court Order enjoining the Seller or the Buyer from consummating the
Transactions is
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<PAGE>
entered;
(c) by the Buyer, if the Seller shall have breached any of its
covenants hereunder in any material respect or if the representations and
warranties of any Seller contained in this Agreement shall not be true and
correct in any material respect, except for such changes as are
contemplated by this Agreement, and, in either event, if such breach is
capable of being cured, such Seller has not cured such breach within 10
business days of the Buyer's notice of an intent to terminate; or
(d) by the Seller, if the Buyer shall have breached any of its
covenants hereunder or if the representations and warranties of the Buyer
contained in this Agreement shall not be true and correct, except for such
changes as are contemplated by this Agreement, and, in either event, if
such breach is capable of being cured, the Buyer has not cured such breach
within 10 business days of the Seller's notice of an intent to terminate.
11.2 Effect of Termination. If this Agreement is terminated pursuant to
---------------------
Section 11.1, any party may pursue any legal or equitable remedies that
may be available if such termination is based on a breach of another party.
12. Payment of Expenses. Each party hereto shall pay its own expenses for
-------------------
lawyers, accountants, consultants, investment bankers, brokers, finders and
other advisors with respect to the Transactions; provided, that the Buyer shall
pay the applicable HSR Act filing fee.
13. Contents of Agreement. This Agreement, together with the other
---------------------
Transaction Documents, sets forth the entire understanding of the parties hereto
with respect to the Transactions and supersedes all prior agreements or
understandings among the parties regarding those matters.
14. Amendment, Parties in Interest, Assignment, Etc. This Agreement may be
------------------------------------------------
amended, assigned, modified or supplemented only by a written instrument duly
executed by each of the parties hereto. If any provision of this Agreement
shall for any reason be held to be invalid, illegal, or unenforceable in any
respect, such invalidity, illegality, or unenforceability shall not affect any
other provision hereof, and this Agreement shall be construed as if such
invalid, illegal or unenforceable provision had never been contained herein.
This Agreement shall be binding upon and inure to the benefit of and be
enforceable by the respective heirs, legal representatives, successors and
permitted assigns of the parties hereto. Any term or provision of this
Agreement may be waived at any time by the party entitled to the benefit thereof
by a written instrument duly executed by such party.
15. Interpretation. Unless the context of this Agreement clearly requires
--------------
otherwise, (a) references to the plural include the singular, the singular the
plural, and the part the whole, (b) "or" has the inclusive meaning frequently
identified with the phrase "and/or" and (c) "including" has the inclusive
meaning frequently identified with the phrase "but not limited to." The section
and other headings contained in this Agreement are for reference purposes only
and shall not control or affect the construction of this Agreement or the
interpretation thereof in any respect. Section, subsection, schedule and
exhibit references are to this Agreement unless otherwise specified. Each
accounting term used herein that is not specifically defined herein shall have
the meaning given to it under
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<PAGE>
GAAP.
16. Notices. All notices that are required or permitted hereunder shall be
-------
in writing and shall be sufficient if personally delivered or sent by mail,
facsimile message or Federal Express or other delivery service. Any notices
shall be deemed given upon the earlier of the date when received at, or the
third day after the date when sent by registered or certified mail or the day
after the date when sent by Federal Express to, the address or fax number set
forth below, unless such address or fax number is changed by notice to the other
party hereto given in accordance with the foregoing notice procedures:
If to the Seller:
TeleSpectrum Worldwide Inc.
443 S. Gulph Road
King of Prussia, PA 19406
FAX: 610-962-5109
Attention: Chief Executive Officer
with a required copy to:
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, PA 19103
FAX: 215-963-5299
Attention: Stephen M. Goodman, Esquire
If to the Buyer:
FirstService Corporation
FirstService Building
1140 Bay Street
Suite 4000
Toronto, Ontario M5S 2B4
FAX: 416-960-5333
Attention: Chief Executive Officer
With a required copy to:
Fogler, Rubinoff
Suite 4400
Royal Trust Tower
P.O. Box 95
Toronto-Dominion Center
Toronto, Ontario M5K 1G8
FAX: 416-941-8852
Attention: Martin L. Middlestadt, Esq.
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<PAGE>
and
Reed Smith Shaw & McClay LLP
2500 One Liberty Plaza
Philadelphia, PA 19103
FAX: 215-851-1420
Attention: Joseph M. Sedlack, Esq.
17. Remedies; No Third-Party Beneficiaries. Any claim against any party
--------------------------------------
hereto for any breach of this Agreement or in connection with any of the
Transactions shall, to the extent permitted by law, be made solely pursuant to
this Section 10 hereof, except to the extent provided by in Section 6.1(e).
There shall be no third-party beneficiaries with respect to the Transactions or
the other matters contemplated by Transaction Documents.
18. Communications. Except for the public announcement of the execution of
--------------
this Agreement, without the approval of the other party, the Seller and the
Buyer shall each refrain from giving notice to third parties or otherwise make
any press release or other public statement concerning this Agreement or the
transactions contemplated hereby. Notwithstanding the above, (i) each party
may communicate, whether oral or in writing, with any lenders, lessors,
customers, suppliers or any other parties from whom any consents, approvals or
waivers are necessary or advisable, or to whom notice is necessary or advisable,
as well as with any professional advisors with respect to the transactions
contemplated by this Agreement and related matters and (ii) this Section 18
shall not be interpreted to prevent any party from disclosing information as
compelled by a court order, provided, however, that prior to disclosing any
information concerning this Agreement or the Transactions in response to any
such court order, the applicable party shall provide the other party with prompt
notice of the court order so that such party may take whatever action it deems
appropriate to prohibit such disclosure.
19. Governing Law; Waiver of Jury Trial. This Agreement shall be construed
-----------------------------------
and interpreted in accordance with the laws of the Commonwealth of Pennsylvania,
without regard to its provisions concerning conflict of laws. Each party hereto
waives any right to a jury trial that may arise pursuant to any claim or
controversy arising out of or relating to this Agreement, or any breach thereof.
20. Counterparts. This Agreement 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
Agreement to produce or account for more than one such counterpart.
21. Consent to Jurisdiction; Service of Process, etc.
-------------------------------------------------
(a) Each party hereto irrevocably and unconditionally (i) agrees that
any suit, action or other legal proceeding (collectively, "Suit") arising out of
this Agreement may be brought and adjudicated in the United States District
Court for the Eastern District of Pennsylvania or, if such court does not have
jurisdiction or will not accept jurisdiction, in any court of competent civil
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<PAGE>
jurisdiction in Montgomery County, Pennsylvania, (ii) consents and submits to
the non-exclusive jurisdiction of any such court for the purposes of any such
Suit and (iii) waives and agrees not to assert by way of motion, as a defense or
otherwise in any such Suit, any claim that it or he is not subject to the
jurisdiction of the above courts, that such Suit is brought in an inconvenient
forum or that the venue of such Suit is improper.
(b) Each party hereto also irrevocably consents to the service of any
process, pleadings, notices or other papers in a manner permitted by the notice
provisions of Section 16 or by any other method provided or permitted under
applicable law. Each party hereto agrees that final judgment in any Suit (with
all right of appeal having either expired or been waived or exhausted) shall be
conclusive and that the Buyer shall be entitled to enforce such judgment in any
other jurisdiction of the world by suit on the judgment, a certified or
exemplified copy of which shall be conclusive evidence of the fact and amount of
indebtedness arising from such judgment.
22. Further Assurances. Seller from time to time after the Closing at the
-------------------
request of the Buyer and without further consideration shall execute and deliver
such further instruments of transfer and assignment and take such other action
as Buyer may reasonably require to more effectively transfer and assign to, and
vest in, the Buyer good title, to each of the Purchased Assets.
IN WITNESS WHEREOF, this Agreement has been executed by the parties hereto on
the day and year first written above.
TELESPECTRUM WORLDWIDE INC. FIRSTSERVICE CORPORATION
By: _______________________________ By: ______________________________
DDS DYMENT DISTRIBUTION DDS HARRIS, LIMITED
SERVICES LTD.
By: _______________________________ By: ______________________________
DDS HARRIS FULFILLMENT, LIMITED
By: _______________________________
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<PAGE>
Exhibit 10.18
ASSET ACQUISITION AGREEMENT
PARTIES: TELESPECTRUM WORLDWIDE, INC.
a Delaware corporation ("Seller")
443 S. Gulph Road
King of Prussia, PA 19406
NCO GROUP, INC.
a Pennsylvania corporation ("NCO")
515 Pennsylvania Avenue
Fort Washington, PA 19034
NCO TELESERVICES, INC.
a Pennsylvania corporation ("Buyer")
515 Pennsylvania Avenue
Fort Washington, PA 19034
DATE: January 16, 1998
BACKGROUND: Seller is in the business of, among other things,
telemarketing which includes direct inbound and outbound marketing, customer
care services, direct mail, product fulfillment, market research, interactive
voice response and related services. Buyer is a wholly owned subsidiary of NCO.
The parties desire that Seller sells and Buyer buys substantially all of the
business and assets of Seller exclusively used in the operation of the market
research business ("the Division's business") conducted by its The Response
Center Division (the "Division") all on and subject to the terms and conditions
of this Agreement.
INTENDING TO BE LEGALLY BOUND, in consideration of the mutual agreements
contained herein, and subject to the satisfaction of the terms and conditions
set forth herein, the parties agree as follows:
1. DEFINED TERMS Certain defined terms used in this Agreement and not
-------------
specifically defined in context are defined in this Section 1, as follows:
1.1 "Accounts Receivable" means (a) any right to payment for goods
-------------------
sold, leased or licensed or for services rendered, whether or not it has been
earned by performance, whether billed or unbilled, and whether or not it is
evidenced by any Contract; (b) any note receivable; or (c) any other receivable
or right to payment of any nature.
1.2 "Asset" means any real, personal, mixed, tangible or intangible
-----
property of any nature, including, but not limited to, Accounts Receivable,
unbilled revenue,
<PAGE>
prepayments, deposits, escrows, Tangible Property, Real Property (as defined in
Section 1.20), Software, Contract Rights (as defined in Section 16), Intangibles
(as defined in Section 1.13) and goodwill, and claims, causes of action and
other legal rights and remedies.
1.3 "Cash Asset" means any cash on hand, cash in bank or other
----------
accounts, readily marketable securities, and other cash-equivalent liquid assets
of any nature.
1.4 "Consent" means any consent, approval, order or authorization of,
-------
or any declaration, filing or registration with, or any application or report
to, or any waiver by, or any other action (whether similar or dissimilar to any
of the foregoing) of, by or with, any Person (as defined in Section 1.18), which
is necessary in order to take a specified action or actions in a specified
manner.
1.5 "Contract" means any written or oral contract, agreement,
--------
instrument, order, arrangement, commitment or understanding of any nature
exclusively related to the Division's business, including, but not limited to,
sales orders, purchase orders, leases, subleases, data processing agreements,
maintenance agreements, license agreements, sublicense agreements, employment
agreements, consulting agreements or sales representative agreements, provided,
however, that the purchase and related agreements among Seller and those persons
who sold the Division to Seller on August 13, 1996 shall not be included under
the term Contract.
1.6 "Contract Right" means any right, power or remedy of any nature
--------------
under any Contract including, but not limited to, rights to receive property or
services or otherwise derive benefits from the payment, satisfaction or
performance of another party's Obligations (as defined in Section 1.16), rights
to demand that another party accept property or services or take any other
actions, and rights to pursue or exercise remedies or options.
1.7 "Deferred Revenues" means such amount as shown on Seller's Closing
-----------------
Balance Sheet (as defined in, and to be prepared in accordance with Section
3.2), related to fees received or billed by the Division in advance of work
being performed.
1.8. "Employee Benefit Plan" means any employee benefit plan as defined
---------------------
in Section 3(3) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), or any other plan, program, policy or arrangement for or
regarding bonuses, commissions, incentive compensation, severance, vacation,
deferred compensation, pensions, profit sharing, retirement, payroll savings,
stock options, stock purchases, stock awards, stock ownership, phantom stock,
stock appreciation rights, medical/dental expense payment or reimbursement,
disability income or protection, sick pay, group insurance, self insurance,
death benefits, employee welfare or fringe benefits of any nature; but not
including employment Contracts with individual employees.
2
<PAGE>
1.9. "Encumbrance" means any lien, security interest, pledge, mortgage,
-----------
easement, restriction, reservation, conditional sale, prior assignment, or other
encumbrance, or other adverse claim, burden or charge of any nature.
1.10. "GAAP" means generally accepted accounting principles under United
----
States accounting rules and regulations, consistently applied, provided that, in
cases where such generally accepted accounting principles permit the use of two
or more accounting policies ("Accepted Policies") yielding different results,
the following Accepted Policy shall be used, regardless of materiality: (a) the
historical Accepted Policy used by Seller, if one is applicable; or (b) if none
of the historical Accepted Policies used by Seller is applicable, the preferred
Accepted Policy under United States accounting rules and regulations. In no
event shall the consistent application of the historical accounting policies
used by Seller have priority over GAAP, regardless of materiality.
1.11. "Hazardous Substances" means any substance, waste, contaminant,
--------------------
pollutant or material that has been determined by any United States federal
government authority, or any state or local government authority having
jurisdiction over Seller's Real Property, to be capable of posing a risk of
injury or damage to health, safety, property or the environment, including, but
not limited to, (a) all substances, wastes, contaminants, pollutants and
materials defined or designated as hazardous, dangerous or toxic pursuant to any
Law of any state in which any of Seller's leased or owned Real Property is
located or any United States Law, and (b) asbestos, polychlorinated biphenyls
("PCBs") and petroleum.
1.12. "Insurance Policy" means any public liability, product liability,
----------------
general liability, comprehensive, property damage, vehicle, life, hospital,
medical, dental, disability, worker's compensation, key man, fidelity bond,
theft, forgery, errors and omissions, directors' and officers' liability, or
other insurance policy of any nature.
1.13. "Intangible" means the name of the Division or any corporate name,
----------
fictitious name, trademark, trademark application, service mark, service mark
application, trade name, brand name, product name, slogan, trade secret, know-
how, patent, patent application, copyright, copyright application, design, logo,
formula, invention, product right client lists or other intangible asset of any
nature, whether in use, under development or design, or inactive and goodwill
associated therewith.
1.14. "Judgment" means any order, writ, injunction, citation, award,
--------
decree or other judgment of any nature of any foreign, federal, state or local
court, governmental body, administrative agency, regulatory authority or
arbitration tribunal.
1.15. "Law" means any provision of any foreign, federal, state or local
---
law, statute, ordinance, charter, constitution, treaty, rule or regulation.
3
<PAGE>
1.16. "Obligation" means any debt, liability or obligation of any nature,
----------
whether secured, unsecured, recourse, nonrecourse, liquidated, unliquidated,
accrued, absolute, fixed, contingent, ascertained, unascertained, known, unknown
or otherwise.
1.17. "Permit" means any license, permit, approval, waiver, order,
------
authorization, right or privilege of any nature, granted, issued, approved or
allowed by any foreign, federal, state or local governmental body,
administrative agency or regulatory authority.
1.18. "Person" means any individual, sole proprietorship, joint venture,
------
partnership, corporation, association, cooperative, trust, estate, governmental
body, administrative agency, regulatory authority or other entity of any nature.
1.19. "Proceeding" means any demand, claim, suit, action, litigation,
----------
investigation, arbitration, administrative hearing or other proceeding of any
nature.
1.20. "Real Property" means any real estate, land, building, condominium,
-------------
town house, structure or other real property of any nature, all shares of stock
or other ownership interests in cooperative or condominium associations or other
forms of ownership interest through which interests in real estate may be held,
and all appurtenant and ancillary rights thereto, including, but not limited to,
easements, covenants, water rights, sewer rights and utility rights.
1.21. "Required Consent" means a Consent which is required to transfer
----------------
Contracts, or any of them, to Buyer and which Consent is expressly required by
the terms of such Contracts and are listed on Schedule 1.21 as required by Buyer
to consummate the Closing.
1.22. "Software" means any computer program, operating system,
--------
applications system, firmware or software of any nature, whether operational,
under development or inactive, including all object code, source code, technical
manuals, user manuals and other documentation therefor, whether in machine-
readable form, programming language or any other language or symbols, and
whether stored, encoded, recorded or written on disk, tape, film, memory device,
paper or other media of any nature.
1.23. "Tangible Property" means any furniture, fixtures, leasehold in
-----------------
provements, vehicles, office equipment, computer equipment, other equipment,
machinery, tools, forms, supplies, fixed assets or other tangible personal
property of any nature.
1.24. "Tax" means (a) any foreign, federal, state or local income,
---
earnings, profits, gross receipts, franchise, capital stock, net worth, sales,
use, occupancy, general property, real property, personal property, intangible
property, transfer, fuel, excise, payroll, withholding, unemployment
compensation, social security or other tax of any nature;
4
<PAGE>
(b) any foreign, federal, state or local organization fee, qualification fee,
annual report fee, filing fee, occupation fee, assessment, sewer rent or other
fee or charge of any nature; or (c) any deficiency, interest or penalty imposed
with respect to any of the foregoing.
2. THE TRANSACTION
---------------
2.1 Sale and Purchase of Specified Assets. On the Closing Date,
-------------------------------------
effective to the fullest extent possible at 5:00 p.m. EST on the Effective Date
(as defined in Section 10.1), and subject to the other terms and conditions of
this Agreement, Seller shall sell, transfer, assign and convey to Buyer, and
Buyer shall purchase, all of Seller's right, title and interest in and to all of
the Specified Assets (as defined in Section 2.1.1), and Seller shall assign to
Buyer, and Buyer shall assume, the Specified Liabilities of Seller (as defined
in Section 2.1.2).
2.1 Specified Assets of Seller. The "Specified Assets of
--------------------------
Seller" means the business of, and all Assets exclusively used in the operation
of the Division's business as of the Effective Date, wherever located and
whether or not reflected on Seller's books and records, including, but not
limited to, the following Assets:
(A) All of Seller's Accounts Receivable and other current
assets arising exclusively in connection with or exclusively relating to the
Division including, but not limited to, prepaid expenses, security deposits,
rent escrows, and other prepayments, deposits and escrows;
(B) All of Seller's Tangible Property, Software and
Intangibles in each case, that is exclusively used in or for the operation of
the Division;
(C) All of Seller's Contract Rights under the Specified
Contracts (as defined in Section 4.13), but excluding Contract Rights under this
---------
Agreement and any other Contracts entered into by Seller with Buyer in
connection with the transactions contemplated by this Agreement;
(D) All of Seller's Contract Rights under any
noncompetition, nondisclosure or other restrictive covenant made for the benefit
of Seller or its affiliates (or any of their respective predecessors) in any
Contract with current or former employees of the Division, regardless of whether
any such current employee accepts Buyer's offer pursuant to Section 2.3;
(E) All rights under all Insurance Policies owned, held or
maintained by Seller or any of its predecessors at any time since January 1,
1991 in connection with or for the benefit of the business, assets or employees
of the Division, but excluding (1) all rights under Insurance Policies that
---------
constitute group medical, dental, hospitalization, health, disability and
related Employee Benefit Plans of Seller ("Seller's
5
<PAGE>
Group Insurance Plans"); and (2) the rights of Seller under its Insurance
Policies pertaining exclusively to actual or potential claims or losses that
remain Seller's responsibility after the Effective Date.
(F) All transferable rights under all Permits granted or
issued to Seller or otherwise held by Seller exclusively relating to or for the
benefit of the Division;
(G) All of Seller's rights with respect to telephone
numbers, telephone directory listings and advertisements exclusively used by the
Division, and all of Seller's goodwill relating to or arising in connection with
the Division's business;
(H) All of Seller's customer lists, prospect lists, supplier
lists, data bases, computer media, sales and marketing materials, invoices,
correspondence, files, books and records, in each case exclusively relating to
or arising exclusively in connection with the Division's business; and
(I) All of Seller's claims, causes of action and other legal
rights and remedies, whether or not known as of the Effective Date, relating to
Seller's ownership of the Specified Assets and/or the operation of the Division,
but excluding causes of action and other legal rights and remedies of Seller (1)
---------
against Buyer with respect to the transactions contemplated by this Agreement;
or (2) relating exclusively to Seller's Assets not included in the Specified
Assets or to Seller's liabilities not included in the Specified Liabilities.
2.1.2 Excluded Assets of Seller. The "Excluded Assets of Seller"
-------------------------
means the following specifically described assets of Seller: (1) Cash Assets;
and (2) Seller's Assets which are not Specified Assets of Seller.
2.1.3 Specified Liabilities of Seller. The "Specified Liabilities
-------------------------------
of Seller" means the following specifically described liabilities of Seller as
of the Effective Date:
(A) The current liabilities, including Deferred Revenues of
Seller incurred or arising exclusively in connection with the Division's
business which shall be clearly reflected on the Closing Balance Sheet and which
are specifically set forth on Schedule 2.1.3. Notwithstanding the foregoing, the
Specified Liabilities shall not include (1) any liabilities for any Taxes; (2)
any long-term debt; (3) any notes payable; (4) any liabilities for overdrafts or
any other liabilities with respect to bank accounts; or (5) any guarantees of
indebtedness of Seller or any subsidiary or affiliate.
(B) The liabilities of Seller under those Specified
Contracts but only to the extent that such liabilities are not due to any breach
or default by Seller under any such Specified Contract. Notwithstanding the
foregoing, the Specified Liabilities
6
<PAGE>
of Seller shall not include the liabilities of the Seller under (1) this
Agreement or any other Contracts entered into by the Seller with the Buyer in
connection with the transactions contemplated by this Agreement; (2) any
Contracts that constitute or evidence Employee Benefit Plans of Seller; (3) any
liabilities or Obligations to employees of the Division except as is otherwise
set forth in Section 2.3 and (4) any Contracts relating to the formation or
acquisition of Seller or any of the predecessors of the Division's business.
(C) The liabilities of Seller under Contracts relating to
the Division's business entered into in the ordinary course of business
consistent with past practices between the date of this Agreement and the
Effective Date, provided that the incurrence or existence of any such liability
or Contract does not constitute a breach or failure of, or a default under, any
representation, warranty, covenant or other provision of this Agreement
(including, but not limited to, those of Section 4.13 and Section 6.2), but only
to the extent that such liabilities are not due to any breach or default by
Seller under any such Contract.
2.2 No Other Liabilities. Notwithstanding any other provisions of this
--------------------
Agreement, Buyer shall not purchase the Specified Assets subject to, and Buyer
shall not in any manner assume or be liable or responsible for any Obligation of
Seller other than the Specified Liabilities, and each and every Obligation of
Seller other than the Specified Liabilities shall remain the sole responsibility
of Seller. Without limiting the generality of the foregoing, and in addition to
the liabilities excluded from the Specified Liabilities under Section 2.1.2 and
except as set forth in Section 11.3, Buyer shall not in any manner assume or be
liable or responsible for any of the following Obligations of Seller:
2.2.1 Affiliates. Any Obligation to Seller or any current or
----------
former shareholder, partner, director or controlling Person of Seller, or to any
other Person affiliated with Seller, or its affiliates and predecessors, if any.
2.2.2 Taxes. Any Obligation for any Tax, including but not
-----
limited to, (a) any Tax payable by Seller with respect to Seller's business
operations, including without limitation, the Division's business; (b) any Tax
payable by Seller with respect to the ownership, possession, purchase, lease,
sale, disposition or use of any of Seller's Assets at any time, including
without limitation, the Specified Assets; (c) any Tax resulting from the sale of
the Specified Assets to Buyer or otherwise resulting from the transactions
contemplated by this Agreement; and (d) any Obligation for any Tax of any Person
under Treasury Regulation Section 1.1502.6 (or any similar provisions of Law),
as a transferee or successor, by Contract or otherwise.
2.2.3 Post-Closing. Any Obligation that is incurred or arises
------------
after the Effective Date, or that relates to any Proceeding or other event that
occurs or circumstances that exist after the Effective Date.
7
<PAGE>
2.2.4 Transaction Related. Any Obligation that was or is incurred
-------------------
in connection with the negotiation, execution or performance of this Agreement
and any other Contracts entered into between or among Buyer and Seller or Buyer
and/or Seller and other parties in connection with the transactions contemplated
by this Agreement.
2.2.5 Defaults. Any Obligation (other than Obligations under
--------
Specified Contracts which are governed by Section 2.1.2(B) or that have been
included in the Closing Balance Sheet) , the incurrence or existence of which
constitutes or will constitute a breach or failure of, or a default under, any
representation, warranty, covenant or other provision of this Agreement,
including, but not limited to, any Obligation, whether or not known to Seller,
that has not been disclosed to Buyer in writing in this Agreement or the
Schedules and Exhibits hereto.
2.2.6 Employees. Except as provided in Section 11.4, any
---------
Obligation to any or all employees of Seller, including, but not limited to,
Obligations under Seller's payroll savings, profit sharing and/or other
retirement plans ("Seller's Retirement Plans"), Obligations under Seller's Group
Insurance Plans (as defined in Section 2.1.1), and Obligations for severance pay
and other termination benefits for those employees who do not accept Buyer's
offer of employment.
2.2.7 Infringement. Any Obligation arising in connection with or
------------
related to Seller's infringement or alleged infringement of any Software or
Intangible of any Person.
2.2.8 Encumbrances. Any Encumbrance on or affecting Seller's
------------
Assets including, without limitation, the Specified Assets.
2.2.9 Proceedings. Any Proceeding or Judgment listed or
-----------
required to be listed on Schedule 4.17.
2.3 Seller's Employees. Subject to the condition that the Closing
------------------
hereunder occurs, Buyer shall offer to employ, as of the Effective Date, all of
the employees of Seller engaged in the Division's business listed on Exhibit
2.3., including employees of Seller engaged in the Division's business then on
permitted leave from the employment of Seller. Such employment will be on an "at
will" or other basis, as Buyer determines, and at time of employment, for
salaries or wages reasonably determined by Buyer but in no event lower than
currently enjoyed by such employees. Buyer, however, following commencement of
employment of such employees, shall have the right to change or modify such
employees' compensation as it deems appropriate. Buyer does not assume, and
Seller shall be fully responsible for the payment of, any severance or other
benefits related to or payable upon the termination of any of the Division's
employees who fail to accept such employment offer, except that Buyer agrees to
assume Seller's Obligation for accrued but unused vacation and sick time of the
Division's employees accepting
8
<PAGE>
employment with Buyer immediately following Closing. Buyer shall assume
Obligations for severance pay and other termination benefit liabilities incurred
by Seller resulting from the termination of any such employee who is hired by
Buyer and then terminated by Buyer within six (6) months. Within at least thirty
(30) days of the Closing Date, Seller shall provide to Buyer accurate and
complete copies of the personnel records of the Division's employees engaged in
the Division's business. Seller shall be responsible for compliance with all
Laws related to the termination by Seller of Seller's employees. Seller shall
cooperate with Buyer's efforts to employ and retain any such employees.
3. PURCHASE PRICE AND CLOSING FINANCIAL STATEMENTS
-----------------------------------------------
3.1 Purchase Price and Allocation. The total purchase price for the
-----------------------------
Specified Assets, subject to the adjustment described in Section 33, ("Purchase
Price") shall be Fifteen Million Dollars ($15,000,000) in cash payable at
Closing plus the assumption of the Specified Liabilities by Buyer in accordance
with Section 21. The Purchase Price shall be allocated amount the Specified
Assets and Specified Liabilities in the manner set forth on Exhibit 31.
3.2 Closing Balance Sheet. Seller shall, at Seller's cost and expense,
---------------------
prepare or cause to be prepared a balance sheet of the Specified Assets and the
Specified Liabilities (to the extent required by GAAP to be disclosed on a
balance sheet) as of the Effective Date ("Closing Balance Sheet") in accordance
with GAAP which shall fairly present in all material respects the Specified
Assets and the Specified Liabilities. Seller shall deliver the Closing Balance
Sheet to NCO within thirty (30) days after the Effective Date. On or before the
date that Seller delivers the Closing Balance Sheet to NCO, Seller shall deliver
to NCO detailed lists ("Closing Balance Sheet Lists") of all of the Specified
Assets and Specified Liabilities by balance sheet account, and with aggregate
net balances equal to the balances on the Closing Balance Sheet. The Closing
Balance Sheet Lists shall include, but not necessarily be limited to, lists of
(a) Accounts Receivable, showing customer names, individual invoice dates,
individual invoice amounts and allowances for doubtful accounts, or, in the case
of earned but not billed receivables, customer names and individual dates on
which the receivables are billed (the "Receivable Lists"); (b) other current
assets included in the Specified Assets, itemized by category and with
appropriate explanation; (c) Tangible Property included in the Specified Assets,
grouped as to type, showing cost, accumulated depreciation and net book value;
(d) Software and Intangibles included in the Specified Assets, showing cost or
amount capitalized, accumulated amortization and net book value; (e) accounts
payable included in the Specified Liabilities, itemized by payee; (f) accrued
expenses and reserves included in the Assumed Liabilities, itemized by category
and with appropriate explanation; (g) deferred revenues included in the Assumed
Liabilities, itemized by customer and dates by which revenue will be recognized;
and (h) other current and long-term liabilities included in the Assumed
Liabilities, itemized by payee.
9
<PAGE>
3.3 Purchase Price Adjustment. The Purchase Price shall be subject to
-------------------------
adjustment as follows:
3.3.1 Balance Sheet Adjustment. The Purchase Price shall be
------------------------
decreased by the amount (the "Negative Adjustment"), if any, by which the Actual
TNW (as defined below) is less than the Minimum TNW (as defined below) and shall
be increased by the amount (the "Positive Adjustment"), if any, by which the
Actual TNW is greater than the Minimum TNW. The "Actual TNW" shall equal the
Specified Assets as of the Effective Date, as reflected on the Closing Balance
Sheet minus (b) the Specified Liabilities as of the Effectiveness Date, as
reflected on the Closing Balance Sheet. The "Minimum TNW" shall equal One
Million Two Hundred Fifty Thousand Dollars ($1,250,000).
3.3.2 Statement of Adjustments. Seller shall (a) prepare a
------------------------
statement ("Statement of Adjustments") showing a clear and detailed calculation
of the Negative Adjustment or Positive Adjustment to the Purchase Price
described in this Section 33; and (b) deliver the Statement of Adjustments to
NCO at the same time as the Closing Balance Sheet and related documents are
delivered to NCO under Section 32. NCO shall notify Seller, in reasonable
detail, of any objections to the Statement of Adjustments (which may include
objections to the Closing Balance Sheet) within thirty (30) days after NCO
receives the Statement of Adjustments and all of the documents required to be
delivered to NCO under Section 32. If NCO does not notify Seller of any such
objections by the end of that thirty-day period, then the Statement of
Adjustments, as prepared by Seller, shall be considered final on the last day of
that thirty-day period. If NCO does notify Seller of any such objections by the
end of that thirty-day period, and NCO and Seller are unable to resolve their
differences within fifteen (15) days thereafter, then the disputed items on the
Statement of Adjustments shall be the remaining disputed items shall be
submitted to Arthur Andersen & Co., Philadelphia, Pennsylvania (the "Arbiter"),
for resolution, with the costs thereof paid fifty percent (50%) by Seller and
fifty percent (50%) by NCO, and the Arbiter shall be instructed to deliver a
final Statement of Adjustments to Seller and NCO as soon as possible.
3.3.3 Payment of Adjustment. In the event that a Negative
---------------------
Adjustment or a Positive Adjustment is required, then the required party shall
pay to the other party an amount equal to the adjustment within fifteen (15)
business days after the Statement of Adjustments is finalized in accordance with
Section 332.
3.4. Contingency Consideration. In addition to the Purchase Price,
-------------------------
Seller may be entitled to receive additional consideration (the "earnout"). The
earnout will be based on fifty percent (50%) of the differential between the
Initial Value and the Ending Value as defined below:
(a) Initial Value: $31,800,000
10
<PAGE>
(b) Ending Value: Either (i) if an initial public offering of NTRC
(defined as Buyer's market research business, the Division's business and the
business of any company acquired by Buyer which is involved in the provision of
market research) common stock occurs or if NTRC is sold prior to December 31,
1998, the average market capitalization of NTRC over the first 30 days of
trading adjusted for any dilution caused by such a public stock offering or the
aggregate consideration received for NTRC (including the assumption of any
funded debt), or (ii) if an initial public offering of NTRC common stock does
not occur and NTRC is not sold prior to December 31, 1998, the average analyst
estimate of NTRC's net income for the year ending December 31, 1999 multiplied
by NCO's preceding 30 day average 1999 EPS multiple (based on analyst estimates)
at December 31, 1998.
At Seller's discretion, Seller may delay calculation of the Ending Value
as calculated in (b) (ii) above until January 31, 1999 or February 28, 1999 in
order to obtain a more favorable preceding 30 day average multiple of NCO's 1999
estimated EPS.
If an initial public offering of NTRC common stock does not occur or if
NTRC is not sold prior to December 31, 1998 and Seller elects at any time prior
to April 30, 1999 not to accept the Ending Value as calculated in (b) (ii)
above, Seller may elect to convert to an alternative earnout calculation as
follows: on March 31, 1999, Seller will be paid seven (7) times the amount by
which the Division's 1998 EBITDA exceeds 120% of the Division's 1997 EBITDA.
For purposes of this calculation, the Division's 1997 EBITDA will be $1,891,000
or the Division's actual 1997 EBITDA, whichever is greater. In addition, on
March 31, 2000, Seller will be paid seven (7) times the amount by which the
Division's 1999 actual EBITDA exceeds 110% of the Division's actual 1998 EBITDA.
In all instances in which an earnout calculation involves the use of EBITDA,
such EBITDA shall be normalized by adding back any acquisition-related or other
extraordinary non-recurring expenses.
Seller may elect (at any time before April 30, 2000) to be paid the
earnout, if any, in either cash or in the form of a convertible note,
convertible into NCO common stock at a price equal to $3.00 above NCO's
trailing average 30 trading day per share price on the payment date. The
principal sum of the note shall be equal to the amount of the earnout less the
value of the conversion options as based on a Black-Scholes model, the
assumptions of which shall be mutually agreed upon by Buyer and Seller at the
time the earnout is being calculated. The interest rate on the convertible note
shall be equal to the rate paid by NCO under its prevailing line of credit, but
shall not exceed 7.5%. Such note shall be for a term of five (5) years.
All dates in 1999 and 2000 shall be appropriately adjusted if NCO's Form
10-K is filed after March 31, 1999 or 2000.
11
<PAGE>
In connection with the foregoing, Seller shall have ten (10) business days
to review and object, in a writing to be delivered within such 10-day period, to
Buyer's calculation of the earnout unless an objection is raised, Buyer's
calculation of the earnout shall be final and binding on the parties for all
purposes. In the event of an objection, subject to the provision of Section
15.19, for a period of thirty (30) calendar days, Seller may or at its sole cost
and expense, engage the Arbiter to audit the books and records relative to the
calculation of the earnout only. Upon completion of the audit within the 30-day
period, Seller shall deliver the written audit to Buyer. The parties shall
jointly review the audit and determine whether an adjustment is required. If an
agreement cannot be reached, the Arbiter shall be consulted and it's
determination shall be final.
3.5. Currency and Method of Payment. All dollar amounts stated in this
------------------------------
Agreement are stated in United States currency, and all payments required under
this Agreement shall be paid in United States currency. All payments required
under this Agreement shall be made as follows: (a) any payment may be made by
wire transfer of immediately available United States federal funds; (b) any
payment exceeding $100,000 shall be made by wire transfer of immediately
available United States federal funds; (c) any payment exceeding $10,000, but
not exceeding $100,000, may be made by bank certified, treasurer's or cashier's
check; and (d) any payment not exceeding $10,000 may be made by ordinary check.
3.6. Imputed Interest. If any Adjustment is not paid as herein
----------------
required, such Adjustment shall be deemed to include interest from the Closing
Date, calculated at the required, applicable rate for imputed interest under
federal income tax law.
4. REPRESENTATIONS OF SELLER
-------------------------
Knowing that Buyer is relying thereon, Seller represents and warrants
to Buyer and covenants with Buyer as follows:
4.1 Organization. Seller is a corporation duly organized, validly
------------
existing and in good standing under the Laws of its jurisdiction of
incorporation. Seller possesses the full corporate power and authority to own
its Assets, conduct the business of the Division as and where presently
conducted, and enter into and perform this Agreement. Seller is duly qualified
to do business in each jurisdiction listed on Schedule 4.1, and Seller is not
required to be qualified in any other jurisdiction in connection with the
operation of the Division. Schedule 4.1 states, for the Division (a) its trade
name; (b) its headquarters address, telephone number and facsimile number; (c)
all foreign jurisdictions in which it is qualified or registered to do business,
and its registered agent and/or office in each such jurisdiction (if
applicable); and (d) all fictitious, assumed or other names of any type known to
Seller that are registered or used by it or under which it has done business at
any time since January 1, 1991.
12
<PAGE>
4.2 Effect of Agreement. The execution, delivery and performance of
-------------------
this Agreement by Seller and the consummation by Seller of the transactions
contemplated hereby, (a) have been, or shall have been by the Closing Date, duly
authorized by all necessary corporate action; (b) do not constitute a violation
of, a default under, or termination of the articles or certificate of
incorporation or other organizational documents or; (c) do not constitute a
default or breach of (immediately after the giving of notice, passage of time or
both), or termination of any Assumed Contract; (d) do not constitute a violation
of any Law applicable to Seller, the Division, the Division's business or the
Specified Assets; (e) except as stated on Schedule 42, do not require the
Consent of any Person; (f) do not accelerate or otherwise modify any Assumed
Obligation of Seller in connection with the Division; and (g) do not result in
the creation of any Encumbrance upon, or give to any other Person any interest
in, the Division, the Division's business or the Specified Assets. There exists
no rights of first refusal or other preemptive rights with respect to , the
Division, the Division's business or the Specified Assets. This Agreement
constitutes the valid and legally binding agreement of Seller, enforceable
against Seller in accordance with its terms.
4.3 Financial and Corporate Records. Seller's books and records
-------------------------------
pertaining to the Division and its business are and have been properly prepared
and maintained in form and substance adequate for preparing audited financial
statements in accordance with GAAP, and fairly and accurately reflect in all
material respect all Assets and Obligations of the Division's business and all
Contracts and transactions to which Seller is or was a party that relate
exclusively to the Division or by which any of the Assumed Assets are or were
affected and which relate or pertain to the Division.
4.4 Compliance with Law. The operation by Seller of the Division, the
-------------------
conduct by Seller of the Division's business, and the ownership, possession and
use of the Assets used in or for the Division comply in all material respects
with all Laws applicable to the Division's business. Except as set forth on
Schedule 44, Seller has obtained and holds all material Permits required for the
lawful operation of the Division's business as and where such business is
presently conducted. All Permits relating to the Division held by Seller are
listed on Schedule 44, and copies of such Permits have been delivered to Buyer.
4.5 Financial Statements. Schedule 4.5 includes complete copies of
--------------------
audited financial statements of the Division consisting of a balance sheet of
the Division for the year ending December 31, 1996 and for the year ending
December 31, 1997(the cost of the 1997 audit to be shared equally by Buyer and
Seller) and the related statement of income for the year ended December 31,
1997, all of which are audited and reported on by Arthur Andersen LLP
(collectively, the "Annual Financial Statements"). The Annual Financial
Statements shall also include complete copies of unaudited financial statements
of the Division consisting of a balance sheet of the Division as of January 31,
1998 and the related statement of income for the one (1) month period then ended
(the "Interim Financial
13
<PAGE>
Statements," and together with the Annual Financial Statements, the "Financial
Statements"). Except as set forth on Schedule 4.5, the Financial Statements are
in all material respects consistent with the books and records of the Seller and
include all costs incurred in the operation of the Division, and there are no
transactions required by GAAP, applied on a consistent basis, to be recorded in
accounting records that have not been recorded in the accounting records
underlying such Financial Statements. Except as set forth on the Financial
Statements, the Financial Statements have been prepared in accordance with GAAP
consistently applied and present fairly the financial position and assets and
liabilities of the Division as of the dates thereof and the results of its
operations for the periods then ended, subject to normal recurring year-end
adjustments and the absence of notes in the case of the Interim Financial
Statements. Except as set forth in the Financial Statements and for the Excluded
Assets, the balance sheets included in the Financial Statements do not include
any material assets that are not intended to constitute part of the Division's
business or the Specified Assets after giving effect to the transactions
contemplated herein. The income statements included in the Financial Statements
do not reflect any operations that are not intended to constitute part of the
Division's business or the Specified Assets after giving effect to such
transactions and reflect all material costs that have been incurred by the
Division's business during these periods.
4.6 Assets. Schedule 46 includes lists of substantially all of the
------
Specified Assets. Seller has good title to all of the Specified Assets and has
the right to transfer all right, title and interest in such Specified Assets to
Buyer, free and clear of any Encumbrance.
4.7 Seller's Obligation. Schedule 47 includes a detailed list of the
-------------------
Specified Liabilities, itemized by balance sheet account, including the
following: accounts payable, accrued employee expenses specifically assumed by
Buyer and, deferred revenue of the Division. Seller has no other Obligation
exclusively related to the Division's business other than (a) the Obligations
listed on Schedule 47; (b) Obligations under the Specified Contracts, any
Contracts not required by GAAP to be specifically disclosed on a balance sheet
and (c) Obligations incurred since November 30, 1997 arising in the ordinary
course of business.
4.8 Operations Since November 30, 1997. Except as set forth on
----------------------------------
Schedule 48, from November 30, 1997 to the date of this Agreement:
4.8.1 Except in the ordinary course of its business consistent with
its past practices, Seller has not (a) created or assumed any Encumbrance upon
the Division's business or any of the Specified Assets, (b) incurred any
Obligation on behalf of or relating to the Division's business, (c) made any
loan or advance to any Person on behalf of or relating to the Division's
business; (d) assumed, guaranteed or otherwise become liable for any Obligation
of any Person exclusively on behalf of or relating to the Division's business;
(e) committed for any capital expenditure exclusively on behalf of or relating
to the Division's business; (f) purchased, leased, sold, abandoned or otherwise
14
<PAGE>
acquired or disposed of any part of the Division's business or Specified Assets;
(g) waived any right or canceled any debt or claim on behalf of or exclusively
relating to the Division; (h) assumed or entered into any Contract on behalf of
or relating to the Division other than this Agreement; (i) increased, authorized
an increase in or in any way changed, modified or amended the compensation or
benefits paid or provided to any of its directors, officers, employees,
salesmen, agents or representatives engaged in the Division's business; or (j)
done anything else outside the ordinary course of business on behalf of or
exclusively relating to the Division or its business, whether or not
specifically described in any of the foregoing clauses.
4.8.2 There has been no material adverse change or material
casualty loss affecting Seller, the Division's business or Assets, the financial
condition of Seller, the Division or the Division's business, and there has been
no material adverse change in the financial performance of the Division or the
Division's business.
4.9 Tangible Property. Seller has good and marketable title to all of
-----------------
its Tangible Property included in the Specified Assets free and clear of any
Encumbrances. All of Seller's Tangible Property used in or for the Division's
business is located at the Facilities (as defined in Section 4.10) and Seller
has the full and unqualified right to require the immediate return of any of its
Tangible Property which is not located at the Facilities. Except as set forth on
Schedule 4.9, all Tangible Property used by Seller or its customers in the
Division's business is in good condition, ordinary wear and tear excepted, and
is sufficient for the operation of the Division's business as presently
conducted.
4.10 Real Property. Seller does not own any Real Property used in or
-------------
for the Division's business. Schedule 4.10 is a detailed list of all Real
Property leased by Seller and which is exclusively used in or for the Division's
business (the "Facilities"), showing location, rental cost and landlord. All
the Facilities under lease to or otherwise used by Seller are in good condition,
ordinary wear and tear excepted, and are sufficient for the current operations
of the Division's business. None of the Facilities, nor the occupancy,
maintenance or use thereof, is in violation of, or breach or default under, any
Contract or Law, and no notice from any lessor, governmental body or other
Person has been received by Seller or served upon any of the Facilities claiming
any violation of, or breach or default under, any Contract or Law, or requiring
or calling attention to the need for any work, repairs, construction,
alternation or installations. Seller has neither placed or caused to be placed
nor has any knowledge or belief that there were or are, any Hazardous Substances
on or under any of the Facilities.
4.11 Software and Intangibles. Schedule 4.11 is an accurate and
------------------------
complete list and description of all Software and Intangibles owned, marketed,
licensed, used or under development by Seller and exclusively used in or for the
Division's business, and, in the case of Software, a product description, the
language in which it is written and the type of hardware platform(s) on which it
runs. No other Software is required to operate the Division's business as it is
presently conducted. Except as explained on Schedule 4.11,
15
<PAGE>
Seller has valid title to, and has the full right to use and transfer to Buyer,
all of the Software and Intangibles listed on Schedule 4.11, free and clear of
any Encumbrance. To the knowledge of Seller, none of the Software or Intangibles
listed on Schedule 4.11, or their respective past or current uses, has violated
or infringed upon, or is violating or infringing upon, any Software, patent,
copyright, trade secret or other Intangible of any Person. To the knowledge of
Seller, no Person is violating or infringing upon, or has violated or infringed
upon at any time, any of the Software or Intangibles listed on Schedule 4.11.
None of the Software or Intangibles listed on Schedule 4.11 is owned by or
registered in the name of any current or former shareholder, partner, director,
executive, officer, employee, salesman, agent, customer, representative or
contractor of Seller nor does any such Person have any interest therein or right
thereto, including but not limited to the right to royalty payments.
4.12 Contracts. Schedule 4.12 is an accurate and complete list of all
---------
of the following types of Contracts included in the Specified Assets
(collectively, the "Specified Contracts"), grouped into the following categories
and, where applicable, subdivided by product line: (a) customer Contracts; (b)
Contracts for the purchase or lease of Real Property or otherwise concerning
Real Property owned or used by Seller including a description of the Real
Property; (c) Contracts for the purchase, lease and/or maintenance of computer
equipment and other equipment; (d) Contracts for the purchase, license, lease
and/or maintenance of Software, and other supplier Contracts; (e) employment,
consulting and sales representative Contracts (excluding Contracts which
constitute Employee Benefit Plans listed on Schedule 4.14, and excluding oral
Contracts with employees for "at will" employment); and (f) other Contracts
(excluding Contracts which constitute Insurance Policies listed on Schedule
4.18. A description of each oral Specified Contract is included on Schedule
4.12, and copies of each written Specified Contract have been delivered to
Buyer. Except as set forth on Schedule 4.12, each of Seller's customer
Contracts is substantially similar to the form service agreement therefor that
is attached as part of Schedule 4.12A. With respect to each applicable customer
Contract, Schedule 4.12 includes a reasonable description of all work remaining
to be performed under such Contracts as of January 31, 1998, and all credits
granted to, or other adjustments made for, the customer to be applied against
future payments or purchases. Except as set forth on Schedule 4.12, with
respect to each of the Specified Contracts, Seller neither is in default
thereunder nor would be in default thereunder with the passage of time, the
giving of notice of both. Except as set forth on Schedule 4.12, to the
knowledge of Seller, none of the other parties to any Specified Contract is in
default thereunder or would be in default thereunder with the passage of time,
the giving of notice or both. Except as set forth on Schedule 4.12, Seller has
not given or received any notice of default or notice of termination with
respect to any Specified Contract, and to the knowledge of Seller each Specified
Contract is in full force and effect in accordance with its terms. Except as
set forth on Schedule 4.12, there are no currently outstanding proposals or
offers submitted by Seller to any customer, prospect, supplier or other Person
with respect to the Division which, if accepted, would result in a legally
binding Contract of Seller involving an amount
16
<PAGE>
or commitment exceeding $50,000 in any single case or an aggregate amount or
commitment exceeding $250,000 in the aggregate.
4.13 Employees and Independent Contractors. Schedule 4.13A is a list of
--------------------------------------
all of Seller's employees engaged (full time or part time) in the Division's
business and (a) their titles or responsibilities; (b) their social security
numbers and principal residence address; (c) their dates of hire; (d) their
current salaries or wages; (e) their last compensation changes and the dates on
which such changes were made; (f) any specific bonus, commission or incentive
plans or agreements for or with them; and (g) any outstanding loans or advances
made to them. Schedule 4.13B is a list of all sales representatives and
independent contractors engaged in Division's business, their tax identification
numbers and states of residence, their payment arrangements (if not set forth in
a Contract listed or described on Schedule 4.12), and a brief description of
their jobs or projects currently in progress. Except as limited by any
employment Contracts listed on Schedule 4.12 and except for any limitations of
general application which may be imposed under applicable employment Laws,
Seller has the right to terminate the employment of each of its employees
engaged in the Division's business at will and to terminate the engagement of
any of its independent contractors engaged in the Division's business without
payment to such employee or independent contractor other than for services
rendered through termination and without incurring any penalty or liability
other than liability for severance pay in accordance with Seller's disclosed
severance pay policy. Seller is in compliance in all material respects with all
Laws respecting employment practices. Seller has never been a party to or bound
by any union or collective bargaining Contract, nor is any such Contract
currently in effect or being negotiated by or on behalf of Seller with respect
to the Division's business. Seller has not experienced any labor problem that
was or is material to the Division's business. Except as indicated on Schedule
4.13A, to the Seller's knowledge, since September 1, 1997, no key employee of
Seller engaged in the Division's business has indicated an intention to
terminate his or her employment with Seller.
4.14 Employee Benefit Plans. Except as set forth on Schedule 4.14,
----------------------
Seller does not sponsor, maintain or contribute to, or has any ongoing
Obligation with respect to, any Employee Benefit Plan (as defined in Section 8),
including, but not limited to, any employee benefit plan as defined in Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"). Copies of all of Seller's Retirement Plans listed on Schedule 4.14
and all summary plan descriptions and other material documents used by Seller to
describe Seller's Retirement Plans to employees have been made available to
Buyer. Except as set forth on Schedule 4.14, Seller is not a party to any
Contract to create any additional Employee Benefit Plan or to continue, modify,
change or terminate any of its current Employee Benefit Plans. If permitted or
required by applicable Law, Seller has properly submitted, or intends to
properly submit Seller's Retirement Plans for the purpose of meeting the
applicable requirements of the Internal Revenue Code of 1986, as amended
("Code"), to the Internal Revenue Service ("IRS") for its approval within the
time prescribed therefor. Copies of all favorable determination letters from
the IRS, the
17
<PAGE>
most recent annual returns on Form 5500 have been made available to Buyer. With
respect to Seller's Retirement Plans described on Schedule 4.14, (a) Seller has
made all payments required to be made by it to date, has accrued all payments
due but not yet payable as of the date of this Agreement in accordance with GAAP
(as defined in Section 19) and shall have made on or before the Effective Date
all payments due as of the Effective Date and (b) Seller has operated and
currently operates such plan in compliance with the plan documents and all
applicable Laws, including without limitation ERISA and the Code and the
regulations thereunder.
4.15 Customers, Prospects and Suppliers. Except as set forth on
----------------------------------
Schedule 4.15, the top fifteen (15) customers of the Division's business have
signed a Contract and are listed in the list of customers included as part of
Schedule 4.12. Schedule 4.15 is a complete list of all current prospects and
the top five (5) suppliers of the Division's business. Except as set forth on
Schedule 4.15, since June 1, 1997, none of the customers (largest ten (10) by
revenue to the Division) or suppliers of the Division's business has given
notice or otherwise indicated to Seller that it will or intends to terminate or
not renew its Contract or business relationship with Seller before the scheduled
expiration date or otherwise terminate its relationship with Seller. To
Seller's knowledge, there exists no material matter which could jeopardize the
relationship of Seller with customers and suppliers of the Division's business.
Except as set forth on Schedule 4.15, to the Seller's knowledge, without any
obligation to investigate or inquire, the transactions contemplated by this
Agreement will not adversely affect relations with any of the customers or
suppliers of the Division's business.
4.16 Taxes. Seller has timely filed all Tax returns and reports
-----
required to be filed by it, all of which were accurately prepared, and, except
as set forth in Schedule 4.16, Seller has timely paid all Taxes or withholdings
required to be paid by it with respect to such returns and reports. Seller has
properly withheld from payments to its employees, contractors, salesmen, agents,
representatives, vendors and other Persons engaged in the Division's business
all amounts required by Law to be withheld, and Seller has timely filed all
informational returns and reports required to be filed by it with respect to
such withholdings. Except as indicated on Schedule 4.16, no audit or other
Proceeding is pending or threatened against Seller, and no notice of deficiency
or adjustment has been received by Seller, by or from any governmental taxing
authority, with respect to sales, use, excise, real property, payroll,
withholding or similar Taxes, and there are no agreements or waivers in effect
which provide for an extension of time for the assessment of any such Tax
against Seller.
4.17 Proceedings and Judgments. Except as described on Schedule 4.17,
-------------------------
(a) no Proceeding involving or related to the Division's business or Specified
Assets is currently pending or, to the knowledge of Seller, threatened, nor has
any Proceeding occurred at any time since August 13, 1996, to which Seller is or
was a party and by which the Division's business or Specified Assets is or was
directly affected; (b) no Judgment involving or related to the Division's
business or Specified Assets is currently outstanding,
18
<PAGE>
nor has any Judgment been outstanding at any time since August 13, 1996, against
Seller, and by which the Division's business or Specified Assets is or was
directly affected; and (c) no breach of contract, breach of warranty, tort,
negligence, infringement, product liability, discrimination, wrongful discharge
or other claim of any nature involving or related to the Division's business or
Specified Assets has been asserted or threatened, to the knowledge of Seller, by
or against Seller at any time since August 13, 1996. As to each matter described
on Schedule 4.17, accurate and complete copies of all pertinent pleadings,
judgments, orders, correspondence and other legal documents have been delivered
to Buyer.
4.18 Insurance. Schedule 4.18 is an accurate and complete list and
---------
description of all Insurance Policies currently owned or maintained by Seller
(excluding Insurance Policies that constitute Employee Benefit Plans described
on Schedule 4.14) in connection with or for the benefit of The Division's
business and all liability and errors and omissions Insurance Policies owned or
maintained by Seller and/or any of its predecessors at any time since August 13,
1996 in connection with or for the benefit of the Division's business. Except
as indicated on Schedule 4.18, all such Insurance Policies are or were on an
"occurrence" rather than a "claims made" basis. Seller has not received notice
of cancellation with respect to any such current Insurance Policy, and there is
no basis for the insurer thereunder to terminate any such current Insurance
Policy. Each such Insurance Policy is or was in full force and effect during
the period(s) of coverage indicated on Schedule 111. Except as described on
Schedule 4.18, there are no claims related to the Division's business that are
pending under any of the Insurance Policies described on Schedule 4.18.
4.19 Questionable Payments. To the knowledge of Seller, neither Seller
---------------------
nor any of Seller's current or former partners, shareholders, directors,
executives, officers, representatives, agents or employees (when acting in such
capacity or otherwise on behalf of Seller), in each case with respect to the
Division's business, (a) has used or is using any corporate funds for any
illegal contributions, gifts, entertainment or other unlawful expenses relating
to political activity; (b) has used or is using any corporate funds for any
direct or indirect unlawful payments to any foreign or domestic government
officials or employees; (c) has violated or is violating any provision of the
Foreign Corrupt Practices Act of 1977, except where such violation was not, is
not and will not be material to Seller; (d) has established or maintained, or is
maintaining, any unlawful or unrecorded fund of corporate monies or other
properties; (e) has made, at any time since August 13, 1996, any false or
fictitious entries on the books and records of Seller; (f) has made any bribe,
rebate, payoff, influence payment, kickback or other unlawful payment of any
nature using corporate funds or otherwise on behalf of Seller; or (g) made any
material favor or gift that is not deductible for federal income tax purposes
using corporate funds or otherwise on behalf of Seller.
4.20 Related Party Transactions. Except as described on Schedule 4.20
--------------------------
and except for any employment Contracts listed on Schedule 4.12, there are no
real estate leases, personal property leases, loans, guarantees, Contracts,
transactions,
19
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understandings or other arrangements of any nature between Seller and any
current or former partners, shareholder, director, executive, officer or
controlling Person of Seller (or any of its predecessors) or any other Person
affiliated with Seller (or any of its predecessors) with respect to the
Division's business or the Specified Assets.
4.21 Brokerage Fees. Except as set forth on Schedule 4.21, no Person
--------------
acting on behalf of Seller is or shall be entitled to any brokerage or finder's
fee in connection with the transactions contemplated by this Agreement.
4.22 Full Disclosure. No representation or warranty made or Schedule
---------------
delivered by Seller in this Agreement (a) contains any untrue statement of any
fact; or (b) omits to state any fact that is necessary to make the statements
made, in the context in which made, not false or misleading in any respect.
5. REPRESENTATIONS OF BUYER
------------------------
Knowing that Seller is relying thereon, Buyer represents and warrants
to Seller and covenant with Seller as follows:
5.1 Organization. Buyer is duly organized, validly existing and in
------------
good standing under the Law (as defined in Section 114) of its jurisdiction of
incorporation. Buyer has the full corporate power and authority to own its
Assets, conduct its business as and where such business is presently conducted,
and enter into this Agreement. Buyer is a wholly owned subsidiary of NCO.
5.2 Agreement. Buyer's execution, delivery and performance of this
---------
Agreement, and its consummation of the transactions contemplated by this
Agreement, (a) has been duly authorized by all necessary corporate actions by
its board of directors and NCO's board of directors; (b) does not constitute a
violation of or default under its charter or bylaws; (c) does not constitute a
default or breach (immediately or after the giving of notice, passage of time or
both) under any Contract to which it is a party or by which it is bound; (d) to
the knowledge of Buyer and NCO, does not constitute a violation of any Law (as
defined in Section 114) or Judgment (as defined in Section 113) that is
applicable to either of them or to the business or Assets of Buyer, or to the
transactions contemplated by this Agreement; and (e) except as stated on
Schedule 52, does not require the Consent (as defined in Section 14) of any
Person (as defined in Section 117). This Agreement constitutes the valid and
legally binding agreement of Buyer, enforceable against it in accordance with
its terms.
5.3 Brokerage Fees. Except as set forth on Schedule 5.3, no Person
--------------
acting on behalf of Buyer or NCO is entitled to any brokerage, finder's or
investment banking fee in connection with the transactions contemplated by this
Agreement.
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5.4. Securities Filings. NCO has heretofore delivered or made
------------------
available to Seller, in the form filed with the Securities and Exchange
Commission (the "Commission"), copies of all material reports and other
documents that NCO is required to file with the Commission (the "SEC Reports").
The SEC Reports were, to the knowledge of NCO, prepared substantially in
accordance with the requirements of the Securities Act or the Exchange Act, as
the case may be, and the rules and regulations promulgated thereunder.
5.5. Financial Statement of Buyer. Schedule 5.5 includes complete
----------------------------
copies of unaudited financial statements of the Buyer consisting of a balance
sheet of the Buyer as of November 30, 1997 and the related statement of income
for the nine month period then ended. Except as set forth on Schedule 5.5, such
financial statements are in all material respects consistent with the books and
records of the Buyer, and there are no transactions required by GAAP, applied on
a consistent basis, to be recorded in accounting records that have not been
recorded in the accounting records underlying such financial statements. Except
as set forth on Schedule 5.5, such financial statements have been prepared in
accordance with GAAP consistently applied and present fairly the financial
position and assets and liabilities of the Buyer as of the dates thereof and the
results of its operations for the periods then ended, subject to normal
recurring year-end adjustments and the absence of notes.
6. CERTAIN OBLIGATIONS OF SELLER PENDING CLOSING
---------------------------------------------
6.1 Investigation. During the period from the date of this Agreement
-------------
to the Closing Date, (a) Seller shall permit Buyer and/or NCO and their
authorized representatives to have full access to the Facilities during normal
business hours, to observe the Division's business operations, to meet with the
Division's officers and employees engaged in the Division's business, and to
audit, examine and copy all of the Division's files, books and records, and
other documents and papers relating to the Division's business, and (b) Seller
shall provide to Buyer and/or NCO and their authorized representatives all
information concerning Seller and the Division's business and the Specified
Assets, and all information concerning the financial condition of the Division
and the Division's business, that is reasonably requested by NCO or Buyer.
6.2 Conduct of The Division's business. Between the date of this
----------------------------------
Agreement and the Closing Date, except with the prior written consent of Buyer:
6.2.1 Seller shall (i) conduct the Division's business in the
ordinary course consistent with past practices, (ii) not make any material
change in its business practices, and (iii) use its reasonable commercial
efforts consistent with past practice to preserve the business organization of
the Division's business intact, keeping available the services of its current
officers, employees, salesmen, agents and representatives engaged in the
Division's business, and maintaining the good will of its customers, suppliers
and other Persons having business relations with the Division's business; and
21
<PAGE>
6.2.2 Except in the ordinary course of its business
consistent with its past practices, Seller shall not (i) create or assume any
Encumbrance upon any of the Division's business or Specified Assets, (ii) incur
any Obligation on behalf of or relating to the Division's business, (iii) make
any loan or advance to any Person on behalf of or relating to the Division's
business, (iv) assume, guarantee or otherwise become liable for any Obligation
of any Person on behalf of or relating to the Division's business, (v) commit
for any capital expenditure on behalf of or relating to the Division's business,
(vi) purchase, lease, sell, abandon or otherwise acquire or dispose of any part
of the Division's business or the Specified Assets, (vii) waive any right or
cancel any debt or claim on behalf of or relating to the Division's business,
(viii) assume or enter into any Contract on behalf of or relating to the
Division's business other than this Agreement (and any other Contract
contemplated herein) or (ix) increase, or authorize an increase in, the
compensation or benefits paid or provided to any of its directors, officers,
employees, salesmen, agents or representatives engaged in the Division's
business.
6.3 Hart-Scott-Rodino Filings. As soon as is practical after the date
-------------------------
of this Agreement, (a) Seller shall make all filings under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended ("Hart-Scott-Rodino Act"), that
are required to be made by it in connection with the transactions contemplated
by this Agreement, and (b) Seller shall cooperate with Buyer and NCO in
connection with the filings by them under the Hart-Scott-Rodino Act, including,
but not limited to, providing all information reasonably requested by Buyer and
NCO and taking all actions reasonably requested by them to cause the early
termination of all applicable waiting periods under the Hart-Scott-Rodino Act.
6.4 Consents. Between the date of this Agreement and the Closing Date,
--------
Seller shall in good faith use its reasonable commercial efforts to obtain all
Required Consents, and to give the notices and make the filings, described on
Schedule 4.2.
6.5 Acquisition Proposals. Between the date of this Agreement and the
---------------------
Closing Date, neither Seller nor any of its officers, employees, representatives
or agents, or their respective affiliates, shall, directly or indirectly,
solicit, initiate, encourage or respond to other than to reject or to advise the
applicable third party as to the existence of this Agreement, but without
disclosing any details regarding the transaction, any inquiries or proposals
from, or participate in any discussions or negotiations with, or provide any
non-public information to, any Person or group (other than NCO or Buyer and
their respective officers, employees, representatives and agents) concerning any
sale of any of the Division's business or any of the Specified Assets.
6.6 Advice of Changes. Between the date of this Agreement and the
-----------------
Closing Date, Seller shall promptly advise Buyer and NCO, in writing, of any
fact of which Seller obtains knowledge and which, if existing or known as of the
date of this Agreement, would have been required to be set forth or disclosed in
or pursuant to this Agreement (it being understood that such advice without the
written consent of NCO shall not be deemed to
22
<PAGE>
modify the representations, warranties and covenants of Seller contained in this
Agreement).
6.7 Access to Employees. During the period from the date of this
-------------------
Agreement to the Closing Date, Seller shall permit Buyer and NCO and their
authorized representatives to have access to Seller's employees on a basis
coordinated with Seller for the purpose of soliciting such employees of the
Division to accept offers of employment from the Buyer upon the Effective Date.
7. CERTAIN OBLIGATIONS OF BUYER AND NCO PENDING CLOSING
----------------------------------------------------
7.1 Corporate Status. Between the date of this Agreement and the
----------------
Closing Date:
7.1.1 Each of Buyer and NCO shall maintain its corporate
existence and good standing in its jurisdiction of incorporation.
7.1.2 Neither Buyer nor NCO shall enter into any Contract that
commits it to take any action or omit to take any action that would be
inconsistent with any of the provisions of this Section 71 or any other
provisions of this Agreement.
7.2 Hart-Scott-Rodino-Filings. As soon as is practical after the date
-------------------------
of this Agreement, (a) Buyer and NCO shall make all filings under the Hart-
Scott-Rodino Act that are required to be filed by them in connection with the
transactions contemplated by this Agreement, and (b) Buyer and NCO shall
cooperate with Seller, in connection with the filings by Seller under the Hart-
Scott-Rodino Act, including, but not limited to, taking all actions reasonably
requested by Seller to cause the early termination of all applicable waiting
periods.
7.3 Consents. Between the date of this Agreement and the Closing Date,
--------
each of Buyer and NCO shall in good faith cooperate with Seller in its
reasonable commercial efforts to obtain the Required Consents and to give the
notices and make the filings, described in Section 4.2 provided that neither
Buyer nor NCO shall be required to guarantee to any Person any obligations of
Buyer under any Contract assigned by Seller to Buyer.
7.4 Advice of Changes. Between the date of this Agreement and the
-----------------
Closing Date, Buyer shall promptly advise Seller, in writing, of any fact of
which it obtains knowledge and which, if existing or known as of the date of
this Agreement, would have been required to be set forth or disclosed in or
pursuant to this Agreement (it being understood that such advice without the
written consent shall not be deemed to modify the representations, warranties
and covenants of Buyer contained in this Agreement).
23
<PAGE>
8. CONDITIONS PRECEDENT TO SELLER'S CLOSING OBLIGATIONS
----------------------------------------------------
Each obligation of Seller to be performed on the Closing Date shall be
subject to the satisfaction of each of the conditions stated in this Section 8,
except to the extent that such satisfaction is waived by Seller in writing.
8.1 Representations of the Buyer. All representations, warranties and
----------------------------
certifications made by Buyer in this Agreement or pursuant hereto shall be true
in all material respects on and as of the Closing Date, with the same force and
effect as though made on and as of the Closing Date.
8.2 Performance by the Buying Companies. All of the covenants, terms
-----------------------------------
and conditions of this Agreement to be satisfied or performed by Buyer on or
before the Closing Date shall have been substantially satisfied or performed.
8.3 Absence of Proceedings. No Proceeding shall have been instituted
----------------------
or threatened (excluding any Proceeding instituted by or on behalf of Seller),
no Judgment shall have been issued, and no new Law shall have been enacted, on
or before the Closing Date, that seeks to or does prohibit or restrain, or that
seeks damages as a result of, the consummation of the transactions contemplated
by this Agreement.
8.4 Hart-Scott-Rodino. All applicable waiting periods with respect to
-----------------
the transactions contemplated by this Agreement shall have expired under the
Hart-Scott-Rodino Act, and neither the Federal Trade Commission nor the
Antitrust Division of the Department of Justice shall have (a) required any
party to divest itself of any assets in order to consummate such transactions,
or (b) taken any actions to prohibit the consummation of such transactions.
8.5. Employment Agreements. Patrick Baldasare ("Baldasare") and
---------------------
Richard Raquet ("Raquet") have each resigned from their employment with Seller
without the need for any termination compensation under their respective
employment contracts with Seller
9. CONDITIONS PRECEDENT TO BUYER'S CLOSING OBLIGATIONS
---------------------------------------------------
Each obligation of Buyer to be performed on the Closing Date shall be
subject to the satisfaction of each of the conditions stated in this Section 9,
except to the extent that such satisfaction is waived by Buyer in writing.
9.1 Representations of Seller. All representations, warranties and
-------------------------
certifications made by Seller in this Agreement or pursuant hereto shall be true
in all material respects on and as of the Closing Date, with the same force and
effect as though made on and as of the Closing Date, and the Schedules to this
Agreement shall be complete, accurate and current in all material respects on
and as of the Closing Date, with
24
<PAGE>
only such changes as are expressly permitted in and are consistent with the
terms of this Agreement.
9.2 Performance by Seller. All of the covenants, terms and conditions
---------------------
of this Agreement to be substantially satisfied or performed by Seller on or
before the Closing Date shall have been satisfied or performed.
9.3 Absence of Proceedings. No Proceeding shall have been instituted
----------------------
or threatened (excluding any Proceeding initiated by or on behalf of Buyer or
NCO any of their affiliates), no Judgment shall have been issued, and no new Law
shall have been enacted, on or before the Closing Date, that seeks to or does
prohibit or restrain, or that seeks damages as a result of, the consummation of
the transactions contemplated by this Agreement.
9.4 Seller's Adverse Changes. Between the date of that Agreement and
------------------------
the Closing Date, there shall not have been (a) any material adverse change or
material casualty loss affecting the Division's business or the Specified
Assets, the financial condition of the Division's business; (b) any material
adverse change in the financial performance of the Division's business; or (c)
any material change affecting Seller's ability to complete this transaction and
deliver the Specified Assets in accordance with the terms of this Agreement.
9.5 Hart-Scott-Rodino. All applicable waiting periods with respect to
-----------------
the transactions contemplated by this Agreement shall have expired under the
Hart-Scott-Rodino Act, and neither the Federal Trade Commission nor the
Antitrust Division of the Department of Justice shall have (a) required any
party to divest itself of any assets in order to consummate such transactions,
or (b) taken any actions to prohibit the consummation of such transactions.
9.6 Consents. All Required Consents set forth on Schedule [4.2] shall
--------
have been obtained.
9.7 Employment Agreements. Buyer executing employment agreements with
---------------------
Pat Baldasare ("Baldasare"), President of the Division and Richard Requett
("Requett"), General Manager of the Division.
10. CLOSING
-------
10.1 Closing. Unless this Agreement is terminated as provided in
-------
Section 14, the closing of the transactions contemplated by this Agreement (the
"Closing") shall be held at 10:00 a.m. local time on next business day after the
satisfaction of the conditions set forth in Section 8.4 and Section 9.5 or such
other date and time as is mutually agreeable (the "Closing Date" or the
"Effective Date"), at Buyer's counsel offices or such other location as is
mutually agreeable.
25
<PAGE>
10. Obligations of Seller at Closing. At the Closing, Seller shall
--------------------------------
deliver to the Buyer the following:
10. Specified Assets. Possession and control of the Division's
----------------
business, the Facilities and all of the Specified Assets used in the Division's
business, including, but not limited to, all applicable keys, access cards and
other entry devices.
10. Documents of Transfer. Such bills of sale, assignments,
---------------------
deeds, endorsements, affidavits, and other instruments and documents of sale,
transfer, assignment and conveyance as Buyer may reasonably require, in order to
lawfully and effectively sell, transfer, assign and convey to Buyer all of
Seller's right, title and interest in and to all of the Specified Assets, in
each case in form reasonably acceptable to Seller and Buyer, dated as of the
Effective Date, and duly executed and, if necessary, acknowledged by Seller.
10. Closing Certificate. A certificate ("Selling Party's
-------------------
Closing Certificate"), dated the Closing Date, in form and substance reasonably
satisfactory to Buyer, signed by the President and Chief Financial Officer of
Seller, in which Seller represents and warrants to Buyer that: (a) all
representations, warranties and certifications made by Seller in this Agreement
or pursuant hereto are true in all material respects on and as of the Closing
Date, with the same force and effect as though made on and as of the Closing
Date; (b) the Schedules to this Agreement are complete and accurate in all
material respects on and as of the Closing Date, with only such changes as are
expressly permitted in and are consistent with the terms of this Agreement (all
of which changes shall be set forth in an attachment to Selling Party's Closing
Certificate); (c) all of the covenants, terms and conditions of this Agreement
to be satisfied or performed by Seller on or before the Closing Date have been
substantially satisfied or performed; (d) as of the Closing Date, no Proceeding
has been instituted or threatened, no Judgment has been issued, and no new Law
has been enacted that seeks to or does prohibit or restrain, or that seeks
damages as a result of, the consummation of the transactions contemplated by
this Agreement; and (e) since the date of this Agreement, there has not been (i)
any material adverse change or material casualty loss affecting the Division's
business or the Specified Assets, the financial condition of the Division's
business or (ii) any material adverse change in the financial performance of the
Division's business.
10. Incumbency Certificate. A certificate of the Secretary of
----------------------
Seller as to the incumbency and signatures of the officers of Seller executing
this Agreement.
10. Resolutions. Copies of the resolutions duly adopted by the
-----------
board of directors and, if applicable, shareholders of Seller, authorizing
Seller to enter into and perform this Agreement, certified by proper officers as
in full force and effect on and as of the Closing Date.
26
<PAGE>
10.2.6 Good Standing. Good standing certificates for Seller from
-------------
its jurisdiction of incorporation and the Commonwealth of Pennsylvania, all
dated no earlier than 15 days before the Closing Date.
10.2.7 Opinion of Counsel. An opinion of counsel to Seller
------------------
addressed to Buyer and NCO and dated the Closing Date, in the form attached as
Exhibit 10.2.7 hereto.
10.2.8 Consents. The original signed copies of all Required
--------
Consents listed on Schedule 4.2.
10.2.9 Debt Payoff. Proper documentary evidence of the full
-----------
payment and satisfaction of all debt of Seller with respect to which there are
any Encumbrances upon any of the Specified Assets; together with all documents
reasonably requested by Buyer to remove all such Encumbrances on the Specified
Assets, including, but not limited to, UCC-3 termination forms duly executed by
the secured parties and mortgage satisfaction and release forms duly executed by
the mortgagees, and UCC-3 termination forms duly executed by former secured
parties for which UCC-1 financing statements remain of record, in each case in
form acceptable for immediate filing with the appropriate state or local
governmental office.
10.3 Obligations of Buyer at Closing. At the Closing, Buyer shall
-------------------------------
deliver to Seller the following:
10.3.1 Closing Payments. A wire transfer of immediately available
----------------
United States federal funds or a bank certified, treasurer's or cashier's check
in the amount of the Purchase Price, in accordance with Seller's proper
instructions as to payment.
10.3.2 Assumption of Liabilities. An assumption of the Specified
-------------------------
Liabilities, in form reasonably acceptable to Buyer and Seller, dated as of the
Effective Date, and duly executed by Buyer.
10.3.3 Closing Certificate. A certificate ("Buyer's Closing
-------------------
Certificate"), dated the Closing Date, in form and substance reasonably
satisfactory to Seller, signed by the President and Chief Financial Officer of
Buyer, in which Buyer represents and warrants to Seller that: (a) all
representations, warranties and certifications made by Buyer in this Agreement
or pursuant hereto are true in all material respects on and as of the Closing
Date, with the same force and effect as though made on and as of the Closing
Date; (b) all of the covenants, terms and conditions of this Agreement to be
satisfied or performed by Buyer on or before the Closing Date have been
substantially satisfied or performed; (c) as of the Closing Date, no Proceeding
has been instituted or threatened, no Judgment has been issued, and no new Law
has been enacted that seeks to or does prohibit or restrain, or that seeks
damages as a result of, the consummation of the transactions contemplated by
this Agreement; and (d) since the date of this Agreement, there has not been any
27
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material adverse change or material casualty loss affecting the financial
condition of Buyer.
10.3.4 Incumbency Certificate. A certificate of Secretary of each
----------------------
of Buyer and NCO as to the incumbency and signatures of the officers executing
this Agreement.
10.3.5 Resolutions. Copies of the resolutions duly adopted by the
-----------
respective boards of directors of Buyer and NCO, authorizing Buyer and NCO to
enter into and perform this Agreement, certified by proper officers as in full
force and effect on and as of the Closing Date.
10.3.6 Good Standing. Good standing certificates for Buyer from
-------------
its jurisdiction of incorporation, dated no earlier than 15 days before the
Closing Date.
10.3.7 Opinion of Counsel. An opinion of counsel to Buyer
------------------
addressed to Seller and dated the Closing Date, in the form attached as Exhibit
10.3.7 hereto.
11. CERTAIN POST-CLOSING OBLIGATIONS
--------------------------------
11.1 Transition and Cooperation. From and after the Closing Date,
--------------------------
(a) Seller shall fully cooperate to transfer to the Buyer the control and
enjoyment of the Division's business and the Specified Assets; (b) Seller shall
not take any action, directly or indirectly, alone or together with others,
which obstructs or impairs the smooth assumption by Buyer of the Division's
business and the Specified Assets; and (c) Seller shall promptly deliver to
Buyer all correspondence, papers, documents and other items and materials
received by Seller or found to be in the possession of Seller which pertain
exclusively to the Division's business or the Specified Assets.
11.2 Use of Names. Beginning immediately after the Closing Date,
------------
Seller shall cease all use of all the name "The Response Center," fictitious
names, product names and other names used by Seller exclusively in the
Division's business at any time on or before the Closing Date and included in
the Specified Assets, except as may be necessary to perform their obligations
hereunder. Upon Buyer's request, Seller shall promptly sign all Consents and
other documents that may be necessary to allow Buyer to use or appropriate the
use of any such name used by Seller at any time on or before the Closing Date.
11.3 Contract Matters. After the Closing, each Contract
----------------
("Transferred Contract") as to which (a) the Contract Rights of Seller are
included in the Specified Assets, and (b) Consent to the assignment thereof from
Seller to Buyer may be required under such Transferred Contract or applicable
Law but was not obtained on or before the Closing Date, shall be handled in
accordance with the following provisions:
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11.3.1 Consent. Seller shall cooperate with Buyer in a
-------
commercially reasonable manner in the Buyer's efforts to obtain Consent to the
assignment of such Transferred Contract. If and when Consent to assignment of
such Transferred Contract is obtained, such Transferred Contract shall no longer
be subject to the provisions of this Section 11.3.
11.3.2 Subcontracting. Seller shall make available to Buyer all
--------------
Contract Rights and other benefits of such Transferred Contract, on a
subcontract or sublease basis or in some other appropriate manner to the fullest
extent as is commercially reasonable and Buyer shall be considered an
independent subcontractor or sublessee of Seller, or an agent of Seller, with
respect to all matters concerning such Transferred Contract. Without limiting
the foregoing, Buyer shall be considered Seller's agent for purposes of (a)
collecting all amounts that may be due from the other party or parties to such
Transferred Contract; and (b) negotiating or otherwise handling all disputes and
issues that may arise in connection with such Transferred Contract. Without
Buyer's prior written consent, Seller shall not agree to any amendment,
modification, extension, renewal, termination or other change in the terms of
such Transferred Contract, nor shall Seller exercise any Contract Right under
such Transferred Contract.
11.3.3 Buyer's Instructions. At Buyer's direction, Seller shall
--------------------
(a) notify the other party or parties to such Transferred Contract that Buyer is
Seller's subcontractor, sublessee or agent with respect thereto and that all
further payments, notices and other communications with respect thereto shall be
directed to Buyer; (b) agree to such amendments, modifications, extensions,
renewals, terminations or other changes in the terms of such Transferred
Contract as Buyer determines, in its sole discretion, are advisable, provided
that any such action does not impose any material financial commitment or
expense of Seller; and (c) exercise any Contract Right under such Transferred
Contract at such time and in such manner as Buyer determines, in its sole
discretion, to be advisable.
11.3.4 Collateral Assignment. Effective as of the Closing Date,
---------------------
Seller hereby collaterally assigns to Buyer (except and only to the extent that
such collateral assignment is expressly prohibited by the terms of such
Transferred Contract), and grants to Buyer a security interest in, all of
Seller's contract rights under such Transferred Contract and all cash and non-
cash proceeds thereof, as security for the prompt and timely satisfaction and
performance of Seller's obligations under this Section 113. Buyer shall have,
and Seller shall deliver to Buyer at the Closing, possession of the original
executed copy of such Transferred Contract. Effective as of the Closing Date,
Seller hereby appoints Buyer as Seller's attorney to take such actions, in
Seller's name and on its behalf, as such attorney reasonably determines to be
necessary or advisable to protect, perfect and continue perfected the security
interest granted hereunder, including, but not limited to, the execution and
filing of such financing statements and other instruments and documents as such
attorney determines, in its sole discretion, to be necessary or advisable for
such purposes.
29
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11.4 Employee Benefit Plans. As soon as is practical after the Closing
----------------------
Date, Seller shall take all actions as are necessary or appropriate to fully
vest, as of the Effective Date, the interests under Seller's Retirement Plans
(as defined in Section 226) of all of Seller's employees who are hired by Buyer,
and to transfer, as soon as possible but not later than nine months after the
Closing Date, the full amount of such vested interests to the accounts of such
employees under Buyer's tax-qualified, individual account, defined contribution
retirement plan. Notwithstanding the foregoing, Seller shall not be obligated
to make any such transfer until Buyer delivers to Seller reasonable evidence as
to the tax-qualified status of the plan under sections 401(a) of the Code.
Buyer assumes the sole responsibility for providing benefits under such plan, in
accordance with applicable laws, including, but not limited to, Code section
411(d)(6), to employees of Seller who are hired by Buyer. Seller's employees
who are hired by Buyer shall be given credit for all purposes under Buyer's
employee benefit plans for their service with Seller prior to the Effective
Date. Buyer shall have no responsibility for the continuing claims of Seller's
employees or COBRA Obligations (as defined in Section 2.1.1(E). Buyer shall be
responsible for providing coverage as of the Effective Date, under the standard
group insurance plans of Buyer, for all medical, dental, disability and related
claims incurred after the Effective Date by employees of Seller who are hired by
Buyer. Buyer shall, for those of Seller's employees hired by Buyer who are
otherwise eligible under NCO or Buyer's plans, waive any pre-existing
conditions, exclusions or waiting periods under its plans.
11.5 Access to Accounting Information. For a period of one (1) year
--------------------------------
after the Closing Date, Seller shall permit Buyer and its authorized
representatives to have full access to, and use of, Seller's books and records,
financial statements, opinions of independent public accountants, and accounting
information, workpapers, notes and related materials, prepared, reviewed or
compiled with respect to, or including the Division's business (whether in the
possession of Seller or Seller's accountants) for the year ended December 31,
1995, December 31, 1996, December 31, 1997 and for the period from January 1,
1998 through and including the Effective Date, and any interim periods therein,
for review, duplication, analysis and any other legal use, including but not
limited to, the preparation of audited financial statements for the Division's
business for use in connection with any public offering of securities pursuant
to the Securities Act of 1933, as amended or any reports filed pursuant to the
Securities Exchange Act of 1934, as amended or applicable state "blue sky" laws.
11.6 Further Assurances. At any time and from time to time after the
------------------
Closing Date, at Buyer's request and expense, and without further consideration,
Seller shall promptly execute and deliver all such further agreements,
certificates, instruments and documents, and perform such further actions, as
Buyer may reasonably request in order to fully consummate the transactions
contemplated hereby and carry out the purposes and intent of this Agreement.
30
<PAGE>
12. RESTRICTIVE COVENANTS OF SELLER
-------------------------------
12.1 Access to Information. During the period that Seller owned the
---------------------
Division's business, Seller had access to proprietary and confidential property,
knowledge and information of the Division's business which, after Closing, shall
be proprietary and confidential property, knowledge and information of Buyer;
such property, knowledge and information must be kept in strict confidence to
protect Buyer's business and maintain Buyer's competitive positions in the
marketplace; and such property, knowledge and information would be useful to
competitors of Buyer for indefinite periods of time.
12.1.1 Basis for Covenants. The covenants of Sections 12.2 and
-------------------
12.3 (the "Covenants") are a material part of this Agreement and are an
integral part of the obligations of Seller hereunder; the Covenants are
supported by good and adequate consideration; and the Covenants are reasonable
and necessary to protect the legitimate business interests of Buyer.
12.2 Nondisclosure Covenants. At all times after the date of this
-----------------------
Agreement, for an indefinite period of time, except with Buyer's prior written
consent, Seller shall not, directly or indirectly, in any capacity communicate,
publish or otherwise disclose to any Person, or use for the benefit of any
Person, any confidential or proprietary property, knowledge or information of
Buyer acquired by Buyer in the transaction contemplated by this Agreement, no
matter when or how such knowledge or information was obtained, including without
limitation (a) any information concerning the Specified Assets, or the conduct
and details of the Division's business; (b) the identity of customers and
prospects, their specific requirements, and the names, addresses and telephone
numbers of individual contacts at customers and prospects; (c) prices, renewal
dates and other detailed terms of customer and supplier Contracts and proposals;
(d) pricing policies, marketing and sales strategies, methods of delivering
Software and services, and Software and service development projects and
strategies; (e) source code, object code, user manuals, technical manuals and
other documentation for Software products; (f) screen designs, report designs
and other designs, concepts and visual expressions for Software products; (g)
employment and payroll records; (h) forecasts, budgets and other nonpublic
financial information; and (i) expansion plans, management policies, methods of
operation, and other business strategies and policies.
12.3 Noncompetition Covenants. During the period beginning on the date
------------------------
of Closing and ending on the fifth (5/th/) anniversary of the Closing Date,
except with Buyer's prior written consent, Seller shall not, directly or
indirectly, in any capacity, at any location worldwide:
12.3.1 Solicitation Restrictions. Communicate with or solicit
-------------------------
any Person who is or during such period becomes a customer, prospect, supplier,
employee, salesman, agent or representative of, or a consultant to, Buyer, in
any manner which interferes or is reasonably foreseeable that it will interfere
with such Person's relationship
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with Buyer in connection with Buyer's operation of the Division's business, or
in an effort to obtain any such Person as a customer, employee, salesman, agent
or representative of, or a consultant to, any other Person that conducts a
business directly competitive with the Division's business as such exists on the
Closing Date.
12.3.2 Competing Business Restrictions. Establish, own, manage,
-------------------------------
operate, finance or control, or participate in the establishment, ownership,
management, operation, financing or control of, any Person that conducts a
business directly competitive with all or any part of the Division's business.
The foregoing notwithstanding, Seller shall be permitted to (i) continue
operating its customer care consulting business ( including its information
gathering and survey activities) conducted by its TARP division, (ii) provide
limited market research services to its customers which are ancillary to other
services provided pursuant to telemarketing contracts with its customers so long
as such market research services do not exceed ten percent (10%) of the overall
services to be provided under such contracts, and (iii) provide up to a maximum
of $1,000,000 in each year, exclusive of clauses (i) and (ii), of non-analytical
information gathering and survey services without such being a violation of the
Covenants, provided that Seller shall not expand or in any way reenter the
business previously conducted by the Division. Nothing shall prevent Seller from
acquiring other companies engaged in the customer care business similar to that
conducted by Seller's TARP division, so long as Seller, following such
acquisitions, remains in compliance with the restrictions of this Agreement.
12.4 Certain Exclusions. Confidential and proprietary property,
------------------
knowledge and information of Buyer shall not include any information that is
now known by or readily available to the general public, nor shall it include
any information that in the future becomes known by or readily available to the
general public other than as a result of any breach of the Covenants of this
Agreement. The ownership by Seller or its executive officers of not more than
five percent (5%) of the outstanding securities of any public or private company
shall not, by itself, constitute a breach of the Covenants of Section 12.2, even
if such public company competes with Buyer.
12.5 Seller's Release of Certain Employees' Noncompetition Covenants.
---------------------------------------------------------------
In connection with Buyer's employment of Baldasare and Raquet, Seller agrees to
release any noncompetition covenants which Baldasare and Raquet executed for the
benefit of Seller with respect to the Division's business, and in consideration
thereof, Buyer agrees to limit its use of Baldasare and Raquet to market
research services. Buyer shall use its best efforts to obtain Baldasare's and
Raquet's release of Seller from any further obligation by Seller to them in
connection with their respective employment agreements with Seller.
12.6 Nonsolicitation of Employees. During the period beginning on
----------------------------
the date of this Agreement and ending eighteen (18) months thereafter, Seller
or any of its affiliates shall not solicit, or hire any employees who were
employed by the Division's business prior to the date of this Agreement to
become employees or independent contractors of Seller or any of its affiliates.
Notwithstanding the foregoing, after ninety (90) days following
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<PAGE>
Closing, this restriction shall no longer be imposed on Seller in connection
with general solicitations or hiring as a result of such general solicitations
of any such former non-managerial employees of the Division who are telephone
representatives or supervisors of telephone representatives.
12.7 Enforcement of Covenants. Seller expressly acknowledges that it
------------------------
would be extremely difficult to measure the damages that might result from any
breach of the Covenants, and that any breach of the Covenants will result in
irreparable injury to Buyer for which money damages could not adequately
compensate. If a breach of the Covenants occurs, then Buyer shall be entitled,
in addition to all other rights and remedies that it may have at law or in
equity, to have an injunction issued by any competent court enjoining and
restraining Seller and all other Persons involved therein from continuing such
breach. The existence of any claim or cause of action that Seller or any such
other Person may have against any member of Buyer shall not constitute a defense
or bar to the enforcement of any of the Covenants. If Buyer must resort to
litigation to enforce any of the Covenants that has a fixed term, then such term
shall be extended for a period of time equal to the period during which a breach
of such Covenant was occurring, beginning on the date of a final court order
(without further right of appeal) holding that such a breach occurred or, if
later, the last day of the original fixed term of such Covenant.
12.8 Scope of Covenants. If any Covenant, or any part thereof, or the
------------------
application thereof, is construed to be invalid, illegal or unenforceable, then
the other Covenants, or the other portions of such Covenant, or the application
thereof, shall not be affected thereby and shall be enforceable without regard
thereto. If any of the Covenants is determined to be unenforceable because of
its scope, duration, geographical area or other factor, then the court making
such determination shall have the power to reduce or limit such scope, duration,
area or other factor, and such Covenant shall then be enforceable in its reduced
or limited form.
13. INDEMNIFICATION
---------------
13.1 Seller's Indemnification. From and after the Closing Date, Seller
------------------------
shall indemnify and hold harmless Buyer, and its respective successors and
assigns, and its respective directors, officers, employees, agents and
representatives, from and against any and all actions, suits, claims, demands,
debts, liabilities, obligations, losses, damages, costs and expenses, including
without limitation reasonable attorney's fees and court costs, arising out of or
caused by, directly or indirectly, any of all of the following:
13.1.1 Misrepresentation. Any misrepresentation, breach or
-----------------
failure of any warranty or representation made by Seller in this Agreement.
13.1.2 Nonperformance. Any failure of Seller to satisfy or
--------------
perform any of its covenants under this Agreement required to be satisfied or
performed by Seller.
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13.1.3 Non-Assumed Obligations. Any Obligation of Seller other
-----------------------
than those expressly included in the Specified Liabilities.
13.1.4 Proceedings by Employees. Any Proceeding against Buyer by
------------------------
or on behalf of any employee of Seller who is not hired by Buyer.
13.1.5 Hart-Scott-Rodino Act. Any Obligation of or
---------------------
Proceeding (including fines and penalties) against the Buyer or NCO from any
breach of a representation or warranty of Seller as to the Hart-Scott-Rodino
Act.
13.2 Buyer's Indemnification. From and after the Closing Date, Buyer
-----------------------
and NCO shall jointly and severally indemnify and hold harmless Seller and its
respective successors and assigns, and their respective directors, officers,
employees, agents and representatives, from and against any and all actions,
suits, claims, demands, debts, liabilities, obligations, losses, damages, costs
and expenses, including without limitation reasonable attorney's fees and court
costs, arising out of or caused by, directly or indirectly, any of the
following:
13.2.1 Misrepresentation. Any misrepresentation, breach or
-----------------
failure of any warranty or representation made by Buyer in or pursuant to this
Agreement.
13.2.2 Nonperformance. Any failure of Buyer to satisfy or
--------------
perform any of its covenants under this Agreement.
13.2.3 Specific Liabilities. Any failure of Buyer to satisfy
--------------------
or perform any of the Specific Liabilities.
13.2.4 Post-Closing Operation of the Business. Buyer's operation
--------------------------------------
of the Division's business following the Closing Date.
13.3 Indemnification Procedures. With respect to each event, occurrence
--------------------------
or matter ("Indemnification Matter") as to which any party (the "Indemnitee") is
entitled to indemnification from any other party (the "Indemnitor") under this
Section 13:
13.3.1 Notice. Within ten (10) days after the Indemnitee
------
receives written documents underlying the Indemnification Matter or, if the
Indemnification Matter does not involve a third-party action, suit, claim or
demand, promptly after the Indemnitee first has actual knowledge of the
Indemnification Matter, the Indemnitee shall give notice to the Indemnitor of
the nature of the Indemnification Matter and the amount demanded or claimed in
connection therewith ("Indemnification Notice"), together with copies of any
such written documents.
13.3.2 Defense. If a third-party action, suit, claim or demand
-------
is involved, then, upon receipt of the Indemnification Notice, the Indemnitor
shall, at its
34
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expense and through counsel of its choice, promptly assume and have sole control
over the litigation, defense or settlement (the "Defense") of the
Indemnification Matter, except that (a) the Indemnitee may, at its option and
expense and through counsel of its choice, participate in (but not control) the
Defense; (b) if the Indemnitee reasonably believes that the handling of the
Defense by the Indemnitor may have a material adverse affect on the Indemnitee,
its business or financial condition, or its relationship with any customer,
prospect, supplier, employee, salesman, consultant, agent or representative,
then the Indemnitee may, at its option and expense and through counsel of its
choice, assume control of the Defense, provided that the Indemnitor shall be
entitled to participate in the Defense at its expense and through counsel of its
choice; (c) the Indemnitor shall not consent to any Judgment, or agree to any
settlement, without the Indemnitee's prior written consent, which consent shall
not unreasonably be withheld; and (d) if the Indemnitor does not promptly assume
control over the Defense or, after doing so, does not continue to prosecute the
Defense in good faith, the Indemnitee may, at its option and through counsel of
its choice, but at the Indemnitor's expense, assume control over the Defense. In
any event, the Indemnitor and the Indemnitee shall fully cooperate with each
other in connection with the Defense, including without limitation by furnishing
all available documentary or other evidence as is reasonably requested by the
other.
13.3.3 Payments. All amounts owed by the Indemnitor to the
--------
Indemnitee (if any) shall be paid in full within fifteen (15) business days
after a final Judgment (at the expiration of any appeal period) determining the
amount owed is rendered, or after a final settlement or agreement as to the
amount owed is executed.
13.4 Limits on Indemnification. Indemnitor's liability under this
-------------------------
Section shall be limited as follows:
13.4.1 Threshold. No amount shall be payable by the Indemnitor
---------
under this Section 13 unless and until the aggregate amount otherwise payable by
the Indemnitor under this Section 13 exceeds One Hundred Thousand Dollars
($100,000), in which event the Indemnitor shall pay such aggregate amount and
all future amounts payable by the Indemnitor under this Section 13.
13.4.2 Ceiling. The Indemnitor's total liability under this
-------
Section 13 shall not exceed Five Million Dollars ($5,000,000).
13.4.3 Time Periods. The Indemnitor shall have no liability
------------
with respect to any Indemnification Matter unless the Indemnitee gives an
Indemnification Notice with respect thereto within twenty-four (24) months after
the Closing Date.
13.5 Exceptions. None of the foregoing limitations shall apply in the
----------
case of any Indemnification Matter involving (i) intentional fraud; (ii) Taxes
or (iii) covenants to be performed after Closing.
35
<PAGE>
13.6 Additional Remedies. The remedies provided in Section 13 shall
-------------------
constitute the exclusive remedies for the matters covered thereby. With respect
to any other matters not covered by Section 13, any party shall be entitled to
such rights and remedies as such party may have at law or in equity, including
the right to seek specific performance or rescission, none of which rights or
remedies shall be affected or diminished by the remedies provided hereunder.
14. TERMINATION
-----------
14.1 Termination by Mutual Consent. At any time before the Closing,
-----------------------------
this Agreement may be terminated by the mutual written consents of Buyer and
Seller, authorized by their respective boards of directors.
14.2 Termination on Default. As used herein, "Default" means, with
----------------------
respect to Seller on the one hand, or with respect to Buyer on the other hand,
that any of the representations and warranties made by such parties in or
pursuant to this Agreement is or becomes false or misleading in any material
respect, or any provision of this Agreement to be satisfied or performed by such
parties is not substantially satisfied or performed in a timely manner, in
either case for reasons within the reasonable control of such parties. If a
Default occurs and is not cured within ten days after notice is given by the
non-Defaulting party to the Defaulting party specifying the nature of the
Default (or on or before the Closing Date if sooner), then the non-Defaulting
party may terminate this Agreement immediately upon notice to the Defaulting
party.
14.3 Termination at Closing. If any of the conditions set forth in
----------------------
Section 8 is not satisfied on or before the fifteenth (15/th/) days after
satisfaction of the condition set forth in Section 8.4, then Seller may
terminate this Agreement by notifying Buyer on the sixteenth (16/th/) day after
the Closing Date effective the Closing Date. If any of the conditions set forth
in Section 9 is not satisfied on or before the fifteenth (15/th/) day after the
satisfaction of the condition set forth in Section 9.5, then Buyer may terminate
this Agreement by notifying Seller on the sixteenth (16/th/) day after Closing
Date effective the Closing Date.
15. OTHER PROVISIONS
----------------
15.1 Confidentiality. During the period from the date of this Agreement
---------------
to the Closing Date, (a) each of the parties shall maintain the confidentiality
of all information normally maintained as confidential and exchanged among them
in connection with this Agreement, in the same manner that the recipient of the
information maintains the confidentiality of its own confidential information,
and (b) none of the parties will discuss the existence or nature of this
Agreement or the transaction contemplated hereby with any of Seller's customers,
prospects, suppliers, employees, contractors, salesmen, agents or
representatives, except in the manner reasonably determined by Buyer and Seller.
If this Agreement is terminated in accordance with Section 14, then each party
shall promptly
36
<PAGE>
return all confidential information and materials of the other parties, and the
provisions of the foregoing sentence shall survive such termination
indefinitely. Seller and Buyer each acknowledge that any breach of this Section
15.1 may cause irreparable injury to the others for which money damages could
not adequately compensate. If there is such a breach, the aggrieved parties
shall be entitled, in addition to all other rights and remedies they may have at
law or in equity, to have an injunction issued by any competent court enjoining
and restraining the breaching parties from continuing such breach. The existence
of any claim or cause of action which any of the breaching parties may have
against any of the aggrieved parties shall not constitute a defense or bar to
the enforcement of this Section 15.1.
15.2 Fees and Expenses. Buyer shall pay all of the fees and expenses
-----------------
incurred by it, and Seller shall pay all of the fees and expenses incurred by
it, in negotiating and preparing this Agreement (and all other Contracts
executed in connection herewith or therewith) and in consummating the
transactions contemplated by this Agreement. Buyer shall pay the Hart-Scott-
Rodino filing fee.
15.3 Notice. All notices, consents or other communications required or
------
permitted to be given under this Agreement shall be in writing and shall be
deemed to have been duly given (a) when delivered personally, (b) three business
days after being mailed by first class certified mail, return receipt requested,
postage prepaid, or (c) one business day after being sent by a reputable
overnight delivery service, postage or delivery charges prepaid, to the parties
at their respective addresses stated on the first page of this Agreement.
Notices may also be given by prepaid telegram or facsimile and shall be
effective on the date transmitted if confirmed within 24 hours thereafter by a
signed original sent in the manner provided in the preceding sentence. Any
party may change its address for notice and the address to which copies must be
sent by giving notice of the new addresses to the other parties in accordance
with this Section 153, except that any such change of address notice shall not
be effective unless and until received.
15.4 Survival of Representations. All representations and warranties
---------------------------
made in this Agreement or pursuant hereto shall survive the date of this
Agreement, the Effective Date, the Closing Date and the consummation of the
transactions contemplated by this Agreement for a period of eighteen(18) months
after the Closing Date unless otherwise set forth in this Agreement, and
thereafter, except for any claims of intentional fraud, no party may make any
claim for indemnification or otherwise on account of any breach of warranty or
on account of a misrepresentation.
15.5 Interpretation of Representations. Each representation and
---------------------------------
warranty made in this Agreement or pursuant hereto is independent of all other
representations and warranties made by the same parties, whether or not covering
related or similar matters, and must be independently and separately satisfied.
Exceptions or qualifications to any such representation or warranty shall not be
construed as exceptions or qualifications to any other representation or
warranty.
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15.6 Reliance by Buyer. Notwithstanding the right of Buyer to
-----------------
investigate the Division's business, Assets and financial condition of Seller,
and notwithstanding any knowledge determined or determinable by Buyer as a
result of such investigation, Buyer has the unqualified right to rely upon, and
have relied upon, each of the representations and warranties made by Seller in
this Agreement or pursuant hereto. For the purposes hereof, the reference to
"knowledge" means that none of the executive officers of Seller and neither
Baldasare nor Raquet have any actual knowledge that the statement made is
incorrect.
15.7 Entire Understanding. This Agreement, together with the Exhibits
--------------------
and Schedules hereto, states the entire understanding among the parties with
respect to the subject matter hereof, and supersedes all prior oral and written
communications and agreements, and all contemporaneous oral communications and
agreements, with respect to the subject matter hereof, including without
limitation all confidentiality letter agreements and letters of intent
previously entered into among some or all of the parties hereto. No amendment
or modification of this Agreement shall be effective unless in writing and
signed by the party against whom enforcement is sought.
15.8 Publicity. All voluntary public announcements concerning the
---------
transactions contemplated by this Agreement shall be mutually acceptable to both
Buyer and Seller. Unless required by Law, the parties shall not make any public
announcement or issue any press release concerning the transactions contemplated
by this Agreement without the prior written consent of the other parties. With
respect to any announcement that any of the parties is required by Law or stock
exchange or The Nasdaq Stock Market regulation to issue, such party shall, to
the extent possible under the circumstances, review the necessity for and the
contents of the announcement with the other parties before issuing the
announcement.
15.9 Parties in Interest. No party may assign this Agreement or any
-------------------
rights or obligations under this Agreement without the prior written consent of
the other party, which consent shall not unreasonably be withheld. This
Agreement shall bind, benefit, and be enforceable by and against the parties
hereto, and their respective successors and consented-to assigns.
15.10 Siegel Management Company. NCO has retained Siegel Management
-------------------------
Company ("SMC") as an advisor in connection with this transaction. Seller and
NCO acknowledge that SMC shall not be liable to either of them or their
successors by virtue of or in connection with SMC's services to NCO.
15.11 Waivers. Except as otherwise expressly provided herein, no waiver
-------
with respect to this Agreement shall be enforceable unless in writing and signed
by the party against whom enforcement is sought. Except as otherwise expressly
provided herein, no failure to exercise, delay in exercising, or single or
partial exercise of any right, power or remedy by any party, and no course of
dealing between or among any of the parties, shall
38
<PAGE>
constitute a waiver of, or shall preclude any other or further exercise of, any
right, power or remedy.
15.12 Severability. If any provision of this Agreement is construed to
------------
be invalid, illegal or unenforceable, then the remaining provisions hereof shall
not be affected thereby and shall be enforceable without regard thereto.
15.13 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when so executed and delivered shall be an original
hereof, and it shall not be necessary in making proof of this Agreement to
produce or account for more than one counterpart hereof.
15.14 Section Headings. The section and subsection headings in this
----------------
Agreement are used solely for convenience of reference, do not constitute a part
of this Agreement, and shall not affect its interpretation.
15.15 References. All words used in this Agreement shall be construed to
----------
be of such number and gender as the context requires or permits. Unless a
particular context clearly requires otherwise, the words "hereof" and
"hereunder" and similar references refer to this Agreement in its entirety and
not to any specific section or subsection of this Agreement.
15.16 Controlling Law. THIS AGREEMENT IS MADE UNDER, AND SHALL BE
---------------
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF
PENNSYLVANIA APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED SOLELY THEREIN,
WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.
15.17 Jurisdiction and Process. In any action between or among any of
------------------------
the parties, whether arising out of this Agreement or otherwise, (a) each of the
parties irrevocably consents to the exclusive jurisdiction and venue of the
federal and state courts located in the Commonwealth of Pennsylvania; (b) if any
such action is commenced in a state court, then, subject to applicable law, no
party shall object to the removal of such action to any federal court located in
the Commonwealth of Pennsylvania; (c) each of the parties irrevocably waives the
right to trial by jury; and (d) each of the parties irrevocably consents to
service of process by first class certified mail, return receipt requested,
postage prepaid, to the address at which such party is to receive notice in
accordance with Section 15.4.
15.18 No Third-Party Beneficiaries. No provision of this Agreement is
----------------------------
intended to or shall be construed to grant or confer any right to enforce this
Agreement, or any remedy for breach of this Agreement, to or upon any Person
other than the parties hereto
39
<PAGE>
including, but not limited to, any customer, prospect, supplier, employee,
contractor, salesman, agent or representative of Seller.
15.19 Seller's Access to Buyer's Records. In connection with Seller's
----------------------------------
right to review or audit Buyer's books and records for any event, including the
calculation of the earnout, as permitted in this Agreement, in order to preserve
Buyer's rights pursuant to Section 12 and any other section of this Agreement,
Seller agrees that it shall not be permitted access to any detailed client
and/or employee specific information as part of any such review or audit.
[SIGNATURES ON THE FOLLOWING PAGE]
40
<PAGE>
EACH PARTY HAS CAUSED THIS AGREEMENT TO BE EXECUTED ON ITS BEHALF BY A DULY
AUTHORIZED OFFICER, AS OF THE DATE FIRST STATED ABOVE.
SELLER:
By: /s/ Jonathan P. Robinson
---------------------------------
Title: Chief Operating Officer
---------------------------
Date: January 16, 1998
-------------------------------
BUYER:
By: /s/ Michael Barrist
---------------------------------
Title: Chairman & CEO
---------------------------
Date: January 16, 1998
-------------------------------
NCO:
By: /s/ Michael Barrist
---------------------------------
Title: Chairman & CEO
---------------------------
Date: January 16, 1998
-------------------------------
41
<PAGE>
Exhibit 18
March 23, 1998
Mr. Richard C. Schwenk, Jr.
Chief Financial Officer
Telespectrum Worldwide Inc.
443 South Gulph Road
King of Prussia, Pennsylvania 19406
RE: Form 10-K For the Year Ended December 31, 1997
Dear Mr. Schwenk:
This letter is written to meet the requirements of Regulation S-K calling for a
letter from a registrant's independent public accountants whenever there has
been a change in accounting principle or practice.
You have advised us that as of December 31, 1997, the Company changed its method
of measuring goodwill impairment under APB Opinion No. 17 "Intangible Assts",
from an undiscounted cash flow approach to a fair value method based on a
discounted cash flow approach, and that 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 segments to which
goodwill relates. You have further advised us that when such estimate of the
future discounted cash flows, net of the estimated fair value of the tangible
net assets is less than the carrying amount of goodwill, the difference will be
charged to operations. We understand that 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, will determine the projected operating cash flows, net of
income taxes, of the individual business segments. Management has indicated that
the change to the fair value method based on a discounted cash flow approach is
preferable in that such method most closely approximates the fair value of
goodwill and the related measurement of goodwill impairment.
A complete coordinated set of financial and reporting standards for determining
the preferability of accounting principles among acceptable alternative
principles has not been established by the accounting profession. Thus, we
cannot make an objective determination of whether the change in accounting
described in the preceding paragragh is to a preferable method. However, we have
reviewed the pertinent factors, including those related to financial reporting,
in this particular case on a subjective basis, and our opinion stated below is
based on our determination made in this manner.
We are of the opinion that the Company's change in method of accounting is to an
acceptable alternative method of accounting, which, based upon the reasons
stated for the change and our discussions with you, is also preferable under the
circumstances in this particular case. In arriving at this opinion, we have
relied on the business judgement and business planning of your management.
Very truly yours,
Arthur Andersen LLP
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 774 28,171
<SECURITIES> 0 0
<RECEIVABLES> 37,360 28,764
<ALLOWANCES> 969 519
<INVENTORY> 0 0
<CURRENT-ASSETS> 78,984 95,450
<PP&E> 36,731 26,082
<DEPRECIATION> 9,848 1,667
<TOTAL-ASSETS> 144,721 296,539
<CURRENT-LIABILITIES> 58,329 46,077
<BONDS> 33,960 5,967
0 0
0 0
<COMMON> 252 252
<OTHER-SE> 80,125 240,259
<TOTAL-LIABILITY-AND-EQUITY> 144,721 296,539
<SALES> 178,922 53,154
<TOTAL-REVENUES> 178,922 53,154
<CGS> 155,902 36,626
<TOTAL-COSTS> 342,960 49,215
<OTHER-EXPENSES> (2,174) (877)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,290 444
<INCOME-PRETAX> (164,154) 4,372
<INCOME-TAX> (2,310) 1,693
<INCOME-CONTINUING> (161,844) 2,679
<DISCONTINUED> 1,369 971
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (160,475) 3,650
<EPS-PRIMARY> (6.36) 0.20
<EPS-DILUTED> (6.36) 0.20
</TABLE>
